Local Cities Steer Clear of High-Risk Investment Strategies : Finances: In the wake of bankruptcy filing by Orange County, officials say their conservative fiscal policies have protected portfolios from heavy losses.
For years, the finance managers of Westside cities envied the high yields that Orange County earned on its risky investment strategy. Now, they’re glad they didn’t follow suit.
Westside officials say they guessed right by following more conservative investment policies than did Orange County, which recently reported a loss of at least $1.5 billion in its investment portfolio. Guided by County Treasurer-Tax Collector Robert L. Citron, the fund followed a complex investment strategy involving derivative-based securities, essentially betting on the future direction of interest rates.
In addition, the county was involved in transactions known as reverse repurchase agreements, or “reverse repos.” As such, Citron borrowed money, or leveraged funds, in the short term to invest in long-term securities and used the funds of clients--cities and other agencies that allowed Citron to invest money for them--as collateral.
“We had an opportunity to place money with them, but I didn’t have a lot of interest,” said Don Oblander, finance director for Beverly Hills. “We knew Orange County couldn’t guess right forever.”
Only two Westside cities say they have money in reverse repurchase agreements, and in both cases it’s a small portion of their invested funds. Such investments account for $10 million of Beverly Hills’ $130-million portfolio and $5 million of Culver City’s $100-million portfolio.
The finance managers of Culver City and Beverly Hills say there is no need for residents to worry. Reverse repurchase agreements are risky if a city or county borrows money on a short-term basis, usually for a month, and invests it in long-term securities--those with maturities of five years or more, said Eric Shapiro, deputy city treasurer of Culver City. Unlike Orange County, Beverly Hills and Culver City have not invested in long-term investments with the money they borrowed as part of their reverse repurchase agreements, according to Oblander and Shapiro.
Beverly Hills, the only city that includes any type of derivative in its portfolio, is somewhat more aggressive in its investments than other Westside cities. Oblander has a small portion of the city’s portfolio invested in federal agency securities that have floating interest rates, similar to a variable rate mortgage.
The interest rates on these securities move contrary to the direction of market rates, so they are considered derivatives. However, the city did not borrow money to invest in the securities, which protects Beverly Hills from losses, he said.
For the most part, investment officials in Westside cities have avoided using leveraging strategies and derivatives. They have chosen instead to use an array of more conservative investments, from Treasury securities and federal agency securities to commercial paper and certificates of deposit.
All of the Westside cities have invested some money in the Local Agency Investment Fund, an $8.5-billion pool of money from cities, counties and special districts that is invested by the state. Malibu, for one, has its entire portfolio invested through the state fund, which invests conservatively and projects a rate of return of about 5.35% by the end of December.
Playing it safe has given finance officers in Westside cities a secure return on their investments, but not the high yields that Orange County enjoyed. When the Orange County fund was averaging returns of 9%, Westside cities were earning between 5% and 6%.
Today, the tables are turned.
“It’s kind of like someone who has a lot of money to spend and you envy that person, but at the end of the day you have money to spend and they have lost it all,” said Paul Brotzman, city manager for West Hollywood. “Then you feel good about what you’ve been doing.”
