by Bradley Parsons
Staff Writer
City Council president Lad Daniels said Tuesday the mayor’s innovative approach to City financing is a small risk worth taking.
Daniels worked with interim Chief Financial Officer Walt Bussells to form a Blue Ribbon Financial Commission — comprised of area financial professionals — charged with evaluating the mayor’s plan to restructure the City’s finances. At its opening meeting, Daniels advocated Mayor John Peyton’s new strategy.
The City has traditionally invested annually about a half billion in capital into short-term funds. Those low-risk ventures have protected taxpayer dollars but only returned about 2 percent. Peyton’s finance team thinks it can recoup about $15 million annually by restructuring the way it borrows and invests. That money is being counted on this year to balance the budget.
Daniels compared the strategy to the City’s management of the $1.5 billion general pension fund.
“The pension fund represents a sacred contract with City workers, as sacred as the relationship between the Council and the mayor’s office,” said Daniels referring to ongoing Council scrutiny of Peyton’s budget. “If we’re willing to take risks with the pension sacred trust, then we should be willing to take the same risks with the City’s money.”
Throughout the budget’s preparation, Bussells has said the proposed changes present minimal risk. Peyton’s plan, he says, simply seeks to match what the City pays on borrowed money to interest earned from investments.
The City’s current approach is to invest short and borrow long. Locked into long-term borrowing rates that exceed the City’s return on short-term investments by 3 percent, the current structure costs about $18 million each year, according to Bussells.
“This is unnecessary cost; this hurts,” said Bussells, pointing to the 4.5 percent the City pays to borrow. “This is risky; to lock ourselves into this number while interest rates drop and not do anything about it. If the City was a savings and loan, we would now be upside down.”
To right the City’s ledgers, the mayor has proposed matching the duration of return on investments to the duration of lending. By matching short-term borrowing to short-term investing, Bussells said the current trend of dropping interest rates would return money to the City rather than taking it away.
However, City Council Auditor Richard Wallace asked Bussells to consider the impact of an interest rate reversal. Sounding the first cautionary note, Wallace said the new strategy could cost the City money if rates climb.
“We didn’t get here by accident,” said Wallace. “Three years ago if we looked at these same numbers we’d be earning more than we’re paying. If interest rates go back up, we’ll still be paying 4.5 percent [on borrowed money], but we’ll be earning more.”
Bussells said interest rates historically trend downward. He said the City would inoculate itself against radical rate climbs by purchasing interest rate caps. The caps work like insurance, returning money to the investor when rates climb above a designated threshold. Bussells said the caps would “limit our exposure if something freaky happens.”
In addition to matching the City’s investments, Peyton wants to invest part of a vehicle replacement fund with the City’s general pension. The $58 million fund is set aside for current and future vehicle replacements or repairs. After spending $17 million to address the 2,800-car fleet’s needs and contributing $6 million to a contingency fund, Peyton wants to put the fund’s $35 million remainder into the pension.
The general pension targets an 8.5 percent return but lost money two of the last three years. However, Bussells pointed to the fund’s long-term success — the fund returned 25 percent in 1997, and averaged about 6 percent over the last six years — as evidence of potential earning.
Wallace compared using the fund to “breaking a $50 million piggy bank.” The City will spend $25 million from the fund to pay its pension contributions this year. Wallace said the Council was concerned how future pension contributions would be funded.
The City started setting vehicle money aside in 1990. Before that, Wallace said a lack of a coherent replacement policy led to a deteriorating fleet as the City postponed buying new cars until funds became available. The problem? They never did.
Wallace said the current policy has worked. He said the Council would want to see a policy guaranteeing how and when vehicles would be replaced. Finance Director Cal Ray is working on an ordinance that he says will answer those questions.