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10-14-08
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10-14-08
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The financial crisis and city hall Page 1 of 2 <br /> • 0 la <br /> LEAGUE 4FC IT E BULLETIN <br /> MWN£SOTA <br /> CITIES ONLINE EDITION <br /> The financial crisis and city hall <br /> Issue 27 Published: October 8,2008 <br /> By Jim Miller <br /> As the financial crisis in our economy widens,cities across the state and nation are feeling the impacts.Not <br /> surprisingly, uncertainty has accompanied the situation. <br /> With credit markets tightening, for example,many cities have found it difficult, if not impossible,to sell <br /> bonds. This has been especially true for cities intending to place large issues,those above $15 million. That <br /> is because large institutional buyers such as Lehman Brothers have been the traditional market for large <br /> issues; many of those firms either no longer exist or are unable or unwilling to purchase bonds, at least for <br /> the time being. <br /> Cities hoping to sell smaller bond issues face a somewhat different problem. Financial advisors to cities <br /> indicate that only those smaller issues that have an attractive rating are being sold. Unrated or lower quality <br /> bonds are not faring well. Many smaller cities, of course, don't sell bonds, but borrow directly from local <br /> banks. Unfortunately, it appears that many smaller banks are also having liquidity problems,which may <br /> make this option less viable for some cities. <br /> Cities are also concerned about their investments. While high grade commercial paper has always been seen <br /> as a safe investment, cities may want to limit exposure in that area.Being as liquid as possible in the short <br /> term, given the state of the economy and the state's potentially growing deficit,makes sense. This may be an <br /> ideal time for the city to ask its financial advisor to review its portfolio to ensure current investments are <br /> appropriate for this market. <br /> Also, even though the FDIC insurance limits have recently been increased, it is well to remember that <br /> liquidity is as important as security. Having all of the city's funds in one bank,even if insured, could create <br /> cash flow problems for the city if the bank fails. It would likely be some time before the FDIC made good on <br /> the loss, and in the meantime,the city would be without its money. Cities should also be aware that banks, <br /> just like bond issues, are rated;your financial advisor may be able to help you assess the likelihood of <br /> potential problems before they occur. <br /> Now would also be a very good time to review the investment portfolio of the fire relief association. Because <br /> relief associations have wider discretion in types of permissible investments,they may also be at greater risk. <br /> For those cities with defined benefit retirement plans for firefighters,the city must make up deficiencies if <br /> state aid payments and fund earnings are inadequate to make pension payments. <br /> Cities should not panic,but they should also not rest on assumptions made years ago. Reviewing the city's <br /> current financial situation, possibly deferring new debt until markets stabilize, and talking with business <br /> leaders in the city are all sound strategies for minimizing surprises and providing maximum flexibility if they <br /> do occur. <br /> For more information,contact Jim Miller,LMC, at jmiller@Imc.org or(651) 281-1205. <br /> http://web.lmc.org/bulletin/story.cfm?id=2108&title_id=1 10/8/2008 <br />
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