Camarillo Helps Case for Curbs on Investments

Camarillo is not the only city that has fallen victim to bad investments. However, the $20 million that city may have lost is certainly among the largest of the losses.

Camarillo’s loss may be larger than some other cities’ but is the result of the same problem--engaging in speculative investments.

State officials, reacting to substantial investment losses of cities such as Lawndale, San Marino and Palmdale last year, had already begun work on legislation to make municipal investments safer when Camarillo’s staggering losses came to light.

Earlier this year, Assemblyman Patrick Johnston (D-Stockton) introduced a bill seeking to make investors of city money more accountable, including the possibility of making municipal investors personally liable, Assembly Finance and Insurance Committee staff consultant Will Brown said.

Two Sides to Question

“We are trying to deal with an old dilemma: How can you insure yourself against fraudulent or downright ignorant behavior without penalizing those who have a lot of investment talent and prowess,” Brown said.

Camarillo officials were shocked to learn last week that the city’s longtime treasurer, Donald F. Tarnow, had lost as much as $20 million last year in highly speculative investments that turned sour when the bond market fell last spring.

The City Council was unaware of the losses until city checks started bouncing in November. Tarnow, an 18-year veteran of city government, was fired Feb. 2 for failing to tell anyone how much money he had lost.

Auditors hired to untangle the mess said that it would have been difficult for anyone to learn about the losses earlier because Tarnow had nearly complete control over both investments and the accounting of investment gains and losses.

Tarnow used sophisticated investment strategies that were made legal more than 10 years ago to allow cities and other local agencies to benefit from changing financial markets, consultant Brown said. Those investment tools, which include buying securities on margin, were meant to be used as a hedge against losses rather than for speculation, he said.

Although cities are barred under state law from investing in stocks, municipalities can invest in a variety of financial instrument such as bank-issued certificates of deposit and mutual funds dealing in government securities.

Danger in Down Market

In the case of Camarillo, Tarnow lost millions by making commitments to buy and sell securities about 30 days in advance of the transaction. In previous years when the market went up, Tarnow made the city substantial profits. But last spring, the market worked against him, and he lost millions.

Stricter state measures under consideration include tightening monthly reporting requirements, said Thomas Rupert, legislative chairman of the state’s Municipal Treasurers Assn. State law requires monthly investment reports, he said, but should also require copies of those reports to be sent to city auditors.

Investment reports should also include any losses of investment principal, and City Council members should take a greater responsibility in reviewing them, Rupert said. “It would put whoever the investment officer is on alert that somebody is watching them,” he said.

Also, legislation is being considered to require City Council members and other governing agencies to approve specific investment strategies after being informed of all risks.

But Rupert said he does not believe that making city investors personally liable for city funds is a workable solution.

No Takers for Job

“You would never find anybody who would take the job,” Rupert said. “Why would you want to be personally responsible for $20 million?”

No decision has been made to include personal liability in Johnston’s proposed bill. But staff consultant Brown said the alternative would be a cumbersome list of specific investment restrictions that would hamper more sophisticated city and county investment officers.

“We are trying to walk a fine line, trying to get governing bodies more involved in investment policy, but we don’t want to ratchet it down too tight,” Brown said.

Investment officers in cities in the San Fernando Valley and eastern Ventura County contacted by The Times say they have already adopted a number of investment policies that would preclude the sort of losses suffered in Camarillo.

In Simi Valley, for example, investment decisions involving the city’s $62-million investment portfolio are checked by four people in two departments, General Services Director Loron Cox said. Most of that city’s money is invested in government-backed securities that are generally held to maturity and not traded, he said.

A Reasonable Rate

“The city’s primary investment objective is to obtain a reasonable rate of return while minimizing potential losses from things such as market changes,” Cox said.

Investment officers in Burbank, San Fernando and Moorpark say they are content to earn 6% to 8% on the cities’ investment funds rather than seeking higher returns in more risky investments.

“Brokers are constantly calling and saying, ‘I can get you 10% to 12% on your money,’ ” said Moorpark City Treasurer Thomas Genovese, who controls a $17-million investment portfolio. “But I shy away from that kind of investment.”