ORANGE COUNTY IN BANKRUPTCY : Ripples of Worry Felt in San Diego County : Investments: County treasurer seeks to reassure local governments and schools despite $357-million paper loss.
After the collapse of Orange County’s investment fund, San Diego County Treasurer Paul Boland is facing sharp questions about the way he has managed a $3-billion government investment pool.
After years of praise for squeezing out high returns for local governments and districts in his county, Boland finds himself defending high-risk investment practices that at first blush look a lot like those used by Orange County’s discredited former treasurer, Robert L. Citron. Among the exotic devices that the two funds have in common is the inverse floater, a “derivative” geared to do well when interest rates fall.
On paper, the San Diego County fund shows a loss of $357 million, largely because the value of Boland’s investments plummeted this year while interest rates rose. This week, Boland has been holding meetings with finance officers from cities, school systems and water districts in the county, trying to assure them of the solidity of his fund and prevent a run on deposits that might force him to sell off holdings at a loss.
Experts in government finance who reviewed the San Diego County investment portfolio for The Times noted the substantial paper losses, as well as Boland’s willingness to bet on the movement of interest rates by investing in derivatives--about 26% of the fund. However, they also noted that, unlike his counterpart in Orange County, Boland had not borrowed heavily in an effort to increase his gains.
Boland drew support Friday when Standard & Poor’s agreed that his fund was sound and concluded that there was no reason to drop San Diego’s current AA bond rating.
Still, Boland says that he will have to sell as much as $400 million in the funds holdings at a loss to meet the cash needs of his investors.
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The 68-year-old retired Navy captain contends that if the investors--the school districts, water agencies and cities that invest in the San Diego County fund--stand together and avoid panic he will be able to wait out most of his fund’s paper losses and keep money flowing when withdrawals are needed.
In San Diego, the large number of government agencies that invest in the fund--and that can claim 25% of its assets--do so voluntarily. They can pull out their share whenever they like, forcing Boland to sell investments at less than their full value.
“The problem in San Diego County is that people have the right to withdraw and if they do so, it would force the county to liquidate some securities,” said Kay Chandler, president of Chandler Liquid Asset Management in San Diego. Chandler was instrumental in helping San Jose out of a similar financial crisis a decade ago.
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In an effort to avoid losses, Boland said that on Thursday he asked finance directors of about 100 municipalities and special districts that invest in the county pool “to sit tight.”
Boland told the assembled officials: “We are all in this together. We have enjoyed the good times, we have to hang together and enjoy the bad times, and if we don’t hang together, we have a problem. We have to come to an agreement.”
He also told the investors that they can expect reduced returns on their investment even if they do stand by the fund--returns of 4% this year compared to nearly 6% last year.
That loss of interest could cost the San Diego Unified School District as much as $1 million next year, said the district’s controller, Henry Hurley. But like school districts generally, the schools have no choice but to keep idle cash on deposit with their county treasurer.
To help ensure there is no run on the fund, Boland is forming an advisory committee, including representatives of four cities, to evaluate withdrawal requests. So far there appears to be no stampede.
“I don’t like the idea of having the value of my investments go down,” said El Cajon Finance Director James Kell, whose city has $24 million in the San Diego County pool. “But as long as nobody panics and everybody remains cool, then I think we can weather this thing.”
Anxiety levels are also high in other counties that, like San Diego, have relied on derivatives and other devices for raising their rates of return.
San Bernardino, Monterey, Placer, Sonoma and Solano are among the counties that have relied heavily on these devices. But their treasurers insist that they are on much more solid ground than Orange County and do not expect any problems meeting their obligations.
Kraul reported from San Diego, Jacobs from Sacramento. Times staff writer J. Michael Kennedy also contributed to this story in Los Angeles.
