City seeks greater return on investments

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

August 13, 2010|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.

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