Investment Yields vs Inflation at LAIF

Local Government Agencies: Are Your Interest Earnings Greater than the 7% Inflation Rate?

As a municipal finance officer (i.e., CFO, Finance Director, etc.), it is usually our job to invest the idle cash balances of our local government.  But some finance officers don’t have the time (or the expertise) to spend the hour or two that it takes to generate tens of thousands of dollars in additional investment yields.

That’s what this CitySpeak article is about, to wake up municipal employees who are responsible for the investment of their local government’s cash balances.

It is time to get “busy” with investing our “idle” cash balances, now that interest earnings (investment yields) are rising.  Due to the loose monetary policies of the Federal Reserve Bank (the Fed) during the past 13 years, our investment earnings were on a roller-coaster ride, and at times barely “above zero”.  Our meager investment yields have been nothing to get excited about, especially since the Fed “opened the spigot” to the money supply!

But the markets for investments have turned.  Your FY 2024 Revenue budget line item “Interest Earnings” may surprise you when compared to prior years!

It’s time to dust off your ladder portfolio and the 5-Year CIP Budget to maximize your local government’s investment yields (without jeopardizing principal or sacrificing safety).

Read below, or watch this video, to learn a little about why I feel it’s time to get back into the markets.  In my 32 years working as a municipal finance officer, I’ve never seen the volatility in interest rates or investment yields (and the irrational relationship between Interest Rates vs Inflation) like I have seen during the last 10 years.

As you get ready to make investment trades (investments), just remember (a) dust off and update your Investment Policy, and (b) keep the SLY investment principle in mind at all times.  You can also get involved with the California Municipal Treasurer’s Association, or some other related organization.

THE ORANGE COUNTY FIASCO:  As some of you may have read about, the SLY principle was thrown out the window during the 1990’s when a certain Treasurer from Orange County, California got “fancy with the spices”!  I’m glad my City organizations were not affected by the high returns offered by the County of Orange.  I never forgot the risk-return dictum from SDSU’s College of Business which states, “higher returns, higher risk”.

Sadly, many local governments had to learn the risk-reward and the SLY principle after being taken in by Robert Citron, Treasurer-Tax Collector from Orange County, California and his reckless investment decisions.  This dude, with his promises of “above market returns and investment yields” caused the costly (and embarrassing) Chapter 9 bankruptcy of Orange County, California in 1994, and the loss of millions of public dollars (though much was later recovered).  I assure you, Orange County officials won’t quickly forget the SLY principle, nor the foolishness of their County Treasurer-Tax Collector.

So, what is the SLY principle?

The SLY principle is a common-sense investment policy for investing public dollars, where Safety comes first, Liquidity comes second, and Yield comes third as the last consideration.  The SLY principle basically says that we can seek to maximize the “yield” of our investments as long as we NEVER compromise on Safety or Liquidity.

BOTTOM LINE: It is vital to our local government organizations to keep in mind that the 7% existing inflation rate is “eating away” at millions of dollars sitting idly in bank accounts not earning higher yields, while preserving safety and liquidity considerations.

Local governments can look to the Government Code and to their Investment Policy to see which investments are allowable and beneficial given their 5-Year Cash Budget, ladder portfolio, 5-Year CIP Budget, etc.  As I said above, it’s time to get busy investing, and to avoid losing about 3-5% of the purchasing power of their cash balances because of the existing high inflation rate.

Most local governments in California are largely invested in LAIF (Local Agency Investment Fund), which is very safe investment which I use at my City organizations as well.  LAIF has always been “the easy solution” when a local government Treasurer or finance officer does not have the time (or the interest) investing into US securities with maturities of longer than 6 months.  But it really doesn’t take that much time, as I said just an hour or two, to move monies which are not needed in the next 18 to 24 months, and achieve investment yields close to 4%, without sacrificing Safety or Liquidity.    Yet LAIF is one of many investment options in our portfolio, and can continue to be such.

Here are seven (7) very important historical milestones in the investment earnings history for LAIF which I thought your organization might benefit from:

  1. 1980 Recession:  LAIF was paying 10.873% and Inflation was at 14%.
  2. 1992 Recession:  LAIF was paying 5.254% and Inflation was at 3.01%.
  3. 2002 Recession:  LAIF was paying 2.672% and Inflation was at 1.58%.
  4. 2007 Recession:  LAIF was paying 5.159% and Inflation was at 2.85%.
  5. 2009 Recession:  LAIF was paying 1.232% and Inflation was at -0.36%.
  6. 2018 Slowdown:  LAIF was paying 1.85% and Inflation was at 2.44%.
  7. 2020 Recession:  LAIF was paying 1.168% and Inflation was at 1.23%

Click the link below to see the actual LAIF yield graph:

LAIF Historical Monthly Yields to December 2022

Today in early January 2023, LAIF is paying about 2.2% and Inflation is at about 7% – we’re losing about 5% purchasing power in our public dollars!

Do you see the problem?

Bottom line: With inflation at 7% today, LAIF investment yields will need to rise SIGNIFICANTLY above 2.2% quickly, “if” Inflation is not appropriately contained by the Fed (which has a 2% inflation target).

Call me or email me at so I can tell you more about how local government officials can learn more about municipal investing, especially during this time when interest rates (investment yields) are improving!

All for now,

John Herrera, CPA



Click here to watch the video.

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