Financial Crisis

Dealing with the financial crisis

The national financial crisis is wreaking havoc everywhere, including city governments. The following steps can help your city through these uncertain financial times:

Ask your financial advisor to review the city's portfolio to ensure current investments are appropriate for this market. Cities are concerned about their investments. While high grade commercial paper has always been seen as a safe investment, cities may want to limit exposure in that area. Being as liquid as possible in the short term, given the state of the economy and the state’s potentially growing deficit, makes sense.

Be careful with the city's available cash. Even though the FDIC insurance limits have recently been increased, remember that liquidity is as important as security. Having all of the city’s funds in one bank, even if insured, could create cash flow problems for the city if the bank fails. It would likely be some time before the FDIC made good on the loss, and in the meantime, the city would be without its money. Cities should also be aware that banks, just like bond issues, are rated; your financial advisor may be able to help you assess the likelihood of potential problems before they occur.

Review the investment portfolio of the fire relief association. Because relief associations have wider discretion in types of permissible investments, they may also be at greater risk. For those cities with defined benefit retirement plans for firefighters, the city must make up deficiencies if state aid payments and fund earnings are inadequate to make pension payments.

Don't panic, but proceed with caution. Cities should not panic, but they should also not rest on assumptions made years ago. Reviewing the city’s current financial situation, possibly deferring new debt until markets stabilize, and talking with business leaders in the city are all sound strategies for minimizing surprises and providing maximum flexibility if they do occur.

The effect on public pension plans

In it for the Long Haul: The Investment Behavior of Public Pensions (from National Institute on Retirement Security)