Always Protect the Principal : Err on conservative side when investing taxes
The ink was barely dry on a report to a state Senate committee last week recommending a sweeping revision of laws governing state treasurers when efforts to water it down began.
Despite the scope of the Orange County fiscal failure, some public officials apparently still think that they can play the financial markets as a way around their tax revenue shortfalls. And there is much money to be made on Wall Street in marketing high-risk financial instruments to supposedly sophisticated public investors. The organization that lobbies for county treasurers said it didn’t want its members’ hands tied by proposals to limit borrowing to 10% of assets; that would prohibit taking advantage of low interest rates.
PRESSURE PLAY: In anticipation of such lobbying, the chairman of the 12-member advisory board that made the recommendations warned the Senate Special Committee on Local Government Investments to get ready for similar pressure from the securities industry.
Eli Broad, chairman and chief of SunAmerica Inc., a Los Angeles-based financial services firm, said his committee’s recommendations came down to a matter of common sense: His own company wouldn’t allow anyone to play fast and loose with his firm’s $24 billion in retirement savings; why should it happen with public money?
He’s right, of course. Orange County, with its heavy leveraging, was only the most extreme case of an American municipality trying to make ends meet by borrowing billions of dollars to gamble with. In California, some of the risky strategies were made easier by state legislation.
The advisory group concluded, “Orange County’s financial collapse and ultimate bankruptcy filing resulted from nothing short of a reckless abuse of the public trust.” The Senate committee got confirmation of that on the very day it received the report. It heard another round of buck-passing by financial advisers and county officials, all offering unsatisfying excuses for why they weren’t responsible for the county’s $1.69-billion investment fund loss.
So the evidence is in: When taxpayers’ money is involved, conservative investment strategies that protect principal are best. Officials must find some other way to close the budget gap.
CRAMPED STYLES: The Senate committee’s advisory board has other good specific ideas about prohibiting borrowing, severely limiting the use of financial derivatives, insisting on greater disclosure and oversight and increasing the responsibility of private investment advisers and brokers.
If concerns are expressed about such reforms, and if treasurers think new restrictions will cramp their style, so be it. Investment advisers and treasurers would be well served if a restrictive environment prevented the collapse of investment funds.
The crisis in Orange County--a part of the country that had prided itself on fiscal conservatism--is a defining and painful case study in why there really is no excuse to take chances with the public’s nest egg.
