CITY HALL — A sustained drop in key federal interest rates amid an erratic financial market that produces major developments almost daily has pushed city officials to increase the liquidity of Glendale’s investment portfolio.
As of Wednesday, the Federal Reserve has slashed its key funds rate — the rate banks charge each other for loans — from 5.25% to 2.25%, and has cut its discount rate, which applies to for direct loans to banks, from 6.25% and 2.25% since last August.
The rate-hacking has driven yields for long-term investments, which are typically higher, to near the same level of their short term counterparts — in large part because investors are experiencing a “confidence crisis,” City Treasurer Ron Borucki said.
“So we say, ‘Let’s not take the risk and go out long,’” he said.
The economic downturn, which is feeding a growing chorus of analysts predicting a recession, has created a volatile course for Borucki to navigate, especially as interest rates continue to dry up traditional sources of revenue building.
Even though he has been able to maintain healthy interest earnings, Borucki said freeing up more money would provide more flexibility in handling the economic turbulence.
In response, the City Council on Tuesday authorized Borucki to invest up to 20% — a 15% increase — of the city portfolio in short term markets, which were previously considered too risky and lower performing.
Long term investment yields have followed falling interest rates, prompting Borucki to focus on markets where money can be more easily moved around since the two investment curves have come to have similar rate of returns.
“We’re trying to keep as much in short term investments because it provides excellent liquidity while providing comparable returns,” Borucki said.
The increase will translate into an extra $50 million to $60 million for the City Treasurer’s Office to invest in short term options like money market mutual funds, city officials said.
The ability to move money around more quickly — instead of it being locked into investments with longer yield curves — is the best way to make sure Glendale’s investment portfolio, valued in December at $454 million, continues to work and have the necessary liquidity “to adjust to the seesaw daily movements of the market,” Councilman Dave Weaver said.
Overall, officials say the city is in a strong financial position, especially after having sold off $110 million worth of utility bonds on Feb. 6, just days before the municipal bond market took a short term dive.
Glendale Water & Power’s high credit ratings secured favorable interest rates that would have been harder to attract had the preplanned sale taken place after a series of sub prime mortgage-related developments hit the bond insurance industry, Finance Director Ron Ahlers said.
“Timing was excellent,” he said. “No one could have predicted what would happen in February.”
The City Council will soon use the key financial indicators as it begins the laborious process of putting together the city’s budget for fiscal year 2008-09, which begins July 1.
JASON WELLS covers City Hall. He may be reached at (818) 637-3235 or by e-mail at email@example.com.