At the lowest depths of the Great Recession, the Federal Reserve drastically slashed interest rates.
From 2009 to 2019, interest rates generally remained low — then COVID-19 happened.
With inflation hitting dizzying highs, the Fed enacted a series of hikes beginning in 2022. By May 2023, the federal funds rate had hit the 5% to 5.25% mark.
Such spikes certainly impact homeowners and consumers of all stripes. But outside of the private sphere, how are the Fed increases impacting local governments?
“All of our money has to be collateralized at 110%,” said City of Dalton Chief Financial Officer Cindy Jackson. “So a lot of banks don’t really want to deal with governments, we’ve been fortunate to have a good relationship with Bank OZK — we signed an agreement with them in 2022, of course, interest rates were really low then, but we got a deal with them … it’s tied to the fed fund rate and they max out on our checking account at 2.2% and on our money market, 2.5%.”
Jackson said the city government also invests in Georgia Fund 1, a state-level offering for municipalities and other government entities.
“It’s highly liquid, I can get my money out of there in 24 hours,” Jackson said. “They are currently paying 5.38%.”
Additionally, she said the city has investments via multiple security banks.
“I have a lot of certificates of deposit (CDs) there,” Jackson said. “How they get away from collateralizing your money … they don’t go over $250,000, so they’re Federal Deposit Insurance Corp. (FDIC) insured.”
The rates for those CDS, she said, span from 3% to 5.7%.
“So when we started out the year we looked at, we were estimating our interest income to be $400,000,” Jackson said. “We’re going to hit $1 million in interest income this year alone for the general fund.”
She noted the local government is also generating interest from its various SPLOST (Special Purpose Local Option Sales Tax) and bond coffers.
“So we’re earning interest on those, too,” she said. “They’re either in our Georgia Fund 1 or the money market account.”
The situation today is a sharp contrast to the financial circumstances of the late 2000s and early 2010s.
“I can remember coming on with the city, we would have half a million dollars in the general fund each year for interest,” Jackson recounted. “We were getting down to, like, $80,000. So that was a big hit during the Recession, but now that the Fed has raised it up, we’re reaping those benefits. “
Jackson delved deeper into the city’s investment policies.
“The thing we look at least is the interest rate because we look at safety and security — we don’t invest in highly risky,” she said. “All of our money’s insured or we invest in local agency and U.S. treasuries … so we don’t get as high of a return as, say, individuals may.”
Citing the local government’s conservative approach to finance, Jackson said the surging interest rates do not “make or break” the city’s fiscal fortunes.
“Luckily, the city, we have a lot of cash, we’re not like a lot of local governments that have to issue tax anticipation notes,” Jackson said. “We have a healthy fund balance so we cash flow … I’ve been with the city 19 years and we’ve never had to issue a tax anticipation note, we’ve always had the money to cover what we budget.”
At the moment, she said the city has just one bond out.
“When interest rates are high, you have to go to the market to borrow money,” Jackson said. “But the city, we don’t have any plans to borrow money … the last time we borrowed money was in 2021 and our true interest cost was 1.682%, which is very low.”
Jackson said Dalton Public Schools was considering borrowing $13 million in a private placement.
“And the rate that they got was 4.28%, which was considered a really good rate,” she continued. “So if you’re having to go to the market to borrow money, it’s going to have an impact on your financial position.”
Jackson brought up the last Special Purpose Local Option Sales Tax package approved by voters in 2020.
“The city chose to pay-go, which means we did not borrow any money against that SPLOST,” she said. “Which the county did, so they’ve had to pay interest — I think 2024, they’ll pay the last payment.”
The city’s SPLOST collections, she said, are 40% over projections.
“We do have flush cash so we could afford to pay what we needed to out of the general fund and then move the money — basically, pay the general fund back when we got our 2020 SPLOST money in,” she said. “We’ve done really well there.”
Jackson said the city sets the timing of its projects to flow with anticipated SPLOST collections.
In essence, that means the city waits until the money is actually in its accounts before spending it on SPLOST projects.
“Or if we have one that we want to go ahead with because it’s just a high need or it’s just a good time to go do requests for proposals (RFPs), we have enough cash in the general fund that we can float it,” Jackson said. “And just pay ourselves back when we got those funds in.”
Assuming voters approve the next round of SPLOST in spring 2024, Jackson said she does not anticipate the interest rates to impact which projects the city ultimately pursues — or the sequencing of them.
“We’re not issuing debt,” Jackson said. “Of course, if the interest rate remains high and collections remain like they have been in the past … we do leave the interest in the SPLOST fund, we don’t necessarily by law have to, but we leave the interest in there and just reallocate it to projects.”
As of early December, the federal funds rate was locked in the 5.25% to 5.50% range.
Wall Street soothsayers seem to be of the consensus that at least some interest rate cuts are on the horizon for 2024. Whether or not that happens, Jackson said she believes the city’s finances are in good condition heading into the new year.
“I’ve locked in some of these CDs anywhere from 18 months to two years, so we’ve got a little bit of leeway there,” she said. “I have about $6.5 million sitting in CDs.”
And if the Fed goes the opposite route and keeps interest rates as-is — or potentially even higher?
“It just reduces the strain that we have to look or project on the other revenue items,” Jackson said. “So if we do hit a recession and our sales tax drops, then that’s just extra money that can take the pressure off other revenue line items.”