December 2, 2005

Volume 23, Number 12

Disaster Preparedness for Treasurers

Maintaining Liquidity in a Disaster

GFOA Recommended Practice on Business Preparedness and Continuity Guidelines

Disaster Preparedness Checklist for Treasurers and Finance Directors

Resources for Disaster Preparedness

Performance Benchmarks

Panel of Economists

Databank

Interest Rate Outlook

Disaster Preparedness for Treasurers

A tornado with 180-mile-per-hour winds ripped through downtown Fort Worth in March 2000, causing extensive damage to several downtown buildings. Total damage was estimated at $500 million. More than 1,100 homes and apartments were damaged. At least 50 commercial buildings suffered damage, including three downtown high-rise buildings that suffered major damage. A skyscraper housing a major bank lost 80 percent of its windows and portions of the downtown area were closed for three weeks due to glass falling from the high-rise buildings. This article will present the lessons learned from the city’s experience with this disaster and will recommend an “emergency tool kit” for treasurers and finance directors (see Exhibit 1 below).

Within 20 minutes of the tornado touchdown, the city’s Finance Department had implemented an emergency plan for purchasing using procurement cards. Actually, the emergency plan was placed into motion by the city’s card administrator who was working late and witnessed—as he is proud to note—“up close and personal”—the tornado from an open multi-story parking garage about a block from the tornado’s path. The initial contact with the procurement card issuer was made while the tornado was still in sight.

Through an existing emergency plan with our bank’s credit card processor, the city was able to immediately increase the credit line of every card issued to select city departments (Water, Transportation/Public Works, Solid Waste, Equipment Services, etc.). Approximately 100 of our cards went to a credit limit of $50,000 each. Use of these cards during the emergency period was monitored online by the Finance Department staff. Over the next 90 days, these cards experienced $120,000 in charges related to the emergency and allowed the city to react quickly with minimum disruption in the procurement and payment process.

A major bank’s downtown building was knocked out of service. Downtown was in shambles and filled with debris. City Hall and the downtown area were closed for several days. The Payroll Supervisor talked his way past a city police officer to get into the downtown area and into City Hall to complete the bi-weekly payroll. The City Treasurer calculated the city’s cash position via his home computer and funded liquidity needs with cash from our money market fund. And business continued.

• Preparation—We have put systems in place that can work if a key employee cannot be in the office. The employees involved in our cash management program can work from home and when they are out-of-town. Their slogan might be: “have phone, have liquidity.”
• Investment Strategy—Our investment strategy is built on the three standards: safety, liquidity, and yield. Our portfolio is diversified by type of investment instrument and maturity.
• Liquidity—We typically carry—at a minimum—10 to 15 percent of our portfolio in a liquidity fund—a money market fund—with immediate access to funds via phone up to 4:30 p.m. We carry an average of $4 million in our bank account with balances collateralized to $5 million. We have established a line of credit with our bank for an additional $5 million to cover any overdrafts, primarily daylight overdrafts. In addition, we have established a $5 million investment savings account with the bank for emergencies.
• Bank Relationship— Needless to say, we have an excellent long-term relationship with our bank. The needs of the city are recognized and are acknowledged, and the bank has consistently demonstrated its willingness to assist—in good times and bad times.
• Reporting—The City Treasurer has access through the bank’s system, via personal computer, to information about incoming wires, outgoing wires, and check clearing to constantly assess cash position, if necessary. The access is not only available at City Hall, but at the Treasurer’s home when he is out of the office.
• Emergency Procurement— Finally, we have an active procurement card program with more than 600 cardholders. Cards are generally used for ad hoc purchases under $3,000 and for travel. Our current volume of procurement card purchases is slightly less than $10 million, which represents 5 percent of the total dollar amount of the annual procurements and 40 percent of the total number of transactions.

Maintaining Liquidity in a Disaster

Editor’s note: Although Farmers Branch, Texas, was far from the devastation that took place in New York City on September 11, 2001, the impact on the banks and financial markets caused a major liquidity crisis in this small city located 1,500 miles away. In this article, Charles Cox, the finance director of Farmers Branch and a former chair of the GFOA Committee on Cash Management, describes what the city did to respond to this liquidity crisis, highlights some lessons they learned, and suggests some liquidity options in an emergency.

T he terrorist attacks in New York City had a widespread impact on the nation's financial system:

• the New York stock exchange was closed for four days,
• the Chicago stock exchange was closed for two days,
• trade settlements were delayed,
• the Bank of New York (which handles about 12 percent of the nations funds transfers on a daily basis) was closed for three days.

On Tuesday, September 11, the City of Farmers Branch accessed its bank’s computer system to perform the daily routine of telling the bank the amount of overnight repurchase investment funds to wire into the city’s zero balance account so that the city would have sufficient funds available to pay the checks for that day. Usually this is a smooth, automatic process: after receiving an electronic notification, the safekeeping firm will wire the requested funds.

What Went Wrong. Unfortunately, our safekeeping firm, Bank of New York, was located within two blocks of the World Trade Center, and its backup facility was located within three blocks of the World Trade Center. Although both facilities were on separate power grids and separate telecommunication switching equipment, they were both closed down due to the disaster.

