THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, December 10, 1994 TAG: 9412100234
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TONY WHARTON AND TOM SHEAN, STAFF WRITERS
LENGTH: Medium: 100 lines
City financial officers in Hampton Roads say it sounds like their investment priorities for taxpayers' money - safety first, profits second - were reversed in Orange County.
The fast-growing California county had to declare bankruptcy Tuesday after suffering heavy losses on some risky, interest-sensitive investments. Orange County's losses were multiplied because the county treasurer had borrowed heavily to expand the investment portfolio.
Local municipal finance officers said cities in Hampton Roads, like the rest of Virginia, are so conservative with their investments that an Orange County-type disaster is highly unlikely here.
``We're sort of plain vanilla in that way, you know?'' said Barbara O. Carraway, Chesapeake's city treasurer. ``We only deal with securities already approved by the state. We always like to sleep at night.''
Nearly all cities of significant size invest part of the taxpayers' money in financial instruments that will keep the money safe, make it available quickly and return a good interest rate - in that order. It is a large but little-publicized aspect of city management.
In Orange County, however, the treasurer not only used a particularly risky type of investment, he also borrowed funds to pyramid the county's portfolio from $7 billion to $21 billion.
The high-risk investments used in Orange County - known as ``inverse floating-rate notes'' - produced higher yields when interest rates were falling. But they reduced the value of the county'sinvestments when rates began climbing earlier this year.
As rates rose, a strategy that generated above-average yields for the county last year battered its investment portfolio this year. Faced with enormous losses and an exodus by cities and towns participating in the portfolio, Orange County filed for bankruptcy.
Virginia and some other states sternly restrict what cities can do with taxpayer money. So cities and counties here are more likely to put their investments into U.S. Treasury bonds, bank certificates of deposit, or private arrangements with banks.
Virginia is one of only five states with a triple-A credit-rating from all three major rating agencies. But in the wake of Orange County's bankruptcy filing, state treasurer Ronald L. Tillett immediately supplied these agencies with additional information about Virginia.
He also distributed financial data to large investors to allay concerns they might have about the health of Virginia's investments. ``I was getting calls from institutional investors who asked `What's your investment policy? '' Tillett said.
Virginia's Department of the Treasury has no derivatives in its $3.5 billion general fund or in the $650 million fund that it manages for 150 cities, towns and counties in Virginia, Tillett said.
Still, the investment debacle in Orange County will prompt requirements that all states and localities disclose more information about their investment activity, Tillett predicted.
While some additional disclosure may be needed, the new rules probably will add to the costs that states and municipalities bear when issuing bonds, he said.
Sterling Cheatham, Norfolk's finance director, said that two or three times a month he hears from salesmen peddling new investments.
``We're constantly approached,'' Cheatham said. ``I mean, marketing is marketing. We just tell them it's not in the confines of our investment policy.''
The size of local cities' investments range from as little as $3 million in Suffolk to $203 million in Virginia Beach. Their methods vary, too.
Suffolk and Portsmouth, for instance, keep very little money in investments that they can't immediately retrieve. Most of Suffolk's money is in short-term, overnight agreements with banks that keep it available as cash.
Portsmouth finance officials said the city is so stressed that it keeps all of its extra money in easily accessible accounts rather than in investments. Last year the city earned $1.1 million in interest.
``We don't even have money invested in any CD's (certificate of deposit) right now because of the limitations of city funds to invest,'' Portsmouth Treasurer Jimmy Williams said.
But Norfolk and Virginia Beach commonly invest in six-month and nine-month bank certificates of deposit, timed to become available when the city needs the money.
Cheatham said his city uses a computer spreadsheet to schedule its income and payments against investments.
``We know when our money is timed to go out and when it's timed to come in,'' he said. ``You can time it pretty closely.''
Most cities report that they have not lost any money on investments in recent years. Norfolk officials pointed out that their interest income fell, along with every other investor's, when interest rates dropped last year.
The state treasurer even issues a monthly report on which banks are the safest for cities to deal with.
``It's much better to be safe than to earn that extra one-one hundredth of one percent,'' said C. Lee Acors, Suffolk's director of finance. ``We realize that this is the people's money.'' MEMO: Staff writers Francie Latour, Mac Daniel and Toni Whitt contributed to
this story.
KEYWORDS: PENSION INVESTMENT VIRGINIA by CNB