Holding a Hot Potato? The Credit Crisis and Its Impact on State Cash and Short-Term Investment Portfolios

The management of cash and short-term investments ensures that state and local governments can provide consistent levels of service throughout the year. Government investment options are constrained by legislation and fiscal prudence, which are frequently viewed as sufficient to ensure that investments carry virtually no risk. However, unanticipated changes in the economy and capital markets may still result in financial losses for state and local governments. This paper provides an overview and analysis of the holdings of state short-term investment portfolios. It finds that state governments have generally been cautious in their cash management and do not have substantial exposure to riskier financial products. However, the current crisis will result in a decline in investment income, which has supplemented more traditional forms of revenue. This will result in additional stresses on resources as other sources of revenue decline and demands for expenditures increase.