Feature Articles and Resources

• Use of Account Analysis Statements
  
• Analyze This!
  
• Sample Balance Analysis (Simplified)
  
• Sample Account Analysis (Simplified): Analysis of Service Costs (for a Single Month)
  
• Analysis to Determine Optimal Account Balance

• Panel of Economists: Economic Forecasts
  
• Interest Rate Outlook
  
• Economic and Interest Rate Data

• Performance Benchmarks
  • 10-Bill Index
  • Money Market Fund Index
  • LGIP Index
  • Key Rates: Cash Markets
  • Relative Value Yield Chart

Use of Account Analysis Statements

Are government finance officers using account analysis statements (AAS) for the purpose they are intended? An account analysis statement is a monthly report produced by a government’s bank that lists the services provided to a government and the compensating balances required to keep on deposit at the bank to pay for these services. By using these statements, a finance officer should be able to determine the best way to pay for bank services, whether it be 1) direct fees, 2) compensating balances, or 3) a combination of both.

Analyzing the Statement. The first step in analyzing the AAS is to make sure the bank sends it every month. If the bank is not sending it, finance officers should request it. Also, an AAS should be received for each account with the bank along with a summary statement that combines all accounts.

The earnings credit rate on the AAS is an interest rate applied to the investable balance of a demand deposit account to determine a fee-based equivalent balance. The investable balance is determined by subtracting reserves from the average collected balance for each account. Banks are required to keep 10 percent of their net demand deposits (checking accounts) at their Federal Reserve bank. Banks pass this expense on to their customers. Make sure that the reserve requirement on the AAS is not higher than 10 percent. If it is, have the bank adjust the account and adjust for prior periods as necessary. Since 90 percent of the available balances are usable for offsetting services, paying for services with fees is more cost efficient.

Banks have some latitude with earnings credit rates (ECR). A higher ECR may look good initially, but it may be accompanied by higher service prices. Similarly, a low ECR and lower than average prices may be increasing the bank’s profits at the government’s expense. Therefore, keep track of the ECR each month and compare the ECR of different banks. A rule of thumb is that the ECR should be similar to the 3-month Treasury bill rate.

Each month compare the types of transactions, volume of transactions, and the cost for the same transactions from each bank. By placing this information onto a spreadsheet, trends and discrepancies will become apparent. The transaction volume for each bank service may be used in price negotiations with the bank. Price fluctuations within a bank may indicate that prices have been raised without the government’s knowledge. This review also should disclose charges for services that are not being performed or for services that are no longer being used, such as special accounts that no longer have any transactions. Banks generally charge a monthly maintenance fee just to keep an account open.

By reviewing and analyzing the AAS, a government can be assured that it is: 1) paying only for services used, 2) paying a fair and equitable fee for these services, 3) not losing the use of some of the potential earning on the government’s funds by keeping excessive non-performing balances in the banks, and 4) creating a database to use in the future when preparing an RFP for banking services.

Donald E. Gray, Jr. is a former president of the New England States Government Finance Officers Association.

Analyze This!

An agency’s bank account analysis statement is a window into the banking relationship and is the best tool available to review and understand any banking arrangements in place.

First of all, if you do not know what an account analysis statement is, then you need to talk to your bank to make sure that your agency’s checking accounts are being analyzed, and if they are being analyzed, that you are receiving the monthly statements. Sometimes not all accounts for one reason or another are on account analysis, and sometimes statements are mailed to an incorrect address or department.

Even if you do receive a monthly bank account analysis statement, you may ask, “What is it?” or “Why should I care?” Account analysis provides you and the bank with a recap of all banking activity associated with your agency to include services utilized, related volumes and pricing, and a summary of balances maintained and any fees owed. Further, it is through account analysis that banks provide their clients with a soft-dollar interest rate (earnings credit rate) that is applied to balances maintained in the accounts. This credit is then used to offset service charges. One should care about account analysis because by reviewing statements on a regular basis, an agency can double-check pricing, catch possible errors, and monitor balances, and consequently be in control of its overall bank fees.

Often, agencies do not start paying attention to account analysis until they receive an unanticipated invoice or auto debit for bank service charges. If an agency wants to be in command of its banking activity and the related fees (and not surprised by banking invoices), the primary way to accomplish this is to stay on top of account analysis on a month-to-month basis.

Here are some tips for getting up close and personal with your account analysis statements:

In summary, the more you understand about your agency’s account analysis, the less you will end up paying in bank fees. And what you do end up paying can be planned and budgeted for.

Susan M. Cotton is a Certified Treasury Professional and manages the firm, Money Matters Consulting. Reprinted with permission from Dollars & Sense, California Municipal Treasurer's Association, Fall 2005, p. 12.

Example for One Month

Average Daily Balance

The Average Daily Balance is simply the amount of cash on hand at the end of each business day—the bank’s book or ledger balance—not necessarily the amount available to the government (owing to the reserve requirment and other factors discussed below). Determining the average depends on the method employed by the bank, and generally can be approached in at least two ways: (a) the sum of the beginning and ending balance divided by the number of days within the month, or (b) “true average.” Calculating the daily balance with the true average (balance determined daily, summed, then divided by the number of days) takes into account every day within a billing period and thereby generates the most complete portrayal of daily balance.

Less Average Float

Average Float refers to funds in transit through the U.S. banking system. Float measurement may differ from bank to bank, therefore if actual float is not used, the bank should specify so in their proposal.

Average Collected Balance

Average Collected Balance is simply equal to the average daily ledger balance less average float.

Less 10% Reserve Requirement

Federal Reserve regulations require that a percentage of all deposited funds be held in reserve. Generally this is 10 percent of deposits. To offer a more competitive RFP proposal, some banks will waive the 10 percent offset for the purposes of the account analysis.

Average Investable Balance

Average Investable Balance is the portion of the government’s average daily account balance that is available for investment after subtracting float and reserve balance requirements.

Earnings Credit Allowance

Earnings Credit Allowance is the income the government’s Average Investable Balance would have earned for one month if it had been invested at the earning credit rate (ECR). The earnings credit allowance is the amount that is used to essentially pay for banking fees, under a compensating balances or blended method.

Note: The assumed annual earnings credit rate (ECR) of 4.50 percent is converted to a monthly figure to determine the monthly earnings credit allowance. The ECR may fluctuate according to an index. This table is adapted from the GFOA publication Banking Services: A Guide for Governments, 2004.

Category / Service

Number of Units

$42.00

2. Depository Services / Deposit Checks (Encoding)

0.095

3. Branch Teller services / Credits Posted (Branch)

3.750

4. Retail Lockbox Services / Lockbox Payments

0.27

5. ACH / ACH Direct Items

0.20

Total Fees

Note: Figures are illustrative only, not actual government data. This table is adapted from the GFOA publication Banking Services: A Guide for Governments, 2004.

Analysis to Determine Optimal Account Balance