A Funds Management Policy for the Treasury?

At the recent meeting of the RA it was decided to set aside a permanent reserve of funds corresponding to two months of tier payment (= approx. 108,000 L$). The particular institutional mandate under which this reserve may be utilised has yet to be spelled out but it is clear from the text of the bill that the reserve is intended to be used in the case where for some reason or other city income is not able to meet the expenses incurred monthly in relation to our payment of tier to LL.

I have been thinking that this decision really needs a follow-up on two particular issues:

1) It would be beneficial to spell out clearly the circumstances under which the reserves may be tapped: i.e. "when the city expenses for a given month are not fully matched by corresponding income" or "when city income for a given month is less than 25% of the monthly tier payment subject to approval by the Guildmaster and a simple majority of the RA".

More importantly however I'd like to raise for consideration the issue of whether it would be desirable for us to consider a Funds Management policy to put all or part of this reserve to active use as working capital for the benefit of the city.

2) It seems relevant to take a decision on the question of whether part of our reserve should be put to use as working capital the interest on which would be plowed back into the city treasury to be available in the promotion of initiatives as the RA sees fit according to budget.

To elaborate a bit on the above an active funds management policy is of course always about balancing the need for the security of having a reserve at disposal in case of unforeseen financial difficulties or emergencies on the one hand and on the other of wanting to capitalise on a relatively large sum of money, which would otherwise be taken effectively out of circulation and losing value by the hour (depending on the existence of inflation of the L$ of course).

Seeing as the RA has decided to keep a reserve of two months tier payment I would at a first glance consider it natural to diffentiate the risk/gain profile for the portfolio into two lumps:

A) One of which should be available on an immediate basis to cover the situation of an unexpected emergency where the city would otherwise be unable to pay tier to LL. For this immediate reserve some initiatives could perhaps be implemented to ensure that the money is available in a situation where access to the normal treasury would not otherwise be possible for reasons of technical outage, transfer of ownership or otherwise (i.e. setting up a seperate account to hold this money - perhaps depositing it with LL as a security or in escrow with a neutral third party).

B) The other part of the reserve could be made available on a short term basis (i.e. within a month of the need for the money being foreseen, which seems reasonable considering that tier presumably is normally paid on a monthly basis and an immediate reserve could cover that need). The treasurer could be entrusted with devising initiatives that would ensure a stable payoff from this investment while at the same time allowing the portion of money to be liquidated on a basis of 2 - 3 weeks perhaps. There will of course be a certain risk associated with putting this part of the reserve to active use but the risk can be managed and the fact that we have an immediate reserve and are able to continually pad any losses on the B reserve from month to month with surplus income or even decide to abandon any further investments for a while seems enough to assure me that it would be a relatively safe option to put part of our reserve to active use.

It seems to me natural to consider the possibility of splitting the reserve of 108,000 L$ into two lumps of equal size. The first of which would fall into the A category and the second in category B. Since the lumps are of equal size the first lump would be able to cover the immediate need for funds to pay LL tier for example whereas the second lump could be made available within a month to cover the force majeure situation of the city failing to get access to other capital or income for a period of more than a month.

Looking at the possibilities available for investing money in SL and taking into account my own risk preference profile it would seem natural to expect a monthly interest rate of 2 - 3% on the investment of reserve B. The particular rate of capital to aim for will of course be subject to discussion and be dependent on the risk preference of the city. I look forward to hearing your views on this.

Finally it should be noted that these issues might well have been raised as amendments at the last meeting of the RA when reserve bill 4-9 was being discussed. I was present at the meeting and did thus have full formal possibilities of raising these issues and present them as amendments. I did not do so and can only explain it by way of the fact that RA meetings currently begin at midnight in my timezone and as the RA had been in session for probably an hour before 4-9 was being discussed I was due to tiredness not exactly in possession of my full cognitive facilities by that point. I apologise for the blunder and hope by way of the above to have made up for this and hopefully prepared the ground for a substantive and principled discussion on the desirability of risk differentiation of our capital reserve. A debate, I might add, which does not need to be mired in a discussion on the relative merits or conspiracy theories surrounding institutions such as Ginko Financial.

