City seeks greater return on investments

NEWPORT BEACH — Like its many residents in navy blazers and khakis, Newport Beach's municipal investment strategy traditionally has been very conservative.

On Tuesday the City Council voted to loosen the tie.

In the face of tight finances and rising pension costs, the city is taking a number of steps to increase returns on its investments and save the money it pays to financial advisers. The moves, while still within state guidelines, may ultimately result in a less diverse portfolio, fewer people handling the city's investments and diminished liquidity.

The most significant change eliminated a cap on the amount the city could invest with any one source. Before, the guidelines said the city could invest no more than 5% of its total portfolio in one place. This protects the government's funds from going down the tubes with a failing company, for example.

But that restriction contradicted other sections of the policy — in some places it limited the amount to 10%. So the Finance Committee asked city staff to make the strategy consistent, said Mayor Keith Curry, who serves on the committee. But instead of raising the cap to 10%, the treasurer's office eliminated it altogether.

"It was trying to make it simpler," said city Treasurer Tracy McCraner.

As a result, the city could hypothetically invest 30% of its total portfolio in a single corporate bond such as General Motors, or it could sink 20% in a single mortgage-backed security, the type notorious for triggering the recent financial crisis.

"I can see where that might concern people," McCraner said. "But I'm comfortable because I know what our intent is."

After consulting with Curry, McCraner said the city was looking to reinstate a limit — probably at 10% across the board.

"If there needs to be another limit here, we'll put another limit here," said Curry, who was surprised to learn of the potential loophole. "The city of Newport Beach has one of the most conservative investment strategies in the state."

In the meantime, the city is grappling with "significantly escalating" pension obligations, said City Manager Dave Kiff.

"[Pension obligations] put a lot of pressure on them to be earning some interest from their portfolio," said Timothy Canova, a professor of law at Chapman University who specializes in public finance.

Both Curry and McCraner denied that there was any intent to make reckless investments.

"That's honest. There's nothing untoward here," agreed Orange County Supervisor John Moorlach, who used to be the county treasurer and is widely respected for forecasting the county's 1994 bankruptcy, before he became treasurer.

But Moorlach is a little more suspect of another change that would allow the city to invest in longer-term securities that, while more profitable, would tie up cash.

That's risky in two respects: The city may need the operating funds, and it wouldn't be able to take advantage of improving interest rates between now and when the security matures.

"The longer you go out, the more exposure you have to changing interest rates," Moorlach said. He suggested the city should have a more defined "laddering" program that says how much could be in short-, medium- and long-term investments.

In the current strategy, which is primarily short-term, "we're not making the yields right now," said McCraner.

The yield, or return on investment, for the U.S. Treasury's two-year note reached a record low this week amid continuing negative financial news. Some of the city's worst-performing investments returned only 0% or 0.56% in the last fiscal year.

The revised policy simply says the investments should be timed to mature when the city needs the cash.

"That just gives the securities a little more flexibility," said Curry. "If you have operating expenses that you don't need right away … you probably can get a significantly enhanced return in a safe security."

Besides enhanced returns, the city is looking to save money by reducing the number of investment managers to reduce the fees it pays to those managers. Right now, it has five, which McCraner said is overkill for a pool of $156 million.

That's a result of a past scandal where the treasurer acted fraudulently, she said.

"They kind of went to overkill," McCraner said. "It doesn't make sense to be that spread out."

One of the investment firms that manages the city's money employs Mayor Curry, although he works in a separate division. Curry is a managing director at The PFM Group, which has been an investment adviser for the city since the early 1990s, long before Curry was elected.

If the Finance Committee or City Council had to recommend hiring or firing any investment firms, Curry said he would recuse himself.

"I don't get involved in these decisions," he said.

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