HIGHER INTEREST RATES MAKE T-BILLS WORTH CONSIDERING FOR CONDOMINIUM RESERVE INVESTMENTS

If you’ve served on a condominium board or managed a condominium community for any length of time, you have almost certainly heard financial experts preach the importance of managing reserve funds conservatively.  Your goal, these experts will have explained, is to protect the principal at all costs, even if that means, as it has usually meant, keeping the funds in bank savings accounts or money market accounts, where they earn little or nothing, and foregoing investments that offer higher returns but might put the principal at risk. 

The investment mantra – do no harm – still applies.  Pork futures, options and bitcoin are all off the table for association reserve funds – or should be. 

But today’s higher interest rates – a product of the Fed’s efforts to combat inflation -- have made Treasury Bills an investment alternative that boards might want to consider. Savings accounts are still paying less than 1.00%, but T-bills in varying denominations are paying more than 4.00%. 

Best of Both Worlds

Both bank savings accounts and T-bills offer the protection of the U.S. government – T-bills because they are government-issued debt; bank savings money market accounts, and bank certificates of deposit (CDs) because they are protected (up to $250,000 per account) by federal deposit insurance.  If the bank fails, you will recover every penny of your insured funds. T-bills offer the best of both worlds – safety (the government has never defaulted on its debt and isn’t likely to) and a higher return than you will earn on a bank account.

T-bills are typically issued in denominations of between $1,000 and $10,000. They are short-term investments, maturing in as little as a few weeks and no longer than a year.  Treasury notes feature higher returns than T-bills, but their longer maturities (two – to ten years) aren’t typically appropriate for associations, which must have access to their reserves to cover both anticipated and unanticipated capital expenses.  The association’s accountant or a financial adviser can help the board select maturities that match the association’s reserve funding needs. 

You can purchase T-bills relatively easily, on line, but you can sell them only through a brokerage account, which the board should probably establish at the outset.  Just make sure the institution at which you open a brokerage account understands condominiums and has experience dealing with them. Brokers unfamiliar with condominiums might balk at cashing out a matured T-bill if new board members have replaced those whose names are on the account.

For board members struggling to balance budgets in the face of rising costs, T-bills offer a rare opportunity to increase the association’s revenues without increasing its financial risks. You’ll find additional suggestions for managing association finances in this related article.

By: Richard Brooks