Should the discussion prove to point in a direction generally positive toward the idea of risk differentiation of the capital reserve I'd be happy to prepare a bill for the next meeting of the RA where the essence of the presented recommendations are brought forth.

This is a very interesting discussion. Diderot, I think you are unfair to yourself re the "mea culpas" about ammendments on the first bill. I see no reason why the first bill which sets forth the intent should be incompatible with a second bill, or perhaps, even a "Treasury Dept" administrative action, which implements it in an intelligent fashion.

The two tiered concept is certainly a good one, and its consistent with standard ideas of "spreading the risk". I feel, though, before we can go much further with this "implementation" discussion, we have to analyze in detail the financial, and also currency, structure of SL. Time presses on me now, so I can only touch on some of the issues. But I think that, fundamentally, we've touched on a root structural issue as significant for the future of NBurg as the constitutional issues going on in other threads.

1) We need to analyze the "containers" of funds in SL. In RL, we have accounts, which are "contained" within highly structured legal entities. individuals, partnerships, corporations... Most funds are contained within corporation entities, many of them public, which have a highly evolved level of structure. In essence, using SL terminology, Judith (an individual) owns a sum of money. She chooses to "Pay" that money to Jeannie (a banking corporation) because she offers her the "Service" of Funds Management, and, because she knows that Jeannie will "Pay" the money back on demand. Because Jeannie is NOT another individual avatar (I'm speaking of RL now), but rather a public legal entity tightly bound into the laws and procedures of the RL society, Judith trusts the arrangement. Jeannie (the banking corporation) has many reasons for preserving the trust position with respect to Judith, not least of which is the desire to make money on that relationship, and to continue in business making money on similiar relationships.

Unfortunately, much of this is missing in SL. An avatar is the only financial entity available to us. The avatar is modeled after the individual in RL (of course , just one pocket with all her money in it ), and of course, underpining that entity in RL is a credit or debit card, which almost universally is based on an individual's credit, not a corporation's. This leaves us with an extremely limited opportunity to structure the legal "trust" arrangements that banks and most financial institutions rely on. This is really where some creative ingenuity is needed to get us past the "deposit your money with me because I'm a trustworthy person" basis of operation.

2) Unfortunately, tied in with issue (1) is the issue of potential Funds Management opportunities. I understand there are some opportunities for interest bearing investment, but, since they all clearly depend on the "trust me" basis of doing business, they don't hold much interest to me. Surely the most interesting potential for the development of the institutional structure needed to ensure "trust" lies right here with us in Neualtenburg. But, as I see it, Neualtenburg is in a position to provide the institutional assurances but not really the investment opportunities. In other words, I can't make much of a return on my money by lending money to myself.

3) A consideration of the ultimate "value" (financial value) of Neualtenburg. I suggest that the City has two bases for its value, and understanding and growing these "bases of value" in the long run provides us the real security of our reserves. One is cash. There is a "book value" of the entity (currently embodied in Rudeen Edo and her Paypal account) which is (hehe.. forgive me for repeating myself ) everything we own minus everything we owe. Mostly, tangibly, we own cash. We owe very little. Thus, from a conservative point of view, our "book value" is our cash.

The second "value" is the longer term one, as accountants would say... intangible. I suggest that the longer term "value" lies in the desirability of Neualtenburg as a place to do business. If, because of the web of law, "business certainty", business-friendly policies, business procedure enforement yielding high quality businesses of integrity,... if, this entire environment of commercial awareness yields a network of "Neualtenburg businesses" as a characteristic set apart from the normal business; then we have established a fundamental value. It may be hard to enter on the Balance Sheet, but it is in fact financial "value".

I feel these considerations will lead us to intelligent Funds Management.


