September 24, 2013
Elizabeth M. Murphy
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Dear Elizabeth Murphy:
The City of Chicago, Office of the City Treasurer wishes to state its concerns regarding proposed changes to the structure of money market mutual funds (MMFs), particularly our concerns with proposals that would require the funds to abandon their stable $1.00 per share net asset value
(NAV) and instead "float" their NAVs (defined as Alternative One in the Commission's release). As the Commission is well aware, as a municipality we benefit from MMFs as both a user of the product and an issuer of bonds held by these funds. We stand to incur substantial costs in the form of higher financing and lower returns on investment under the Commission's proposal.
State and local governments use MMFs to hold cash balances for our short and mid-term cash management needs. We are subject to statutes governing our investment operations generally, as well as for specific allocated funds, that limit the types of products in which we can invest. We manage over $7 billion out of our office for both the City of Chicago and four of its Pension Funds. Each is managed according to its approved investment guidelines.
We manage over $2 billion in our Operating Portfolio that is comprised of over 100 separate accounts. Floating NAV, per day redemption restrictions and potential fee hair-cuts would drive us to government funds only and diminish our ability to earn incremental income as we provide liquidity for our City's needs.
Bond indentures and credit agreements impose additional restrictions for us. We manage over $3 billion in our Bond Proceeds portfolio that have a multitude of restrictions and in some cases limited investment options.
Stable NAV MMFs are permitted investments for us, and we rely on these funds to obtain ready liquidity, preservation of capital, and diversification of credit. Variable NAV MMFs generally are not permitted investments for us. In fact, few other permitted investment options provide the same features of safety, return, liquidity, and stable market history as stable NAV MMFs. Depending on the Bond indenture, we might be restricted to illiquid CDs or other vehicles that would not work as well as the MMFs we have been utilizing at this time.
The Commission's Alternative One presents significant challenges to our current investment strategy, which relies on our access to stable NAV MMFs. Due to the size of our balances, and the size of large cash payments we must make for payrolls, bond payments, and infrastructure improvements and maintenance, we generally would not qualify as "retail"
investors eligible for stable NAV "retail" MMFs under the Commission's proposed rules. This leaves us with the institutional floating NAV option, and we are doubtful that these funds would be considered permissible investments under current requirements.
Though we do investment in various other institutional level fixed income vehicles as per our approved investment guidelines, we regularly utilize MMFs as way stations as we sell investments or move money to pay for investments and other payables. We would never be able to count on the principal balances invested in floating rate NAV funds and count on that dollar amount invested as the amount available to later liquidate to settle a trade or other payables. This would force us, should we be willing to take the risk of principal loss, to carry a higher position than necessary to ensure full payment could be made. The reduced earning differential between government MMFs and Prime MMFs (that would be considered under the new proposal as a floating NAV product) would end up reducing our earning power. It would be highly imprudent and fiscally irresponsible for us to engage in MMFs that would carry such a high risk/return, possibly resulting in a loss of principal.
Even if we could reduce our use of MMFs to such a degree that would allow us to invest in stable value government funds, we would still incur costs in the form of lower returns. In the best of times, government MMFs pay a significantly lower yield than prime MMFs. At this time, they have almost no return due to the current interest rate environment and during the aftermath of the 2007-2008 credit crisis, most government MMFs were yielding 0.00%. Even today, 5 years later, we find some of our funds yielding as little as 0.01%. Collateralized bank deposits, one of the only other options for states and municipalities, also have near-zero interest rates, assuming we can find a bank to accept them (uncollateralized bank deposits in amounts well above the FDIC insurance limit of $250,000 are not allowed for state and local governments).
We use the income from our cash investments to help pay the cost of providing services to our citizens. Less income on our invested cash means fewer services, and makes our tight budgets even tighter. In total, state and local governments hold approximately $92 billion in MMFs. If we are restricted to investing only in government MMFs, the lost income to state governments amounts to many millions of dollars per year. We make good use of that income and we will have to further tighten our budgets if
it is no longer available to us. We will also face pressure as an issuer
of debt instruments if the Commission's regulations decrease overall demand for MMFs. We believe the Commission understates the potential for this outcome - particularly in tax-free municipal funds. In its release, the Commission suggests that only retail investors use tax-free municipal funds, as only individuals receive beneficial tax treatment from these investments. This has not been our experience.
Many institutional users, such as corporations, who value these funds for their access to the municipal debt market and their rate of return, will be forced to reduce their holdings as a result of the $1 million per day redemption limit. Many corporations find tax-exempt MMFs a tax advantage based on their corporate tax base and use these vehicles for Corporate Cash liquidity. Since the collapse of the Auction Rate Securities market in 2008, corporations have found the available Corporate Cash investment vehicles limited at best. Their institutional status would diminish their liquidity options even further and make their cost of doing business go up as well. In addition, most corporations would not wish to jeopardize
their principal balances from potential floating NAV fluctuation. In any
event, if overall demand for MMFs drops, MMFs will reduce their purchases of state and local debt. As a result, we may have to limit projects and tighten budgets to account for the higher cost of financing. All this happens at a real cost to our citizens.
At a time when many of our constituents have suffered so much since the mortgage fall-out, job loss and in many cases sustained unemployment, additional services that we offer by way of our Policy Division to provide financial literacy and economic growth throughout our Chicago neighborhoods could be curtailed or even eliminated. We have 3 main goals in the Office of the City Treasurer: 1. To keep our money safe, 2. To maintain enough liquidity for our City to pay the bills and 3. To maximize our return on investment within the City's agreed upon general investment policy. A floating NAV and a per day redemption limit would not serve to help us with the aforementioned.
Please consider the economic cost to state and local governments - and to our citizens - from the Alternative One proposal and do not adopt the MMF amendments that would prohibit a prime institutional MMF from attempting to maintain a stable NAV or the per day redemption cap with the potential of additional applied haircuts (Alternative two) to institutional buyers.
Treasurer Stephanie D. Neely