Is San Luis Obispo investing wisely?

August 17, 2014

By JOSH FRIEDMAN

The city of San Luis Obispo’s investment committee agreed Thursday to propose minor changes to the city’s investment strategy, while rejecting several higher-yielding options.

On June 30, San Luis Obispo’s investment fund contained $87.6 million. After factoring in investing expenses, like fees paid to intermediaries, its rate of return is only about .3 percent.

At that rate, a portfolio of approximately $90 million produces an annual yield of about $300,000.

Several factors such as California law limit the city’s ability to generate sizable returns.

Other limitations, though, are self-imposed. The city tailors its investment strategy to preserve cash for back filling operational expenses, rather than for purchasing better-performing assets.

San Luis Obispo investment policy, which is set by the city council, has required corporate securities rated “AA” or higher while state law allows “A” rated corporate investments.

On Thursday, the San Luis Obispo Investment Oversight Committee voted in favor of changing the city policy to allow the inclusion of “A” securities in the city’s portfolio. The city council will eventually decide whether or not to adopt the policy change.

Municipal investment adviser Jayson Schmitt, who manages a portion of the city’s portfolio, said Thursday that the proposed change would not add much risk while increasing returns.

Schmitt, an employee of San Diego-based Chandler Asset Management, said at maturity, San Luis Obispo’s corporate bonds generate an average yield of .56 percent, while another California city of similar size generate .70 percent returns with “A” rated bonds.

While San Luis Obispo can expect small gains from including “A”-rated securities in its portfolio, larger returns would be possible by placing its money in investments with longer durations.

California law only allows cities to invest in paper assets that mature in five years or less. But, the city’s investments currently mature in one year on average.

Much of the city’s portfolio is liquid, meaning it has no date of maturity and can be cashed out at any time. Finance director Wayne Padilla, who manages the investment fund, said Thursday that the city-controlled portion of the portfolio is 93 percent liquid.

The city controls nearly half of the overall portfolio, while Chandler manages the remainder.

Of the $42.4 million-city managed portfolio, $35.2 million sits in a liquid, state of California-managed investment pool. The pool delivers a yield of .23 percent. City management keeps an additional $4 million of its internally handled portfolio in cash.

“The city has to have liquidity in order to maintain overall operations,” Padilla said Thursday.

City Manager Katie Lichtig elaborated, saying that, in some months, the city needs cash reserves from the investment fund in order to cover operating expenses. Lichtig said the upcoming construction of an expanded Highway 101-Los Osos Valley Road interchange would likely require cash from the investment portfolio to supplement city funds on hand.

Both Padilla and Lichtig serve as members of the oversight committee. The committee consists primarily of city staff and is chaired by Padilla because he also holds the position of city treasurer.

During Thursday’s meeting, the public representative member of the oversight committee, Steve Barasch, argued that the city should purchase assets that take longer to mature in order to generate more yield.

On Thursday, Schmitt said that securities in the utilities sector with five-year durations can produce returns of up to 2.2 percent. A return of 2.2 percent is nearly 10 times larger than the average yield of assets in the city-managed portfolio.

If the city could raise the yield of its entire portfolio to just 1.5 percent, it would generate an addition $1 million annually.

Lichtig said Thursday that the city’s investment fund may be overly liquid, but neither she nor Padilla would commit to moving funds into higher yielding investments with longer durations.

Both Lichtig and Padilla also disputed an idea raised by members of the public who suggested that the city could use some of its portfolio money to pay down debt. City resident Leslie Halls said doing so would make sense because the interest rates the city pays on its debt are higher than the yields generated by the investment fund.

Padilla said that city staff does not feel the market is right for refinancing debt. Lichtig added that some bonds have provisions requiring the city to pay them off over time, as opposed to all at once.

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