The city of Camarillo may have lost $20 million of its $24-million investment portfolio in the last year because its former city treasurer engaged in highly speculative investments, an independent audit of city finances has revealed.
Shocked city officials learned of the losses Tuesday night. The city has been aware of problems with its investments for months but the losses were believed to have been about $2.5 million.
But the total losses appear to be much higher, said Alan C. Darlington, an accountant with Arthur Andersen & Co., the firm hired by the City Council to conduct an audit to determine the exact amount lost.
City officials have blamed the problem on former Treasurer Donald F. Tarnow, 46, who made investment decisions for the city of 38,000. Tarnow was fired Feb. 2 for failing to report the investment setbacks to city officials.
The accounting firm released its preliminary findings Tuesday. Camarillo's total investment portfolio fell from a high of $24 million at the end of last June to a current balance of about $4 million, Darlington said.
The losses are a serious blow to the Ventura County community, whose annual city budget totals about $20 million. The report prompted the City Council to order an immediate freeze on all new city building and road improvements, and to vote to appropriate money from general operating revenues to cover about $1.5 million lost from employee pension and deferred compensation accounts.
The other $18.5 million in losses were from Camarillo Sanitation District funds and the city's investment fund, which was used to collect interest from idle cash before it is needed to pay for city services such as police salaries and road improvements.
The city will also lose an estimated $2.25 million a year it had expected to earn in interest from its now-depleted investment portfolio, City Manager Thomas W. Oglesby said. But there will be no cut in current city services, he said.
"It took 11 years to build our investment account from $2 million to $24 million, and that was in a very opportune investment market," Oglesby said. "We are going to have a very tight budget for the next few years."
Admits No Wrongdoing
Tarnow, who could not be reached for comment on the auditor's report, had said in a previous interview that he had done nothing wrong.
The losses were linked to government securities investments. Auditors found that Tarnow lost the bulk of the city money last spring when bond market prices fell dramatically, the auditor's report said. Tarnow had engaged in a sophisticated investment strategy that called for the purchase of government securities on margin, the report said.
The strategy called for Tarnow to make commitments to buy or sell federally backed notes 30 days in advance of the actual purchase date, Darlington said. Although the investment instruments themselves were sound, when the prices of bonds fell last spring, the city lost millions, he said.
Tarnow had employed the investment strategy with great success in 1986, earning the city nearly $3 million from interest and proceeds from the sale of the bonds, city officials said. But beginning last year, after Tarnow transferred the bulk of the city's money from less risky investments such as certificates of deposit to the speculative buying and selling of federally insured Treasury notes and mortgages, the strategy backfired, Darlington said.
Officials Kept in Dark
City officials were kept from knowing of the losses for several months because Tarnow had complete control over investments and over city accounting of investment gains and losses. Auditors found that Tarnow had either deliberately or mistakenly misrepresented many investment transactions that he recorded in the city's books.
The City Council voted Tuesday to begin a study of stricter investment procedures that will provide a monthly accounting of investment gains and losses. In addition, Camarillo will probably hire an outside specialist to handle city investments, officials said.
Both the auditing firm and City Atty. Colin Lennard said there is currently no evidence of wrongdoing or personal gain on Tarnow's part.