The next day, we found out that our instructions had not gone through and our local bank president called and told me that the city was overdrawn by $500,000. In the meantime, I had payroll and a major accounts payable run that was due to go out that Friday, so obviously we were in a cash crunch. Not only did we not have money for accounts payable or payroll, but also we were $500,000 in the hole at the bank. The city’s bank depository contract provided for overdrafts in an unlimited amount for a maximum of three days at the bank's prime interest rate. However, the bank president was uncomfortable with the prospect of a several million-dollar overdraft extending to four or five business days.

The Solution. I called in my staff and we brainstormed about our options. The wire system was still up. So we could move around cash as long as we did not have to buy and sell investments through any of the major exchanges or brokerages. Through this brainstorming process we found out that we had an investment maturing the following Monday. In addition, this investment was held by a secondary safekeeping firm, which was still operating because it was located in another part of the country. This firm offered to wire us cash early if we would fax them a letter selling them all or a portion of the investment that was maturing the following Monday. We decided that this was the best option. The firm wired us enough money to cover our overdraft as well as to make payroll and accounts payable that Friday. That worked. It is something that I never would have thought of if we hadn’t come together and brainstormed about it.

Lessons Learned. Here are some lessons that we learned from our experience. In addition, Exhibit 2 suggests some liquidity options in an emergency.

• In contracts and agreements, require vendors to include alternative emergency contacts who are not in the same location or building as the primary contact.
• If you have a controlled disbursement/zero balance account, carefully consider the optimum balance between liquidity and maximizing your investment earnings.
• When responding to an emergency, be innovative. Brainstorm your options with your staff and/or investment committee.
• Diversify your safekeeping institutions.

GFOA Recommended Practice on Business Preparedness and Continuity Guidelines

The GFOA recently issued a new recommended practice, “Business Preparedness and Continuity Guidelines.” This practice recommends that governments develop, test, and maintain a plan to continue their basic business operations during and immediately after disruptive events. Governments must be able to anticipate problems, detect threats and determine effective protective actions to enable them to continue to function. A strategy should be developed to mitigate risk and control costs.

Governments should consider the following when designing business preparedness and continuity guidelines:

• Compliance. When developing response plans, governments must make sure that they are compliant with applicable local, state, and federal guidelines.
  
  
• Risk Management. The risk manager should assess potential areas of insurance coverage in planning for any type of disruption.
  
  
• Administrative Support Functions. A government should plan to have such functions as human resources, purchasing, treasury, legal, and insurance available during an emergency situation. For specific items like investments and payments on debt obligations, contact information (office, mobile, and home) for the professional bond and investment team (trustees, remarketing agents, brokers, banks, etc.) should be available to all members of the finance team, and a copy should be kept off site with these individuals as well (car or home).
  
  
• Outsourced/Recovery Services. A government should assess the ability of providers of outsourced services themselves (e.g., garbage collection) to recover from unscheduled disruptions.

Plan Implementation. After developing its business preparedness and continuity plan, the following steps should be implemented.

1. Record Keeping. Governments should develop a plan and procedures for contemporaneous record keeping in a format acceptable to FEMA.

2. Personnel Assignments and Communication. Governments should formally assign personnel from each department or agency to serve on the disaster and emergency recovery team. A strong business continuity plan maps out an organizational structure and lists roles and responsibilities, so employees are aware of their tasks. Essential and non-essential classifications may be used. Home and cell phone numbers as well as e-mail addresses for all essential employees should be updated regularly. In addition, governments should establish procedures for assembling the team in the wake of a disaster or emergency. Those procedures should take into account the possibility that one or more ordinary means of communication may not be available in such circumstances (e.g., cell phones, e-mail) and specify appropriate alternative means of communication in such an eventuality.

3. Outsourced/Recovery Services. A government should negotiate contingent contracts for recovery services in advance or establish an emergency procurement process and identify criteria that would activate the process.

4. Disaster and Emergency Recovery Plan Safeguard. A government’s disaster and emergency recovery plan should be safeguarded to ensure that it is available in the event of a disaster or emergency.

Disaster Preparedness Checklist for Treasurers and Finance Directors

Resources for Disaster Preparedness

Panel of Economists

Effect of Transition to New Fed Chairman on Interest Rates

In about a month, Ben Bernanke will take over as the new chairman of the Federal Reserve Open Market Committee. Public Investor asked its panel of economists what will be the likely impact on interest rates and financial markets during the first six months of Bernanke’s tenure as the markets adjust to a new Fed chairman. Bernanke is a well-known proponent of explicit inflation targets, which is a practice adopted by some other central banks but opposed by Alan Greenspan. We asked the panel how an explicit inflation target would affect interest rates.

Lacy Hunt states that the effect would be negligible. He notes that monetary policy has a delayed effect on economic activity. Because of this delayed effect, the monetary policy over the past one or two years will have a much a much greater effect on interest rates in the first half of 2006 than the actions of the Bernanke Fed.

Hunt expects that inflation targets will reduce inflationary expectations, which would lower interest rates. Inflation targets may enable the Bernanke Fed to convince the markets of their anti-inflationary credentials over a shorter period of time. Hunt adds that the recent rise in long-term interest rates may be because the financial markets are not convinced that Bernanke’s anti-inflationary commitment is as strong as Greenspan’s.

Carl Tannenbaum expects that there will be little change in the Fed’s modus operandi during Bernanke’s first six months. However, a crisis during this period would give Bernanke an opportunity to “prove his mettle” to Wall Street. Tannenbaum expects that the fed funds rate will peak at 5 percent by the middle of next year. He predicts that an official inflation target will not have a big affect on interest rates.

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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.