Is San Luis Obispo investing wisely?

August 17, 2014

moneyBy 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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Rambunctious

“Is San Luis Obispo investing wisely?”



kettle

“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.”


So the “oversight committee” is made up of the same people who need to be overseen?


Who thought this was a good idea?


slo Fact Finder

For some unexplained reasons and for the first time in many years local taxpayers, property owners and business people are finally asking the right questions about the significantly high local fees & taxes paid within the City of San Luis Obispo and why the city has more in its savings accounts than ever before (earning FAR less interest on the public’s money than the the regionally adjusted inflation rate in the county).


All of these recent questions go to the heart of our city’s fiscal management policies & strategies and form the basis for further questions about the need for any new tax after the expiration of Measure ‘Y’ no matter what it may be labeled, like Measure ‘G’, Measure ‘G-14’, a General Purpose Tax or an Essential Services Tax.


In any event the present city management just continues to say “Trust Us” as we know what’s best for the citizens of SLO Town and we know how to manage the public’s money for the benefit of “whoever” ? Recent and past examples of this approach may just not “cut it” any longer for the voters an I hope other civic related organizations and current city council candidates begin really to take notice and SOON ! !


SLOBIRD

This action by the City is questionable on many levels.


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


Since inflation is running around 2%, the City is losing 1.44%, or 1.3 million a year PLUS what are we paying San Diego-based Chandler Asset Management.


2. We are not even making enough on the $90 million Investment Fund to even pay for Lickit and Padilla’s salaries. Only in government would management consider this a successful investment plan.


3. What are we paying Chandler Asset for? Obviously they are doing the same thing as the City, nothing! Let the City Treasurer invest it all and save the fees paid out.


4. The City policy is that there be a 20% reserve on the City Budget. This exceeds that amount.


5. $90 MILLION savings account hardly requires a continued assessment of the Sales Tax known as MEASURE G


Vote NO on MEASURE G!


womanwhohasbeenthere

This was a very revealing meeting and this story is pretty accurate. The city self-manages about 2/3 of the pool which is liquid (maturing in 30-90 days) so the manager can move money around as she deems fit aad the tradeoff is next to nothing in interest return. Longer term investments (up to five years per state law) ,”laddering” investments to come due at different times, investments in local banks that would keep the money here and recirculate it locally, are all reasonable and legally permitted tools. With better management we could see a much better rate of return. Sadly my impression is no one at the city staff level really understands this or else does not want to make decisions to lead this way.


We owe PERS nearly $150 million. The city is technically insolvent according to its own balance sheet. But like many people in debt, it can be overcome but it will take leadership and tough political decisions that will offend powerful organized interest groups. (Regrettably taxpayers are not an organized interest group although they are the ones ultimately on the hook for these bad decisions).


The answer is not more taxes and fees and fines. The answer is to cut spending, pay downcostly debt when allowable (as noted, some bonds cannot be paid off early), and get a better rate of return on our $93 MILLION in the bank.Building some of the Capital Improvement Projects that keep getting postponed would also be a good investment as they will only getmore expensive as time goes by – the skate park being a great recent example. The county has done this cutting and balancing act over seven years and the city could do the same if it had the backbone to act.


scoopone

My first question is: what is the city paying Chandler Asset Mgmt?



Shouldn’t the city seek out bids/ideas from other investment firms? And, no we don’t

need to hire another consulting company to help them decide.


panflash

Scoopone raises a very good question. I’m not necessarily a big fan of SLO city’s policies and practices, but in this case I think it is prudent to be very careful with its investment portfolio. Preservation of principal should be the highest priority in municipal investment decisions- it can be a very dangerous game to chase after rate of return with public money. Anyone who wishes to put their own personal wealth at risk to chase after higher interest is certainly welcome to do so- but it is not appropriate to dangerously gamble with the taxpayers’ money.


Now, having said that, let’s go back to soopone’s question asking “what is the city paying Chandler Asset Mgmt?” In an investment environment such as the present, with historically low rates of return, that minimal return is further reduced close to zero (or even below!) if you are paying someone else to “advise” you or actually manage your investments. SLO city, and many other local municipal governments, may be at a point at which it would make best sense to drop any such paid “advisors” and save that expense. That could actually add to the city’s true rate of return, while still prudently preserving its precious principal.


So, yes- if SLO actually, truly, needs outside paid advisors, then they should certainly seek competitive bids for investment management service. But, with rates of return being so low, for now, perhaps the city should also analyze the option of canceling paid outside financial management consultants and directing their own staff to handle these matters until a more comfortable safety/rate of return ratio environment is available again.


achillesheal

No wonder they need to raise taxes daily. 0.3%??? Are you kidding me!? Incompetent fools writing and executing laws in all branches of government.


Look up efficient frontier. Idiots!


flytrap

The bottom line is that they have to make 2% to 3% a year just to keep up with inflation or else the fund will lose total value. Presently, since inflation has been 2%, the pool is losing 1.44%, or 1.3 million a year. Thus, the sages on the investment committee have obviously misnamed it an “investment pool”. It should be better termed a “planned shrinking pool”. The committee should also Google “inflation” in order to introduce themselves to this concept.


kayaknut

Actually the bottom line is to keep up with inflation those in charge feel the only possibility is to raise revenue and not cut expenses, such as salaries, benefits, pensions, only to threat reduction in services if they don’t get their “new” taxes, such as Measure G, fees or penalties


Extremely Stoic

http://www.bloomberg.com/news/2013-03-14/california-said-to-raise-bond-yield-on-longer-maturities.html


Why is this not an option? SLO doesn’t trust the state to deliver?