2005 Legislative Outlook for Public Investors

As we begin the New Year, the policy rumblings in Washington are loudest regarding Social Security and major tax reform. With a focus on these major issues and an enhanced Republican majority, Congress and the White House are primed to move right out of the box with these initiatives. Closely behind in the congressional agenda are: health care reform, a six-year transportation funding bill, and telecommunications reform.

This leaves little room on the front burner for major banking initiatives. However, as was the case with the past Congress, leaders in the Senate Banking and Financial Services Committees will likely re-introduce key pieces of banking legislation that are of interest to local and state treasurers.

Bankruptcy Reform. In 2004, bankruptcy reform failed to be completed for the eighth year in a row, and while it is likely that legislation will be re-introduced in the 109th Congress, agreement on the composition of the reform bill may continue to be elusive. Local and state governments will want to keep a close eye to ensure that debt owed to governments—from those filing for bankruptcy—will receive a priority status for repayment.

FDIC Reform. The Federal Deposit Insurance Reform Act of 2003 overwhelmingly passed the House two years ago, but failed to receive the attention of the Senate. The measure would have assisted local and state governments by increasing the insurance on in-state deposits to the lesser of $2 million or the standard maximum deposit insurance plus 80 percent of the municipal deposits in excess of that amount. Fed Chairman Alan Greenspan and the White House weighed in with their opposition to the legislation. Although there will likely be strong bi-partisan support to help protect government bank deposits, because of powerful opposition it is unlikely that it will gain the traction needed to move forward and take effect.

SLGS Regulations. One issue that is guaranteed to be addressed in 2005 is changes to the State and Local Government Securities (SLGs) program. Late in 2003, the Treasury Department proposed regulations that would severely impact the program, and likely curtail its use by local and state governments. As proposed, the changes would:

• limit the daily trading window from 10 a.m. - 6 p.m. Eastern Standard time;
• punish issuers who cancel their subscriptions; and
• limit the funds that can be invested in SLGS.

While the proposal outlined administrative burdens that the Bureau of Public Debt faces, GFOA and other public finance industry organizations commented that Treasury should implement a Web-based system and incorporate other agreed-upon standards prior to implementing other provisions that would likely force issuers into the open market, and increase costs to local and state governments. Treasury received comments, including those from GFOA, in November, and is likely to act in the first half of 2005.

Of particular concern is that Treasury has not embraced the notion of holding public hearings on the matter, nor talking in-depth with the issuers or other stakeholders in the public finance community to carefully review the best methods to address their concerns without adversely impacting local and state governments. We will continue to push for a dialogue and express our concerns about the severity of their proposed changes. GFOA's letter to Treasury on this matter may be viewed on the GFOA's Web site.

Susan Gaffney is the director of the GFOA Federal Liaison Center in Washington D.C.

GFOA Publishes Book on Banking Services

GFOA has issued an all-new edition of the leading publication on banking services, Banking Services: A Guide for Governments. Written by a team of banking industry professionals and government finance officers experienced in banking relations, the book provides a comprehensive overview of the various services banks provide to support government cash management operations. It also provides guidance on managing the procurement process and oversight of the banking relationship. Please refer to the enclosed brochure for more information about this comprehensive guide to banking services.

Call for Awards for Excellence Submissions

GFOA is seeking applications for the 2005 Awards for Excellence. GFOA recognizes outstanding initiatives in the areas of cash management, budgeting, pension/benefits, and other areas of public finance. See GFOA's Web site under Award Programs for more details on how to apply. The deadline is January 31, 2005.

Break-Even Analysis in Excel

In last month's issue of Public Investor, the method of break-even analysis was presented, using software provided by Bloomberg. Since Bloomberg is an expensive subscription-based service, many treasurers may not have access to a Bloomberg “terminal.” Most do have access to common spreadsheet software like Excel or Lotus 1-2-3, and one Public Investor subscriber illustrates how break-even analysis can be done using a spreadsheet.

Essentially break-even analysis requires creating a three-row table that allows for a comparison between a single security having a relatively long maturity and two short-term securities that, together, have the same maturity as the single security. For example, in the exhibit below, Option A (a two-year) pays nearly 40 basis points more on an annual basis. For Option B to be a better option, short-term interest rates would have to increase by a significant amount—to 3.21 percent or over 70 basis points relative to the current yield on a one-year security—to overcome this hurdle. If interested, contact Nick Greifer at ngreifer@gfoa.org to obtain a copy.

2004 Public Investor Index

For your reference, the following table lists major articles appearing in Public Investor during 2004.

