Once Burned, Cities Now Redouble Their Investment Controls

A year into the county bankruptcy, cities have dramatically changed the way they invest their money, creating strict guidelines that stress safety and liquidity, forming citizen watchdog committees to advise finance officials and placing funds in low-risk, low-yield investments.

The moves also mark a significant departure in the level of control city officials now exert over investment matters.

“I think that as cities, we now need to be responsible for our own funds. We need to be the ones watching,” said Eva Miner Bradford, a La Palma councilwoman. Before, “We thought, ‘What could be safer than having our money with the county treasurer?’ ”

The fallacy of that assumption became evident when the county filed for bankruptcy last Dec. 6--an action precipitated by a $1.7-billion loss in a county-run investment pool that contained city and school district funds.

The loss was blamed on the risky investment practices of former longtime Treasurer-Tax Collector Robert L. Citron, who pleaded guilty to 12 felony counts of misleading investors and other misdeeds.

City officials insist that the days of Citron’s reverse-repurchase agreements, floaters and other exotic investing strategies are over. Instead, municipalities favor more conservative investments like treasury bills and Ginny Maes from the Government National Mortgage Assn.

“All we can do is buy securities with stated maturity dates. Period. No funny things,” said Josephine Julian, Mission Viejo’s deputy treasurer. Securing high yields “is way down on our list of priorities.”

While cities are unified in their desire for more safeguards and security, they differ on exactly how they invest their money. Some cities operate completely in-house while others have contracted with outside money managers. Still other cities are talking about creating a new investment pool exclusively for Orange County cities.

In the months following the bankruptcy filing, city finance departments were besieged with calls from money managers offering to provide their investment services. But most cities have been reluctant to pay for outside help.

In Huntington Beach, the city treasurer’s office continues to make all investments. But the office is now governed by guidelines approved by the City Council. An advisory committee made up of residents with finance backgrounds also provides the treasurer with advice and oversight.

Councilman Ralph Bauer said Huntington Beach’s new investment guidelines are so specific that outside professionals are simply not needed. “It’s really not that complicated,” Bauer said. “You really don’t have that many options anymore.”

Other smaller cities have adopted similar policies, often purchasing securities and holding on to them through their maturity dates.

While this so-called “passive” form of investing is considered safe, it prevents cities from taking advantage of changing market conditions.

Several municipalities, including Placentia and Mission Viejo, have begun talking about forming a new investment pool for Orange County cities.

The concept, now being studied by the California Society of Municipal Finance Officers, would provide member cities with an “active” portfolio managed by professionals who could buy and sell securities as the market fluctuates. Such an approach would likely provide higher yields than “passive” investing.

But officials said cities would retain total control over the pool and could maintain all the safeguards and restrictions they now apply to individual city investments.

“The benefit of this kind of structure is that you have 24-hour liquidity and absolute control over the investment parameters,” said Howard Longballa Placentia’s finance director.

Other cities aren’t waiting for the pool to become reality. They have begun placing city money in the hands of outside professionals to invest.

Irvine recently contracted with a money manager who will serve as the city treasurer--a function that until the bankruptcy was performed by the fiscal services manager.

Like in Huntington Beach, the treasurer in Irvine makes investment decisions based on strict guidelines and is monitored by a citizens oversight committee.

“The bankruptcy has made us take a look at the way we are doing things through the 1990s and into the next century,” said Irvine City Manager Paul O. Brady Jr. “This debacle has us doing a lot of things differently. When it comes to day-to-day investing, we need to have expertise. But we need experts checking the experts.”

A wild card in the cities’ investment plans is the county treasurer’s office.

Many municipalities have passed ordinances or resolutions expressly prohibiting treasurers from placing money in the county investment pool. Even county officials doubt they’ll be investing city funds any time soon, especially while the county and cities continue to clash over the bankruptcy recovery plan.

“I think for now, their credibility is gone,” Bradford said of the county. “I think they need to give us a sense of confidence.”

Still, some city finance officials acknowledge that County Treasurer-Tax Collector John M.W. Moorlach has improved the office since taking over earlier this year. That praise is echoed by local school districts, which are required by law to invest in the county pool.

“They’ve done a good job with us,” said John Nelson, assistant superintendent of the Orange County Department of Education. “They have a strong oversight committee and strong policies. . . . They are providing us with the information we need and are receptive to our ideas.”

Moorlach said the county pool probably will never handle the huge sums of city money it had before the bankruptcy. But as recovery efforts move forward, he said, the treasurer’s office can serve as a viable investment alternative for cities as well as special districts.

“It’s going to take some time, but I think we can be an option for them,” Moorlach said. “We want to be in a place where cities feel comfortable with us.”

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Investment Options

Since the Orange County bankruptcy, cities have altered their investment policies. Instead of placing funds in the county pool for the treasurer to invest, cities are taking greater control, stressing safety and liquidity over high yields. Three investment methods that municipalities are either practicing or considering:

* In-house operations: Many smaller cities now invest their own money. They often simply buy conservative securities such as U.S. Treasury bills and keep them through maturity dates. While offering relatively low yields, this approach is considered safe.

* Money managers: Some larger cities such as Irvine have contracted with money managers to handle investments. These professionals are usually regulated by strict new city investment guidelines and monitored by citizens oversight committees. Using money managers allows cities to take advantage of changes in the market.

* City pool: Some cities, including Mission Viejo and Placentia, are talking about forming a new investment pool exclusively for Orange County municipalities. Such a pool could provide higher yields while allowing cities to maintain strict investment safeguards established since the bankruptcy.

Sources: City finance departments; Times reports

Researched by SHELBY GRAD / For The Times