As state and local governments and school boards fight to survive loss of federal aid, many are taking a harder look at how they can generate revenue by better investing their short-term funds.

This means that the traditional approach of leaving these funds in local banks and accepting whatever return the banks offer is being replaced by a search for new investment outlets. These once stable community bank customers are now investing deposits in instruments offered by money-center institutions and even in offshore assets.

While many local bankers bemoan the loss of local deposits, we must admit that in some instances the banks don't deserve to keep these funds. They offer interest rates that are a disgrace, relying on inertia to keep deposits when competitors-both bank and nonbank-offer far higher yields.

Many times, however, banks have truly tried to do their best to reward local governments with market-based yields. But with the high cost of operating branches and meeting reserve requirements and Community Reinvestment Act guidelines, it is pretty hard to compete with the yield offered by a money fund that relies on an "800" number for public contact. It is the unlevel-playing-field problem all over again.

Of course, most bankers recognize that rate isn't everything in forging a relationship with a municipality or school board.

Some relationships involve merely paying interest on the public money. But others involve providing invaluable services such as buying short-term notes, giving financial advice, and aiding every charity and public project in sight.

Most importantly, banks can help keep a community alive through loans that fund home building and buying, purchases of consumer goods, and reinvestment in the community.

How do you quantify what a deposit of public money in a bank does for employment and the general welfare? All we know is that if the funds go into money market instruments, pass-throughs, or offshore investments, the value to the community bank is low or nil.

But how can bankers get the public to realize this? Right now, public antipathy toward banks is pretty high, thanks to the battle over automated teller machine surcharges.

Can you see a mayor or school board chief braving the ridicule likely for accepting a lower yield on short-term funds to help the local bank? And as for legislation requiring local placement of public funds, forget it. Today's political environment can be summed up as: "Let's bash the banks."

What can bankers do to solve this problem?

Publicity of course can be very helpful. If banks would generate stories for local newspapers and other public forums in order to present their case, it would give public officials ammunition to defend a policy of relying on the local bank despite its uncompetitive yields.

Would it be a good idea for local bankers to survey the officials who keep money in their banks to see whether they are satisfied with the services now offered or might like other services that would help offset the bank's rate disadvantage?

This could backfire. After evaluating what banks offer against what the municipal body could get in higher yields elsewhere, some public officials may decide they would be better off to move the funds. This might not have occurred to them before the banker asked whether there was anything he could do to be more helpful.

But this is a risk that must be taken. Time is of the essence. Every public deposit that moves out for the first time will be hard to win back.

This is a major issue for all banks.

We think that many of you will have valuable ideas on how to keep public deposits. So we are making this topic the latest in our periodic contest for a one-day presidency at Schmidlap National Bank.

Send your ideas to me at: 14 Friar Tuck Circle, Summit, N.J. 07901. A certificate announcing your appointment as president awaits the person who submits the best idea.

Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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