Sudane

I was waiting for Sudane to respond to this before I chimed in.

Reading the two posts. I sense that they set out two different visions. Diderot asks, "Where can the city invest its money?" I like the idea, right down to the two pools. The problem is, invest where? As Sudane said, the only institution in SL potentially capable of providing the risk mitigation and dispute resolution functions to facilitate in world investment is Neualtenburg. It doesn't seem to be a wise idea to be the guarantor of our own investment agreements.

Sudane, whether she means to or not, sets out a different vision, one in which the city, using the Notary, legal frameworks, and dispute resolution systems, becomes that trusted institution for financial agreements, sort of Second Life's equivalent of Switzerland. This seems to me to be very intriguing. As Gwyneth has pointed out, building structures and systems is what we're good at around here. A next question is, "What steps can the city take to build the rest of SL's trust in those systems and structures?"

Exactly! And I would propose that the steps involve this encouragement of business that I mention. Perhaps the connection does not appear obvious. But the field of endeavor we're involved in here is building a "climate", an identity, an association. The existence of high quality, entrepenour-driven businesses which have found it advantageous to operate in Neualtenburg seems to me to be the key.


Sudane

I think the connection has been obvious for some time.

The challenge is that it appears to me that little of Neualtenburg's municipal leadership energy has gone to attracting such high-quality entrepreneur-driven businesses.

Is there a present demand for such, or is it merely a fantasy?

To test: how many such businesses have settled in Neualtenburg since day one? How many of those in the last 3 months?

Hah! There surely is no demand. This is a fantasy; might we more generously call it a conviction? ... A conviction which motivates the putting in place of new policies, which we're now developing.
I think its fair to say prior to 24 days ago, a climate conducive to such policies was not present.


Sudane

Frank, the test is not the last three months, but the next three months. We just established a commercial zone on the platz. We just put in a notary. We're even now working on how to improve our legal structures to give city merchants access to clearly defined dispute resolution frameworks.

I would also argue that at the very least, Kendra Bancroft's commercial offerings in Altenburg meet your definition. If, in your mind, they don't, do please clarify as to exactly what would qualify as a "high-quality entrepreneur-driven business".

Actually, I was just using the term introduced by Sudane in yesterday's post, so Sundane might know. I thought it was pretty vague.

If you are asking what businesses I'd be looking to attract to Neualtenburg, if the goal was to develop it as a niche for investors, dispute resolution and financial responsibility, I'd look for several characteristics.

1. First, I'd look for a business that offered a long-term service best suited to advance or recurring payments, for which the buyer would depend on the seller to provide continuing support.
   
2. Second, I'd look for a business that would have some network effects, so that the value of the service would be enhanced as more people used it, reinforcing the value of the service to all users.
   
3. Third, I'd look for a business that required a relatively high degree of skill and professional attention to operate, so that it would be less vulnerable to competitive pressures.
   
4. Fourth, I'd look for a business that would benefit from branding, from confidence in origin, and that would have the potential for brand extension (the Virgin brand is a classic example).
   

These might include:

1. developers of advanced network systems for providing new forms of communications, transportation, games and PVP combat systems,
   
2. professional creators of "bespoke" environments such as highly skilled architects, designers or scripters,
   
3. offerors of well-founded financial and professional services such as lenders and land developers.
   

I would not include (except to the extent used to demonstrate systems like those above):

1. retail vendors or malls
   
2. casinos, bars, coffee shops or brothels
   
3. theaters, arenas or stadiums
   
4. anything using lots of prims, scripts or other resource drains.
   

Others' thoughts on these?

These are great suggestions. Thank you!

Indeed. While my in-world "shop" is more just a way of getting what things I make out there than a business, previous to currently the rules of the city greatly discouraged me from putting more than the token vendor in the general store.

You've been a tremendous help to Neualtenburg. I hope it can continue. They should give you an honorary degree or something.

Thank you for the kind words. I have a surfeit of degrees as it is, but appreciate the thought.