Making the Most of Nonprofit Reserves
Peter Holupchinski, Senior Wealth Advisor
According to a June 2022 survey from Invesco, the typical organization currently maintains 55% of its short-term investments in cash, the highest figure since 2016. And with inflation and uncertainty spiking, decision-makers at charities and foundations are under pressure to eke out as much return as possible. And so the question becomes, should we be thinking more strategically about our cash reserves?
With inflation hitting a 40-year high (Reuters), the Federal Reserve has been forced to raise interest rates to try to combat rapidly rising prices. But interest rates on FDIC-insured bank accounts and certificates of deposit (CDs) are only loosely linked to the Fed Funds rate, the interest rate set by the Fed. That’s because the Fed Funds rate is not the only factor that banks take into account when setting interest rates.
Banks also consider how much cash customers have deposited and how much competitors are offering. According to Ken Tumin, founder of DepositAccounts.com, “banks have few incentives now to offer attractive deposit rates because they’ve been flush with funds since the earliest days of the pandemic” (Why Savers Aren’t Getting Higher Rates With Today’s Red-Hot Inflation | Barron’s (barrons.com).
Options to consider (yields quoted as of July 12)
Though the average yield on a traditional savings account is a paltry 0.06 percent, it is possible to shop around and find savings accounts paying up to 0.6 percent APY (Bankrate). But even that pales in comparison to the 2.78 percent current rate on a 6-month U.S Treasury bill. If you go out a bit longer, 1 year U.S Treasury rates are 3.07 percent and 2 year rates are 3.03 percent (Treasury.gov). On a hypothetical $1 million cash reserve, the difference between 0.06 percent in a savings account and 3.07 percent in a 1 Year Treasury amounts to $30,100 in extra interest.
Treasuries are liquid, safe, and fully backed by the American government (similar to FDIC insurance). But it is important to remember that Treasuries are not riskless unless held to maturity, as prices can and do move prior to maturity. So, as you consider the attractive yield on Treasuries, it is often best practice to assume that those funds are unavailable until maturity, even though that is not technically the case.
In practice, a combination of FDIC insured bank deposits and U.S. Treasuries can strike the right balance between readily available cash and maximizing yield. For example, an organization could keep 3 months of operating reserves in checking/savings while putting the remainder of shorter-term reserves into Treasuries.
How we can help
CLA’s Nonprofit Investment Advisory + Consulting Services were developed to help nonprofits fulfill their philanthropic mission and navigate through financial uncertainty by leveraging our expertise in nonprofit finance, cash and reserves management, governance, risk management, and investing. Contact Peter Holupchinski for more information! peter.holupchinski@claconnect.com
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