MOORLACH UPDATE — Daily Pilot — August 14, 2010

It’s been awhile since someone asked me about an investment policy statement.

If you’re at the short end of the yield curve, these past sixteen months have been hard on your personal money market returns.

An average retail money market fund has an expense ratio of 70 basis points.  The County’s money market funds had their yields dip down to 0.75 percent on April 1, 2009 and have been below that yield ever since.  For those of us in retail funds, our net yield has been zero.

The current yield on the County’s money market funds, with a balance of $2.8 billion, is a little less than 0.4 percent.  Consequently, going out a little further than the weighted average maturity of 60 days is something to consider.  By way of reference, the weighted average maturity of money managed by municipalities has been in the 20 day area subsequent to Orange County’s portfolio implosion.

Municipal treasurers have to make difficult decisions.  Do they keep everything very short?  Or do they invest funds out longer because certain funds will not be used for their intended purposes for several years?

The County’s Extended Fund, which is allowed to invest in three year durations, is earning 1.3514 percent.  Therefore, if you go out a few years longer, you’ll earn 100 basis points more.  The biggest question is, “Is that enough compensation for the added risk?”  The lingering question that should be asked is, “What if the short-term rates move up more than 100 basis points in the next three years?”  Cycles do happen and many economists are hinting that inflation is on the horizon.  Consequently, putting everything into three-year investments may not be the best idea if the economists are right.  A middle ground is called “laddering.”  Split the amount you want to invest long-term into equal portions.  If you want to move $36 million out three years, have $1 million mature every month and give yourself the option to roll it over up to your target date or another three years.  The County’s investment policy provided for this strategy for separately managed (specific) portfolios that were trying to match the assets with the intended date of usage (liabilities) and the laddering strategy would be the recommended approach.

Investment policy statements should be reviewed every year.  Accordingly, Newport Beach has an opportunity to make a couple of very minor positive changes next year.

The good news?  A reporter is asking about investment policy statements!

City seeks greater return on investments

Some city investments yielding zero to about a half-percent return.

By Mike Reicher,

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.


August 15


“Calif. Bill May Force State to Use Tobacco Money for Health Care” provided a new twist to the dueling ballot measure efforts.  Deborah Finestone of The Bond Buyer wrote the piece that started on one bill and drifted over to another unique ploy by then Sen. Joe Dunn.  Sen. Dunn supported Measure H and wanted to protect the tobacco settlement revenue stream from being hijacked.  It was fun gamesmanship.  And it meshed with my opposition to hypothecating the income stream.  Ironically, a year or two later, Sen. Dunn would vote to allow the state to hijack its tobacco funding, securitizing it in total, in order to pave over one year’s budget deficit for the state of California.  Unbelievable.

                Pending state legislation [, Senate Bill 673,] could soon restrict California to using its share of the national tobacco settlement, estimated at $450 million per year, only for health care related purposes, a move that would complicate budgeting, sources said.

                [Gov. Gray] Davis vetoed a similar bill last fall.

                Another bill that is still pending could also restrict counties’ use of settlement proceeds.

Senate Bill 1142, authored by Sen. Joseph Dunn, D-Garden Grove, would prohibit any local jurisdiction from securitizing, incurring debt against, or in any way encumbering those funds after an initiative concerning tobacco money use has been filed.  The bill, which has moved to the Assembly Appropriations Committee, has until the end of this month to make it to Davis’ desk.  Otherwise, it cannot become law this year.

                While it would pertain to all the counties and cities in the state, the bill is “without a doubt drafted with Orange County in mind,” said Orange County Treasurer John Moorlach in his letter supporting the bill.

                Last week [supervisor Chuck] Smith addressed the Assembly Local Government Committee dealing with the bill, saying the board had no intention of trying to securitize the money prior to voter’s taking action in the Nov. 7 election.

                The bill would apply to initiatives that qualified for the ballot on or after the bill’s introduction on Feb. 26.

                “I believe once voters have put a measure on the ballot it’s not proper for a government body to usurp that process,” Moorlach said.  “I see it as poor leadership.”


I made it to Martin Wisckol’s “The Buzz” column in the OC Register again.  It was titled “Harman hedges bets with political fund,” and it was the lead portion of the column.  The concluding paragraph should sum up the scenario at the time quite well.

                Assemblyman Tom Harman, R – Huntington Beach, was all geared up to run against county Treasurer John Moorlach for an open county supervisor seat next year, raising $54,000 for his supervisorial campaign account through June 30.  In fact, he’s spent nearly $45,000 of that already.

                But there’s a twist.

He’s spent most of that money not for the supervisor’s race, but for a state Senate election – depositing $32,000 of it directly into a Senate campaign account.  That’s being done thanks to the prospect of Sen. John Campbell, R – Irvine, winning the congressional seat vacated by Christopher Cox.  If Campbell beats out former Assemblywoman Marilyn Brewer and the pack – we hear that Gov. Arnold Schwarzenegger may announce the special election today – it would create an open Senate seat.

                But Harman’s not all in, with $10,000 still in his supervisor campaign account.  Of course he could switch it all back to the supervisor’s account if he changes his mind again.  And it’s all perfectly legal although, predictably, it doesn’t sit well with county campaign watchdog Shirley Grindle.

                “A lot of donors feel comfortable giving for a local race, but not for the higher office – where they might have another candidate they favor,” said Grindle, who believes there’s a degree of subterfuge to such transfers and that they should be outlawed.

                Meanwhile, public employee unions are scrambling to find somebody to run against Moorlach, who’s critical of public employee pensions.  The unions had backed Harman for Assembly and were counting on him lining up against Moorlach.

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