ORANGE COUNTY IN BANKRUPTCY : OCTA to Keep Funds Out of County’s Pool

The Orange County Transportation Authority approved a strict policy Monday that takes investments out of the hands of the county treasury, sharply limits risk and calls for new portfolio managers to disclose regularly the nature and market value of securities.

James Kenan, OCTA’s director of finance and administration, said the policy, which grants the highest priority to safety of the agency’s principal and liquidity, was the product of more than a month of crafting.

Only the minimal investments required by law will be placed with the Orange County investment pool and then they will be removed as promptly as possible, Kenan said.

“About $80 million flows into the pool by law,” Kenan said. “I think the direction here is to let it stay there for about five minutes and then get it out.”

The policy sharply limits investment in derivatives and forbids the use of reverse repurchase agreements, which contributed to the collapse of the county’s investment pool and the unprecedented Dec. 6 bankruptcy filing. It also sets strict caps on all types of investments in order to ensure that the portfolio is diverse; requires that most investments be rated at least AA, equal to OCTA’s rating; and calls for investments to be kept in at least two separate portfolios, managed by as many as eight independent investment managers.

The policy was applauded by state officials.

“We view it as positive,” said Peter Schaafsma, executive director of the California Debt Advisory Commission. “ . . . The safety of the principal has to be the foremost consideration.”

State Treasurer Matt Fong, who chairs the commission as well as a task force on investment reforms, has called for similar measures.

The policy was hailed locally as a significant effort to guard against a repeat of the county’s fiscal collapse and as a model for other municipalities across the country.

“I think it’s an excellent policy. Its proactive, has the checks and balances in place, and probably could serve as a model for other investment practices,” said County Supervisor William G. Steiner, who sits on the OCTA board.

OCTA had more than a billion dollars in the now collapsed county investment pool. For years, all the agency’s surplus money went directly into the county treasurer’s office, with former Treasurer-Tax Collector Robert L. Citron making all the investment decisions.

The new policy also requires that portfolio managers report the makeup and market value of the portfolios to OCTA monthly, and reduces the maximum term of securities that can be purchased from five years to three.

“There may be some overkill here, but frankly now I think that’s the right approach,” Kenan said.

The policy borrows from state legislation now being considered that would better regulate government investments, but sets some limits that are even stricter than those being proposed in Sacramento, Kenan said.

It comes at a time when cities and counties across the country are looking to regulate investment with public funds in the hopes of averting another crisis like Orange County’s. But Kenan said few if any entities have drafted clear guidelines.

“The fact is, we tried like hell to get copies of investment policies from other government agencies,” Kenan said. “They just didn’t exist.”

Kenan said San Bernardino County officials and several treasurers across the country have already requested copies of the policy.

The OCTA staff will take bids from investment managers and return to the board with recommendations on April 24. Kenan said the authority will likely split the business among “three to five” managers, but may select as many as eight firms.

Part of the OCTA’s new oversight will be conducted by a Treasury Review Committee made up of members of the public, Kenan said.

The OCTA staff is also working with accountants Ernst & Young to craft a treasury arm of the agency for the first time ever. That plan should be honed within a month and will likely call for the hiring of an “in-house investment officer,” Kenan said.

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Prudent Investing

The Orange County Transportation Authority board of directors approved a new investment policy Monday that creates its own regulated pool for investments, taking that function out of the hands of the county treasurer’s office. Only high-quality investment vehicles will be permitted. Some of the other guidelines:

MAXIMUM TERM

* All investments have maximum term of three years.

* Board of directors must grant authority to make an investment or investment program of longer term.

* Extension authority must be granted no less than three months prior to investment.

POOL LIMITS

* Orange County pool investments shall be limited to no more than 10% of OCTA’s portfolio and no more than 5% of the Orange County investment pool portfolio balance.

* Pool investments limited to only those funds legally mandated to be deposited in the county treasury.

MONEY MARKET FUNDS

* Must be rated AAA (or equivalent highest ranking) by two of the three largest nationally recognized rating services.

* Manager must be registered with Securities and Exchange Commission, have at least five years’ experience, currently control assets in excess of $500 million. Permitted investments must conform to those authorized by the California Government Code.

* Investments may not represent more than 10% of money market fund assets.

COMMERCIAL PAPER

* Must be rated P-1 by Moody’s or A-1 by Standard & Poor’s services.

* Issuing corporations must have A or better rating on longer term debt, if any, and must be organized and operating within the United States.

* Corporation must also have more than $500 million in total assets.

* Investment may not represent more than 10% of a corporation’s outstanding paper.

* Maximum term: 180 days.

DIVERSIFYING INVESTMENTS

To ensure that investment portfolio is not saturated in a specific type of security or industry, OCTA also set diversification guidelines. Only U.S. Treasury vehicles or those of a federal agency or sponsored by the U.S. government can make up 100% of the investments. Otherwise, here are the maximum totals: Type of investment: Percent Repurchase agreements, other collateralized obligations: 75% Bankers acceptances: 40% Mortgage and asset-backed securities: 40% Negotiable CDs: 30% Commercial paper (if weighted average maturity of all more than 30 days): 30% Medium-term notes and depository notes: 30% California and local agencies: 25% Money market funds, mutual funds, pools (in total): 15% Commercial paper (if weighted average maturity of all less than 31 days): 15% Derivatives (hedging transactions only) and subject to prior approval: 5% Reverse repurchase agreements: 0% Source: Orange County Transportation Authority