Cash management and local government: Can cities afford their 'lack of interest'

Cash management may emerge as a solution to some of the financial problems cities are experiencing in the 1990s. While there appears to be sufficient incentive to use sophisticated cash management practices, there is no indication that the use is widespread. This study attempted to establish which differences in local government cash management practices exist and to explain why there is a differential use of cash management in cities.;The literature holds that there should be large differences in cash management practices, differences that are attributed to differences in form of government. Other literature argues that, while traditional definitions of reform only consider the political and structural characteristics, we need to extend this scope and include the influence of administrative characteristics of government on local policy.;From this literature, we developed a model that would account for variation in the use of cash management tools among cities. The basic argument was that different forms of government could be equated with a differing emphasis on either technical competence or representativeness in the handling of public affairs. Therefore, the form of government has consequences for the level of professionalism in administration and for the sophistication of the administrative process as reflected in administrative procedures. The level of professionalism and administrative procedures in turn will influence the cash management practices of local government, while the return on investment of idle funds (interest earnings) depends heavily on the cash management practices. We extended the model by adding a few possibly intervening variables (population size, budget size, and legislative limitations).;From this study, it is evident that cities are doing more in cash management than was at first expected. We also found considerable diversity in what cities actually do. This is what we had expected on the basis of our theoretical model. However, our model holds that variation in cash management practices correlates with variation in form of government. This correlation appears not to be true. Our empirical findings indicate that form of government does not have any bearing on the extent that cities are using cash management practices.