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Beyond the News: So, What is Next?

January 29, 2025

Top of mind recently has been the importance of portfolio liquidity.  I’ve commented on this several times in recent posts—most recently in last week’s note on the changes in state and local government investment portfolios reported in the Federal Reserve’s release on  Financial Accounts of the United States.  The events this week could not be more to the point. We’re in for an uncertain ride and the best laid plans for state and local government investment portfolios could be upended with little notice.

Monday evening a journalist posted to X a copy of a two-page memo from the Office of Management and Budget that announced a temporary pause, beginning at 5:00 PM (eastern time) Tuesday of all Federal grants, loans, and financial assistance other than payments made directly to individuals. After a short interval, several of the politically-tuned news sites posted stories with medium-sized headlines that were mixed in with the “usual” Washington news of the day, but it took several more hours until the news appeared on the leading financial or general news sites, thus making it into the broader public domain. 

By Tuesday morning the Government Finance Officers Association had a bulletin and post on their website, but it was limited to a link to the OMB memo. (Through the day GFOA posted some additional information including a 50+page spreadsheet that identified specific Federal programs that would be implicated.) By late Tuesday, the news had headlines like this: “Trump’s spending freeze spreads chaos across US.”  Meanwhile a Federal judge issued a temporary injunction that put a hold on the suspension for now. At mid-day Wednesday the Trump administration had rescinded the order.

Tuesday was not a fun day for financial managers at the 90,000 state and local governments to think through, prep for and implement the response to a temporary interruption in what represents in the aggregate more than a quarter of their revenue.

how much money does the federal government provide state and local governments USAF LOC country United States national map chart download

It’s not just the reach or substance of potential changes in Federal fiscal policy, but the suddenness and absence of advance signals that would afford government financial managers the ability to make and revise plans. Financial managers scrambled to understand the implications of the memo, and to decide whether to pause or prorate their spending or to continue spending in anticipation of a resumption and catch-up in related Federal payments.

The OMB memo did not set a date for resumption, but it appeared from the context of the memo that it would be sometime after February 10. It also implied future payments could be reduced by amounts the Trump administration determined were in programs implicated by a number of its just-issued executive orders.

What does this have to do with portfolio management? The simple answer is that a pause in Federal assistance for multiple (even if not all) programs can quickly challenge the best laid cash planning, leading to calls for portfolio cash to advance/support payments. Whether and how much will be a hard call by financial managers, and their already difficult decisions should not be constrained by portfolio cash flows.

What to do? Cash flow planning is key. Last week I suggested that portfolio managers address this planning question: “Am I prepared for a [20] % drawdown of investment balances over the next year?”  The 20% was not a fixed percentage but a placeholder for a figure that would create a meaningful, if temporary, reordering or reduction in revenue.

No, the sky need not fall to invoke this question. Over the balance of the year, we could see:

  • Failure to pass a Federal budget by the mid-March deadline.
  • Suspension of one or more Federal assistance programs without the notice and process that goes along with the formal regulatory procedures.
  • Legislation to end one or more Federal programs that emerges with little notice as part of the budget reconciliation process.

There are some elaborate cash flow models out there and some investment managers and consultants offer this as a service. That’s well and good, but without seeming like a Know Nothing, common sense back of the envelope estimates work as well.  After all, the question is "if things do not go according to plan how much liquidity will I need in my portfolio?” 

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Keep in mind that in the current market there is little if any cost to liquidity. The Treasury yield curve is extraordinarily flat, with only about 25 basis points separating the low and high yields within the two-year maturity space. And in fact, the highest yield is for very short maturities.  Of course, that implies the risk that rates will be lower later in the year but at this point public funds portfolio managers would be well served to put a premium on liquidity.

**This is updated to reflect the recission of the OMB order mid-day Wednesday.


Greetings, fellow colleagues in the public funds investment community! I'm Marty Margolis, a seasoned expert with a deep understanding of the intricacies of managing public sector investments. Having led the growth of PFM Asset Management and managing assets exceeding $150 billion, I am excited to connect with you through the Public Funds Investment Institute. If you haven't already — subscribe below to join our community, explore our thought leadership, and gain valuable insights. I encourage you to connect with me on LinkedIn or reach out via email to share your thoughts, feedback, and ideas. Let's collaborate and make a positive impact together.

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Marty Margolis

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