Document Type

Research Report

Publication Date

Winter 1985

Abstract

In March 1978, in accordance with the unanimous recommendations of two special commissions, the Treasurer of Massachusetts established a "linked deposit program." Under the terms of this program, a portion of the approximately $400 million available for short-term investment from the state's General Fund was to be deposited with in-state banks and thrift institutions, selected on the basis of their performance in promoting the economic and social welfare of Massachusetts citizens and communities through their lending and related activities.

Six years after its inception, the Massachusetts linked deposit program (LDP) has grown to become a sizable and stable part of the Treasurer's investment program. By the spring of 1984, when the research for this study was undertaken, there were $114 million of LDP deposits outstanding, at 72 of the state's approximately 400 banks. In spite of its size, however, and contrary to recommendations by both special commissions that program implementation include careful monitoring and evaluation, there has never been a systematic evaluation or review of the Massachusetts LDP.

The rationale for an LDP is straightforward: by giving preference in awarding public deposits to banks whose loan portfolios contain a relatively large amount of loans in specific publicly-designated categories, public funds would be channeled to those banks most likely to put them to socially desirable uses, and banks would have an incentive (the prospect of obtaining increased public deposits at favorable rates) to alter their overall loan portfolios in socially-desired directions. By following the lead of state Treasurers in Illinois, Missouri, and Colorado in adopting an LDP, the Treasurer of Massachusetts sought to utilize a promising mechanism for making banking institutions responsive to the public interest as well as to the interests of their shareholders and depositors.

In fact, the recommendation by the Special Commission on State Investment that Massachusetts establish an LDP was a highly qualified one. The Commission emphasized that the program's ability to promote its stated objective would depend on the nature of the LDP adopted: "...it is crucial that [an LDP] be well-designed, well-implemented, and well-publicized."

This report presents the results of a systematic analysis of the extent to which the operation of the Massachusetts LDP meets the three-part standard articulated by the Special Commission on State Investment. After a short Introduction, Part II reviews the historical evolution and present structure of the Massachusetts LDP. Part III summarizes the methods and the results of a quantitative analysis of all of the bids by, linked deposit scores of, and LDP awards to the banks that participated in the program during 1983 (the most recent year for which complete data were available). Part IV contains a systematic evaluation of each of the major aspects of the Massachusetts LDP's design and implementation. Because one goal of this project, which was undertaken with the cooperation of the Treasurer's office, was to identify desirable changes in the program's structure and operation, a number of constructive proposals for strengthening and improving the Massachusetts LDP are included. Part V offers a brief conclusion.

Comments

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

 
 

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