HomeMy WebLinkAboutIR 7604 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 7604
may 19, 1992
To the Mayor and Members of the City Council
Subject: BANK FEES
Ten
The City's banking services agreement is presently designed to
pay for bank fees (i.e. items deposited, unencoded items,
returned checks, lockbox charges, account reconciliation tape,
etc. ) through the maintenance of a "compensating balance" at the
bank. Should the minimum balance fail to offset the fees for
services rendered, the bank may invoice the City at the end of
contract period for the difference.
Originally, a $2, 000, 000 compensating balance would usually
cover the bank's monthly fees. It no longer does. The bank's
earnings credit rate has fallen from 6.42% in January 1991 to a
low of 3.81% in February 1992. Also, since the implementation
of the Water Department's lockbox in December 1991, the City's
banking services fee has almost doubled from an average of
$15, 000 - $16,000/month to $32,000 - $33,000/month. It would
take a compensating balance of $11,500, 00 to cover the bank's
fees now.
The compensating balance approach to paying bank fees does not
work to the City's financial advantage. For example, to pay the
bank's January fee of $32, 129, the City would have had to
maintain a compensating balance of $11,284,000. The bank's 12%
reserve requirement would have reduced the balance by $1,354,000
to $9,930,000. This amount, multiplied times the January
earnings credit rate of 3.82%, would have generated enough
interest earnings to cover the bank's fees in January.
The City has elected to maintain a compensating balance at or
around $2,000, 000 and invest the difference between the actual
balance and the "required" balance at an overnight rate higher
than the bank's earnings credit rate. For example, the City's
actual compensating balance in January was $2, 136,000. Net of
the bank's 12% reserve requirement, it was $1,880,049. At the
bank's earning credit rate of 3.82%, the net balance generated
$6,083 toward paying the January fee. The difference between
the "required" balance ($11,284,000) and the actual balance
($2,136, 000) was $9,148,000. By keeping this amount invested at
the City's average overnight investment rate of 4. 14%, $31, 127
ISSUED BY THE CITY MANAGER FORT WORTH,TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No._ 76o4
_.�PITEJ► Kay 171 1992
To the Mayor and Members of the City Council page 2 of 2
► Subject. BANK FEES
Ion
was earned, plus the bank's earning credit of $6,083, for total
monthly earnings of $37,210. These total earnings exceed the
amount that would have been earned by maintaining the "required"
compensating balance by $5,081.
Since June 1991, the dollar amount of the earnings credit on the
City's bank balance has been less than the total monthly fees
charged by the bank. Through March 1992, the cumulative
difference between the bank's earning credits and the bank's
fees for service is $101,000. The cumulative amount owed the
bank is increasing about $24,000/month (i.e. the difference
between the fees charged by the bank and the monthly earnings
credit) . Eventually, this bill will have to be paid, and prior
to fiscal year end, Council approval to pay the accumulated fees
will be requested. Funds will be available in the City's
unallocated interest account to pay this expense.
eL By investing the difference between the City's actual balance
and the balance "required " to pay the bank's monthly fees, the
City has earned $29,900 more during the June 1 - March 31 period
than it would have earned had it simply maintained a
compensating balance equivalent to the one needed to generate
the monthly fees. Total earnings (i.e. bank credits and
overnight investment earnings) are presently exceeding the bank
fees by about $5,000/month.
A Request for Proposal for banking services is being developed
which will pay the bank's fees directly out of a budget line
item and allocate the costs of banking services to the
appropriate funds. As the RFP process continues, staff intends
to maintain an average positive collected balance of $2,000, 000,
rather than increasing the balance to $11,500,000. The smaller
balance will maximize the City's earnings by avoiding the bank's
reserve requirement (recently lowered to 10% by the Federal
Reserve) and by earning at the City's overnight investment rate
which., since June 1991, has averaged 25 basis points higher than
the bank's earnings credit rate.
(I OLjau�4, (1-
Bob Terrell
Acting City Manager
ISSUED BY THE CITY MANAGER FORT WORTH,TEXAS