Document Type

Research Report

Publication Date

12-1985

Abstract

The idea underlying the Massachusetts Linked Deposit Program (LDP), which has been operated by the Treasurer since 1978, is that a portion of the money in the state's General Fund is deposited in Massachusetts banks, with the amounts awarded to individual banks linked to their performance in serving the people and communities of Massachusetts. Bidding banks must offer a required minimum interest rate and must furnish specific information on the composition of their loan and investment portfolios. This information is used to compute a "linked deposit score" for each bank, which provides a basis for linking the awarding of public deposits to the performance of private banking institutions. Following the awards of May 1985, a total of $142.8 million in LDP funds was held by 79 banks.

A previous report by the present author, "Private Banks and Public Money: An Analysis of the Design and Implementation of the Massachusetts Linked Deposit Program" [published by the McCormack Institute in early 1985] presented the initial results of the first systematic review and evaluation of the Massachusetts LDP that had been undertaken since the program's inception. This report identified serious deficiencies in every program aspect reviewed. Its most important single finding was that there was in fact no linkage between the scores and awards — that is, that the size of the deposits awarded to individual banks was unrelated to the LDP scores calculated for those banks by the Treasurer.

Private Banks and Public Money included a number of constructive proposals for strengthening and improving the Massachusetts LDP. In response, the Treasurer's office implemented a number of significant changes in the forms and procedures used for the May 1985 cycle of bids and awards. The present report describes and evaluates the design and implementation of these modifications. The principal conclusion that emerges from the analysis presented in the body of this report is that although significant improvements were introduced in May 1985, the two major conclusions of our previous study remain valid: (1) "there is [still] in fact no linkage in the Massachusetts linked deposit program as it is currently operated" and (2) "the Massachusetts LDP [still] falls far short of being 'well-designed, well-implemented, and well-publicized' — that is, it [still] fails to meet the three-part criterion originally set forth by the Special Commission on State Investment."

Comments

Prepared for the John W. McCormack Institute of Public Affairs, University of Massachusetts Boston.

 
 

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