I just sat in on a couple hours of Day 2 of the Chicago City Council hearings on the city’s budget proposals for next year.
I caught the last half hour or so of the Q&A for City Clerk Susana Mendoza, dominated by questions from alderman about how to creatively raise more money in coming years, as well as expressions of appreciation for what a great job she and her office were doing.
The thrust of one questioner was, “As an animal lover, I’d like to focus on one area. We have animal scofflaws all over the city. We need to capture the revenue we are missing. Can we get vets in involved in licensing city animals?”
From there, we moved to an appearance by Chicago City Treasurer Kurt Summers. Treasurer Summers has instituted a valuable communications and accountability practice, with quarterly conference calls helping to keep citizens and the media up to date on conditions in the city’s very large investment portfolio(s).
In response to an alderman’s question, the Treasurer made a case for another change the city will be making, and it deals with cash management. Summers plans to reduce “idle cash” in the city’s assets under management, citing in part how much more funds the city has “sitting in the mattress” compared to “best practices” developed by the Government Finance Officers Association. Summers stated that the difference could be “responsibly invested,” and put to work earning greater interest. Asked about the future difference, across all funds, Summers offered an estimate of as much as $30 to $40 million a year in additional earnings from this practice.
There’s no such thing as a free lunch, however, the saying goes. With greater expected return comes greater risk – a basic axiom for financial markets generally, including cash management practices. If the 2007-2009 financial crisis taught us anything, it was that seeking yield on cash and “cash equivalents” can bring unpleasant and nasty surprises.
This possibility relates to another new initiative developed in the Treasurer’s office. Going forward, the city will develop a minimum credit quality rating, with ‘credit quality’ defined for the investment portfolio as a whole.
But our recent financial crisis highlights two sources of uncertainty in this new policy, with issues worthy of monitoring in the city’s otherwise-worthy new communications practices.
Another lesson our latest and greatest financial crisis taught us was that “stabilization” and “risk floor” initiatives can actually be a vehicle for assuming greater risk. Especially if, as in the city’s new initiatives, definitions of risk rely on external opinions developed by credit rating firms.
And these issues may relate to other sad lessons that past financial crises can teach us, if we choose to learn from them, anyway. Entities with their backs against the wall, yet propped up by public capital, may have incentives to take higher risks to try to get out from behind their problems -- especially if decision-makers and well-connected insiders reap the fruits on any upside, while the downside is borne by citizens and taxpayers generally.
This set of incentives assertably trebled the public's losses in the S&L crisis back in the 1980s/1990s.