‘Good News for the Economy’ Is Bad News for City Treasury

When the federal discount rate was cut Nov. 6--for the fifth time in less than a year--the mood in the Glendale city treasurer’s office grew a little more tense.

U.S. Treasury Secretary Nicholas F. Brady called the latest cut “good news for the economy.”

But Glendale City Treasurer Betty Evans, charged with making money on the city’s investments, isn’t so sure. Evans, 49, daily invests from $1 million to $2 million in overnight deposits.

She and other officials said the city is like any investor who counts on interest earnings for a livelihood. Although lower interest rates mean good news for consumers generally, they are bad news for investors--and for city budgets.

“Interest rates for all kinds of securities have dropped very much in the past several months,” said Dan Harrison, secretary of the California Society of Municipal Finance Officers. “That will affect the interest earnings of every investor, including cities.”

Because of rates that have plummeted to the lowest level in 18 years, Glendale officials say the city will lose $50,000 to $100,000 a month in interest earnings on its $200-million portfolio. The monthly losses are expected to start in January when a large group of investments will come up for renewal.

“It’s nobody’s fault,” said Glendale Finance Director Brian Butler. “There’s a damn recession out there and interest rates are down.”

With more than $7 million at stake in the city’s expected earnings from investments this year--almost 9% of the city’s $82.6 million general fund revenues--lower interest rates are not good news for Glendale. Revenues from interest and investments could fall $2-million short of projections, Butler said.

Glendale City Manager David Ramsay earlier this month ordered a city employee hiring freeze. Unspecified further belt-tightening measures are expected.

More than likely, savings will begin with more conservative purchases of office supplies and new equipment--mundane items that will have little impact on taxpayers, officials said.

“Every time you spend money there is an opportunity to save money,” said Thomas Marston, Glendale’s executive assistant finance director. “If you absolutely have to have a new car and previously planned to buy a Lexus, you may still be able to buy a Yugo.

“Instead of eating steak every night, we’ll have to learn to like peas and carrots.”

The city earned its greatest return on investments--$17.2 million--during 1981-82, when interest rates peaked and the national economy went into a tailspin. Rates in the last five years have fluctuated from 7.36% in 1986 to 9% in 1988, down to the current 6.9%.

Evans predicts a further drop, to 6.85%, by the end of 1991 or early in 1992.

Despite declining rates, cities have few viable alternatives to stave off the loss of revenues from declining interest earnings, said Conny Jamison, president of the California Municipal Treasurers’ Assn.