Common Sense Lost Out to Greed in Orange County : Investments: We need more oversight, stricter disclosure requirements and written goals, policies and guidelines.
The bankruptcy of Orange County was an accident waiting to happen. I sensed it more than two years ago, when I paid a courtesy visit to Orange County Treasurer Robert Citron. With his characteristic cockiness, Citron whipped out a chart showing that low interest rates historically follow presidential elections. The market, he pronounced with unshakable confidence, would remain true to form--and he would be investing accordingly.
Therein lies one of the biggest differences between Citron’s philosophy and the one I have followed as manager of California’s $26-billion investment fund, including the $8.5-billion Local Agency Investment Fund composed of 2,150 different local agencies. In overseeing California’s public dollars, my investment policy has been to adjust to changing market conditions. It’s a strategy that has preserved the value of taxpayer money while still earning an average yield of 5.44% over the last four years--one of the highest returns of like-sized funds across the country. In contrast, Orange County’s policy was to anticipate market changes and bet local public dollars in a bold gamble to make a market killing.
In the end, the market killed Orange County. Citron’s high-risk investment strategy backfired when interest rates began rising this year. Heavily leveraged and locked into long-term investments, Citron was unable to adjust to interest-rate fluctuations. With an eye only on the big kill, Citron sacrificed two of the three basic principles that guide my own investments--safety and liquidity. Instead, he sought only yield. That’s only part of the lesson of Orange County. As we sort through the wreckage of the financial collapse of one of the richest, most entrepreneurial and risk-minded regions of our state, there are also other lessons.
First is the need for more oversight. California’s investments fund is subject to a system of checks and balances that include a Pooled Money Investment Board (which includes members representing both the governor and the state controller), the state auditor and the state controller. Municipalities should create similar systems of local checks and balances. I stress the word local. I would not support state oversight, which would require the creation of a potentially massive state bureaucracy while striking at the heart of local control. Better to create local oversight systems that include monitoring by those who understand the intricate nature of modern investment financing structures.
Second, stricter disclosure requirements should be put into place on the local level. The fund I manage issues monthly reports of all investment transactions to all participants in the investment pool, as well as to libraries, universities and others who request the information. Similar disclosure should be required of all investments funds in the state to ensure better accountability.
Third, there is clearly a need for written investment goals, policies and guidelines. This does not preclude the possibility of new legislation, such as the statutory limits imposed on California’s fund, which restrict the kinds of investments that proved to be Orange County’s downfall. But legislation alone isn’t enough. What’s needed is a written statement that can be used to measure performance. For instance, my office’s written policy strictly prohibits the amount of the state’s portfolio that can be invested in any reverse repurchases. This policy provides our investment team the discretion it needs to make a prudent profit for taxpayers, but at the same time guarding against excessive risk-taking. Orange County and other municipalities should adopt similar written policies.
In tight economic times, there is an understandable and even appropriate desire by public officials to make up revenues through enhanced investment earnings. Every dollar earned for taxpayers through my fund is a dollar that hasn’t needed to be cut from the state budget, or raised through new taxes. But public investment funds aren’t like personal investment funds, which are designed with an eye to the future--say, college or retirement. Public funds are basically short-term cash management tools. The money is available for investment only until it’s time to pay the bills. If in the meantime we can make a profit for taxpayers, so much the better.
They lost sight of that in Orange County. The temptation to get something for nothing became too overwhelming. It was greed overcoming common sense. Now that the accident has happened, let us get back on the road--wiser and better equipped the make the drive safely, responsibly and with an eye to where we really should be headed.
