The Falls Church City Council had quite a rousing time of it at its work session Monday night when it had its first go, rather a free-for-all, about how to spend the some $14 million in net proceeds from the sale of its water system to Fairfax County.
There are obvious extremes that should be avoided, such as to blow it all on a really big weekend in Vegas or to walk down the street randomly handing out $100 bills, equivalent in government to either adding the money to the general fund to mitigate against belt-tightening measures for a one year “splurge,” or to use it to provide a tax rebate to citizens.
Extreme on the opposite end of a spectrum of options would be to lock the money away. To assess things like this, one must start with a healthy skepticism rooted in the practical realization that any financial institution’s advice on what to do with someone’s money is looking to maximize profits from its use of your money for itself, first, and not for its client.
Once, in this newspaper’s small business experience, when we were encouraged to apply for a bank loan, the prospective lender wanted us to use the money to buy an old house for an office. Well, the bank stood to benefit the most from that use of its loan, without any regard for whether it would do anything to bring our business any closer to achieving its goals.
Similarly, we have felt pressure over years to take surpluses and to lock them up in the form of financial instruments that would ensure the bank’s control over the money for a significant period, with fierce penalties for early termination. In exchange for a minimal advantage in interest, banks sought to acquire the ability to use our money for its own investment strategies for many years, thinking of their own profits, not ours.
So, it was highly fortuitous for our business that we did not lock our resources up in any such manner. The intuition to remain as flexible as possible turned out to be more like a premonition. The Great Recession hit, and if we’d not had instant access to our saved up resources, the result would have been catastrophic.
So, the City Council should avoid the temptation to lock up this windfall by, for example, deploying it to the pension fund and thereby losing all control over the principal and unable to get it back. Instead, the City should establish an endowment to retain the principal as a tool for investment, while maintaining the flexibility to modify its use depending on the need.
Times are still very volatile. As an inevitable end to the Federal Reserve stimulus program threatens to send interest rates spiking upwards, this is no time for the City to commit prematurely to any “lock box” approach, but instead to remain as nimble as possible.