El Segundo Ponders Hiring Firm to Increase Income

Strapped by a drastic decline in interest income, city officials are considering hiring a professional money management firm to increase earnings on the city’s $22-million portfolio.

City officials are reviewing proposals from several firms that claim that they can increase the city’s interest income by as much as $300,000. The city plans to turn over roughly a quarter of its portfolio to a private investment group for a one-year trial, City Manager Arthur E. Jones said.

City Treasurer Louise Eckersley--a part-time elected official--would continue to manage the rest of the portfolio.

‘Private Firm’s Ability’

“We are going to test a private firm’s ability to produce more interest than we have been able to raise ourselves, since they have a full-time investment staff that can take better advantage of short-term opportunities and overnight investments,” Jones said.

Indeed, several private investment firms are beginning to solicit municipal business by touting their ability to access information and international brokerage networks that are not available to city officials.

“It seems to be the beginning of a trend because the markets have become very volatile and very dynamic, and cities . . . are having trouble with the changes because they just don’t have the personnel to maximize their earning potential,” said a spokesman for Prudential-Bache Securities, one of several firms that wants to manage El Segundo’s portfolio.

No city in the South Bay area uses a private investment firm to handle its cash reserves.

El Segundo experienced a windfall from the mid-1960s through 1982 when sales tax from the Chevron USA plant provided more than 80% of city revenue; that allowed officials to build a fat reserve fund.

But when Chevron lost a principal fuel oil contract in 1982 that generated $12 million in sales taxes that year, city revenues nose-dived. As a result, city officials increased business taxes and began to rely on income from reserves that were stored away during better times. The city’s 1986-87 budget is $24.8 million. Falling interest rates have dealt a devastating blow to cities like El Segundo that depend on interest earned in the money markets to balance their budgets, officials said.

Beginning with the boom in the 1960s, El Segundo had earned up to 21% on its investments until market rates started to fall in 1985, Eckersley said. “I’m lucky if I’m getting 5 1/2 to 7 1/2% now,” she said.

The city’s interest income, which provides about 6% of the operating budget, is projected at $1.5 million for 1986-87 compared to $2.3 million earned during the 1985-86 budget period. That loss, combined with the elimination of $300,000 in federal loans and a significant decrease in sales and employee tax revenue, has sent city officials scrambling for new sources of income.

The Government Finance Officers Assn., a Chicago-based, nonprofit organization that conducts research for municipal governments, expects that an increasing number of cities will turn to professional investment firms as the market continues to slump.

Investment bankers across the country are gearing up for the anticipated demand by contacting cities with large investment portfolios and advertising in municipal journals.

It was a private firm--Pacific Century Group--that planted the seed about hiring a private investment group.

“We just called them up and made an appointment and made a presentation, and I think we generated some interest, “ said Frank Hurst, senior vice president for Security Pacific National Bank, the parent company of the Pacific Century Group.

Good Information Stressed

“The basis for making good decisions in the investment market is having good information. We have the information and the ability to take advantage of opportunities that (city officials) might not be aware of,” said Hurst, who said his company could bring El Segundo’s investment earnings up to 14%.

The City Council was prepared to hire Pacific Century Group at its Nov. 4 meeting but decided to postpone the decision when several other firms presented competitive bids, Jones said.

The companies, which include Prudential-Bache Securities, Paine-Webber, Merrill Lynch and American Money Market Services, a subsidiary of Wedbush, Noble, Cooke Inc., would charge roughly $25,000 a year to manage $5 million in investments. The annual fee would decrease as the amount of money invested increased.

Though most city officials favor hiring a investment manager, not everyone thinks the fee is worth paying.

“I’m not convinced they can increase our investments by enough that we would still realize a profit after paying that $25,000 fee,” said Eckersley, who is approaching the final year in her second term as city treasurer.

‘Greatly Reduce Liquidity’

“What I am earning is the going market rate, and I just don’t see how they can take our investments and squeeze that much more earnings out of them. Besides, using a private firm would greatly reduce liquidity. It would be much more difficult to get at those funds in case we needed them,” said Eckersley, who places much of the portfolio in commercial paper--bonds on private corporations--that can be invested at a 5 1/2 to 6 1/2% rate over a 24-hour span.

But the investment bankers say Eckersley and her staff are unable to take advantage of international markets like those in London and Japan that trade from 3:30 p.m. to 6 a.m. Pacific time.

“We could offer the complete tracking of interest rate markets 24 hours a day because this is all we do here,” said Richard Rouche, senior vice president with Prudential-Bache.

Private investors say they could increase El Segundo’s interest income by 5% or more by trading on the international market.

Decline to State Earnings

Representatives of each of the firms declined to say what they had earned on similar portfolios over the past year or over the past five years. However, Prudential Bache and Pacific Century both said they had earned 13% for cities with smaller portfolios.

The city will likely hire one of the competing firms by December, Jones said.

Under the proposed agreement, city officials will review the investment earnings every three months. If the firm is successful in increasing the city’s investment earnings, the city would relinquish its control over the rest of the investment portfolio over a one-to-two-year period.