Municipal Investments Hit Tap City : The lesson in recession: Better safe than sorry

With tax receipts down and the demand for services up, municipalities in Southern California are under tremendous pressure to make the most of their investments. A high-yield investment can do more than simply put a little extra cash in a city treasury. It can postpone a tax increase--something that city officials devoutly want to avoid.

But the current atmosphere of civic desperation, combined with lower interest rates on many favorite municipal investments, can make cities vulnerable to hucksters. Now is the time for cities to exercise extreme caution and remember that if an investment looks too good to be true, it may well be that it is.

For a pointed lesson in this, part of the hangover from the 1980s, cities need only look to what happened to 10 California cities, a state utility and Iowa and Colorado trust funds that handled investments for dozens of towns, cities and public entities in those states. While details are still being sorted out in court, it appears that at least $100 million that was invested through Newport Beach investment adviser Steven D. Wymer cannot be accounted for. Wymer, 43, was indicted Thursday on 30 counts of securities fraud, mail fraud, money laundering, obstruction of justice and other federal charges. He is expected to plead not guilty at his arraignment Monday. Wymer’s two Irvine companies--Institutional Treasury Management and Denman & Co.--may file for bankruptcy protection.

MISSING MILLIONS: The shock of these potential losses on hard-strapped cities is difficult to overstate. Torrance, thinking it had $6.2 million in taxpayers funds in its account, learned that it had a balance of a mere $93. Orange, assured it had $7.2 million, was told by the Securities and Exchange Commission after the investigation was launched that it had only $4,032. Among the other cities and public entities that are out: Palm Desert, $12.3 million; Indio, $4.3 million; Loma Linda, $2.7 million, Big Bear Lake, $2.5 million, and Coachella Valley Joint Powers Authority, $8.1 million.

Whether this money was lost or stolen is not clear; the facts will be determined in criminal proceedings. In the end, it may turn out that some or most of these cities and other public entities were simply duped; preliminary investigations indicate that at least some financial statements may have been forged.

But there also may be some responsibility on the part of the cities involved. When the pressure is on to perform financial feats, promises by someone offering higher yields for investments can be all the more enticing. State regulations govern what California cities can invest, but the age-old rules of “safety, liquidity and yield” can get shuffled when cities are most in need--as many are in this recessionary time.

DUBIOUS STRATEGIES: In Marshalltown, Iowa, for example, it appears that the city invested for many years in highly risky options-trading strategies. For awhile, this resulted in fat yields for the city, but in hindsight, in view of all the loses, the double-digit returns look more like a red flag that officials ignored.

Of course, it’s possible for anyone, or any city, to be deluded by someone who has been put in a position of trust. Now that the scandal is coming to light, there will be much second-guessing about what these cities might have done to better protect themselves. It doesn’t help that, especially in smaller cities, some of those in charge of investments may have had little experience in the world of finance.

But the scandal also indicates that some of the cities involved may have ignored preliminary signals or engaged in questionable strategies in the hope of higher returns. Their losses are an expensive lesson that all cities would do well to heed. The highest priority for investing taxpayer money must always be safety.