The city of Phoenix is launching a plan to invest up to $50 million in public money with banks and credit unions in the metro area with the goal of providing them with the capital to make loans to businesses and individuals.
The Arizona Republic reports that Phoenix, in turn, hopes to get a higher rate of return on some of its investments.
Phoenix is the latest city to join a group of municipal and state governments that have sought out community banks in the wake of the financial crisis.
“Not only is the city following a policy that provides for prudent and efficient investment, but provides additional funds for consumer and small-business loans in the local economy,” said Mayor Greg Stanton.
Investing money in local banks isn’t easy. State law requires that the city’s bank deposits be insured by the Federal Deposit Insurance Corp. to prevent it from losing taxpayer money if the bank fails.
Or, in some cases, banks can use collateral to back up the city’s investment beyond what is insured. That limits the city’s options.
The maximum federal insurance on low-risk investments that the city might utilize, such as a certificate of deposit, is $250,000. That could require the city to work with many banks if it hopes to invest anywhere near $50 million locally.
Phoenix primarily invests its money in U.S. government securities.
Such investments have become less desirable in recent years as high demand for safer securities has made interest rates on U.S. Treasury notes plummet to historic lows.
Overall, $50 million is a relatively small portion of the city’s total investments, which amount to about $1.5 billion and are restricted for myriad purposes.
Finance Director Jeff Dewitt said the city likely could not invest more in local banks given FDIC insurance limits.
Phoenix has a team of in-house investment managers who oversee its deposits and ensure that city funds are protected while earning the highest yield possible.
Dewitt said the city is inviting local banks to submit applications with their investment pitches.
He said proposals must be completely FDIC-insured or collateralized and offer a higher rate of return than U.S. Treasury notes.