by Bradley Parsons
Staff Writer
To help close a $20 million gap in his inaugural budget, Mayor John Peyton will list projected profits from future investments as City revenues, according to the City’s finance director and Peyton’s chief financial officer.
Finance Director Cal Ray said Friday that Peyton would include about $15 million in expected investment revenue in his budget’s final draft. That money is expected to materialize once the City balances its investment interest earned with its loan interest paid. Currently, the City pays more to borrow than it receives from investing.
According to Peyton’s chief financial officer and budget point man Walt Bussells, “matching the City’s books” will return $10 to 20 million to the City next year. Bussells said that money will be listed as revenue in the budget. Bussells said the changes received unanimous support from the budget staff.
Peyton is counting on the proposed changes to increase nearly fivefold the return on City investments, and according to Bussells, intends to commit those unrealized funds to City operations. A draft of the budget released last week predicts investment income of $3.1 million after projecting $4.1 million for 2002-03.
Ray said the City will have to change policy to restructure its investments. The current policy authorizes the City to invest in relatively low-yield, low-risk markets like certificates of deposit and money market certificates. Bussells said the General Counsel’s Office was combing through the ordinance code to identify investment restrictions on City investments.
Although the administration hopes to strip the ordinances of investment restrictions, Bussells said the proposed changes would reduce the risk to taxpayer dollars. He said the City’s current investments return a profit only during times of sharply increased interest rates. In contrast, the current, low-rate climate bleeds money.
“Interest rates are unpredictable,” said Bussells. “These changes will insulate the City, inoculate it against dramatic rate shifts.”
Bussells predicted the new financial approach would result in the largest single-year increase to the City’s Rainy Day fund in history. The contingency fund increased by about $5.5 million last year.
Bussells said the investment strategy was commonplace at the JEA, where he splits time as the utility’s chief executive officer, and in the private sector. He gave Pittsburgh, Charlotte and Raleigh as municipal examples of balanced-book investors.
Bussells said he didn’t know why the City hadn’t previously matched its books: “I’m an accountant, not a psychologist.” But said the current budget crunch and a tepid financial climate provided the impetus for change.
“Sometimes you need tough times to question how you do things,” said Bussells. “We’ve been forced to re-examine our investment approach.”
Although the draft budget reveals a $20 million deficit, Bussells said unlisted pension contributions helped push the real gap closer to $40 million. He said the budget staff was forced to think innovatively to bridge the funding divide without raising taxes or cutting services. Peyton pledged repeatedly during the campaign not to raise taxes.
Peyton is required by ordinance to submit a balanced budget, which the Council must approve. Bussells said Peyton would meet that task.
While the projected investment income will erase about a third of the deficit, the Peyton team will spend future funds to further level its ledger. Ray said last week Peyton could take a portion of $60 million earmarked for future procurement of City vehicles and either invest it or insert it into this year’s general fund.
“It’s a ready cash resource and we need to decide whether to leave it alone or put it to work more aggressively,” said Ray. “But we have to balance that against what we’ll do in future years and how that will be received by the taxpayers and the Council.”
Bussells has advocated new financial tactics as co-chairman of the mayor’s transition team. In a June meeting of the team’s subcommittee on financing and efficiency, Bussells said the City should take better advantage of a strong credit rating and tax-exempt status to borrow money at lower rates. He said that money could then be re-invested into taxable markets with traditionally higher rates of return. Bussells emphasized the safety of the recommended investments.
“We’re not going to recommend the City invest in hedge funds,” said Bussells. “We can invest conservatively, reduce the cost of borrowing and still get a higher return on our tax dollars.”