COVINGTON, Ky. - Covington's investment policy for taxpayer funds used to be a bare-bones outline largely reliant on state statute.
After tonight, it's 17 pages.
New Covington Finance Director Muhammed Owusu uses a point-in-time story to explain:
In the month of March, Owusu said, because the timing of tax collections and bill payments creates big swings in cash flow (an ordinary occurrence for governments), the City had roughly $25 million in its account at a local bank.
Yet because the City wasn't investing that money, the account actually cost Covington taxpayers a little over $500 in fees for that month.
"Yes," Owusu said, "we had $25 million in the bank, and we were getting charged. That's not how it should work."
At the very least, he said, the City could have been earning a couple of thousand dollars for taxpayers by setting up the account as a "sweep account" where funds not needed for paying immediate bills are automatically transferred at the close of each business day into investment instruments that earn interest.
Even better, he said, the City should have been putting excess public funds to work in a well-planned portfolio of temporary investment vehicles designed to protect the principal yet maximize the return for taxpayers.
Under the City's updated and greatly expanded investment policy, which was approved by a 5-0 vote of the Covington City Commission tonight (June 12), policies and procedures for such investment strategies are now in place to guide a new focus on making sure the City's funds don't sit idle.
"Effective cash management is essential to good fiscal management," said Owusu, who took over April 30 as the City's Finance Director.
City leaders hired Owusu - who has nearly 30 years' experience managing money and overseeing public spending in state and city governments around the country, including in New York, Virginia and Washington, DC. - to bring stability to the leadership of the City's Finance Department and oversight of its finances, which were damaged by the 2008 recession and resulting budget cuts and an embezzlement scandal involving a previous director.
Whereas the Finance staff itself is filled with dedicated, experienced and long-serving employees, the director's position has been filled by a revolving door of temporary, short-lasting and interim directors over the last few years, creating challenges related to consistency and leadership.
Covington's previous investment policy, passed in 2014, was a bare-bones authorization that sent officials and residents to Kentucky Revised Statutes for guidance.
The new policy:
- Establishes principles and safeguards based on best practices of the Government Finance Officers Association.
- Spells out clear objectives for the City's investing.
- Provides transparency with periodic reporting.
- Authorizes what specific investment vehicles can be used and which ones are prohibited, as well as the limitations on investments.
- Instructs the Finance Director to create and maintain a list of broker/dealers authorized to provide investment services, as well as establishes the procedures for creating that list.
- And encourages the use of competitive bidding when practical for all investment purchases.
Owusu said the policy is timely because it will enable Covington taxpayers to benefit from the environment of rising interest rates.
"It puts policies and procedures in place that enable Covington to take advantage of opportunities when available," he said. "It's just a good way of doing business."
Five principles will guide decisions:
- Preservation of capital and protection of principal.
- Maintenance of sufficient liquidity to meet operating needs (i.e. pay bills).
- Security of City funds and investments.
- Diversification of investments to avoid unreasonable or foreseeable risks.
- Maximization of return on the portfolio.
The Finance Director is required to report at least once a month on the investment portfolio to the City Manager and City Commission. And investment strategies will be reviewed at least once a year.
"The first requirement establishes transparency and openness," Owusu said. "The second will force us to be aware of new things in the market. This industry is always evolving."
City Manager David Johnston said the new investment policy is indicative of Owusu's expertise and professionalism.
"It's exactly the type of change we were hoping for when we hired Muhammed," Johnson said. "He hit the ground running determined to improve how the Finance Department operates. Taxpayers would love seeing how excited he gets about his work."
Since Owusu's hiring, the City:
- Has been conducting "relationship reviews" with the finance institutions with which it does business in order to make its banking more efficient.
- Has begun the process of hiring a revenue-collections manager to oversee the collection of all payroll, net profit and insurance premium tax returns, as well as accounting and auditing responsibilities. By helping to separate the revenue collection and expenditure functions of the department, the position helps fix a weakness identified in Covington's last audit.