Many people know about the $1.38 million Lawrence lost this year when the state cut aid to cities to balance its own books.

But few know about the $600,000 the city may have missed out on in 2002 because of state rules forcing the city to invest its idle funds with Kansas-based banks instead of national institutions.

City officials want the rules changed. Legislators won’t.

“I think their lack of attention to this issue is harmful to local taxpayers at a time when we need to maximize every penny we’ve got,” Assistant City Manager Dave Corliss said.

But state banking officials say they need money from Lawrence and other municipalities to stay at home.

“It all boils down to the fact that Kansas has been and continues to be a capital-short state,” said Jim Maag, executive vice president of the Kansas Bankers Assn. “Anytime you move money out of the state, I don’t think it does anything for economic development.”

City, county and school governments are allowed by state law to invest idle funds and generate more money for themselves.

But state law requires that money be invested through Kansas-based banks if those banks can meet a minimum “benchmark” rate of return on those investments. Cities can’t invest with national banks that might offer a higher rate of return.

In 2002, the state set the benchmark at 1.6833 percent. City officials said the highest rate of return available — but not to the city — was 4.1 percent.

So the city earned $421,738 in 2002 on its temporary investment of $52 million in idle funds. With the highest interest rate, officials said, the city could have earned $1.029 million.

¢ Office of the State Bank Commissioner¢ See more information on the state’s banking laws¢ Kansas Bankers Association

Corliss said the extra money could have helped the city offset revenue shortfalls from the state.

“In tougher fiscal times, it’s time to make tougher decisions on mandates,” he said. “This is one that, I think by all appearances, is a no-brainer.”

But the Kansas Senate declined to act this session on a bill that would have dropped the restrictions on cities. Sen. Jim Barnett, vice chairman of the Financial Institutions and Insurance Committee, said his colleagues were skeptical about the large sums of money Lawrence and other cities could have earned if the rules changed.

“There were charts and numbers on both sides,” Barnett, R-Emporia, said. “We’re trying to balance the interests of both sides of the issue.”

But the city, and national banks, say local governments should be allowed to make their own choices. US Bank in Lawrence cannot compete for the city’s business because it isn’t based in Kansas.

“I think the free-trade aspect would be compelling to the taxpayers,” said Chuck Warner, president of US Bank in Lawrence, “particularly at a time when tax dollars are so short.”