January	Public Investor Interviews GFOA Cash Management Committee State Treasurers Respond to Mutual Fund Scandals Insuring Treasurers Against Lawsuits New York Fed Revises List of Primary Dealers
February	GFOA Pushes Positive Pay States Oppose New Rules Preempting State Banking Oversight Association Calls for Stricter Ethics for Fixed-Income Research Cook County Boosts Yields through Online Auction
March	Public Investor Interviews Portfolio Managers
April	Fed Keeps Rates at Unprecedented Lows Federal Government Issues New CRA Regulations Getting Ready for Check 21 ACH Fraud a New Worry
May	Improving Local Government Investment Reports GASB 40 Takes Effect Next Month
June	Late Trading and Market Timing: Implications for Fiduciaries Federal Reserve: Use of Checks Continues Decline Greenspan on Bank Risk
July	Keys to Performing a Successful Treasury RFP GFOA Annual Conference Tackles Treasury Topics
August	Public Investor Interview on Best Practices for Investment Reporting New GFOA e-Document Provides Roadmap for Prudent Investing S&P Changes Name of Money Market Rating Survey: Investors Stay Course on Investment Strategy
September	The Rewarded Risks of One to Three-Year Investments Legislation Expands Use of CDARS for Investment Risk Management
October	Credit Card Acceptance: What to Negotiate Check 21 to Take Effect This Month New Banking Services Book Available Long Bonds Surprise
November	Oil and Money: It's Different This Time Rising Interest Rates and Step-Up Securities Treasury Proposes Changes to the SLGS Program
December	Break-Even Analysis for Maturity Selection Surety Bonds as an Alternative for Collateralizing Public Deposits Congress Raises Debt Limit GFOA to Offer New Investment Seminar

Panel of Economists

The 2005 Economy

This month, Public Investor asked its panel of economists to provide Public Investor readers with their forecast of the economy over the next six months commenting on economic growth, inflation, and interest rates.

Dr. Lacy Hunt expects a significant slowdown in 2005, with an increased risk of recession. He highlights several economic indicators that suggest weakness in the domestic and international economies. Consumer plans to buy vehicles, appliances, and homes are all dropping to record lows. The real average weekly earnings in November were 1.6 percent below the level of a year earlier, which was the weakest figure in almost eight years.

Although the index of leading indicators rose 0.2 percent in December, it declined in the five previous months. Internationally, recent data show that industrial production declined in Europe and Japan. In addition, the GDP for the 12 European Union nations in the Euro system grew at the slow pace of 1.2 percent in the third quarter. Hunt expects the long-term trend in interest rates to be downward.

Carl Tannenbaum expects some moderation in economic activity during the first six months of 2005. He predicts that GDP growth will average between 3.0 percent and 3.5 percent. Tannenbaum highlights several factors that will contribute to more moderate growth including: high energy prices, rising interest rates, and the absence of tax relief. He anticipates that the Federal Reserve will continue to raise the Fed Funds rate over the next six months, raising it to 3.0 percent by the middle of the year. Inflation should remain low, but oil prices are a wildcard.

GDP Grows at 4 Percent

Gross Domestic Product posted stronger than expected growth in the third quarter, increasing 4 percent. The most recent Federal Reserve “Beige Book” of economic activity generally reports continued economic growth. Eleven of the twelve Fed districts reported expanding economic activity. The districts with the strongest economic growth were New York, Philadelphia, Atlanta, and Dallas. The Cleveland district reported little change in economic activity.

Looking ahead, some economists expect somewhat slower economic growth in 2005. The factors that may tend to dampen economic growth in the coming months include: rising interest rates, a slowing housing market, rising energy costs, and the reduced possibility that the federal government will provide further fiscal stimulus. The biannual Livingston survey of economists conducted by the Federal Reserve Bank of Philadelphia predicts that real GDP will slow to 3.5 percent in 2005.

RGM

Fed Continues to Raise Rates

The Fed continued its series of rate increases by raising the Fed Funds rate by 25 basis points to 2.25 percent at its most recent meeting on December 14. So far, the Fed has raised rates 125 basis points since it began tightening in June. The Fed Funds futures market expects the Fed to continue raising the Fed Funds rate at the current pace, and predicts that the Fed Funds rate will rise to 3.00 percent by July 2005. However, some Fed watchers anticipate that more moderate economic growth will cause the Fed to raise rates more gradually in 2005.

The biannual Livingston survey of economists predicts that interest rates will rise over the next two years. Forecasters predict that the three-month Treasury bill will rise to 2.8 percent by June 2005, 3.4 percent by December 2005, and 3.8 percent by December 2006. They predict that the 10-year Treasury note will rise to 5.2 percent by December 2005 and 5.5 percent by December 2006.

RGM

6-Month Treasury Bill
2-Year Treasury Note
30-Year Treasury Bond

• Banking Services Book brochure

The Public Investor is published monthly by the Government Finance Officers Association (GFOA), 203 N. LaSalle Street, Suite 2700, Chicago, IL 60601. (312/977-9700; email: PublicInvestor@gfoa.org) Annual subscription rates are $55 for active GFOA members, $70 for associate GFOA members, and $85 for nonmembers. For reprint permission contact GFOA.

The information and opinions printed herein are from sources believed to be reliable, but GFOA makes no guarantee of accuracy. Opinions, forecasts and recommendations are offered by individuals and do not represent official GFOA policy positions. Nothing herein should be construed as a specific recommendation to buy or sell a financial security.