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Low-Risk Ventures Protect Area Cities' Funds : Finances: Examination of local municipalities' investments shows a reliance primarily on conservative strategies. Only Claremont faces a major loss in Orange County bankruptcy.

February 02, 1995|RICK HOLGUIN and RICHARD WINTON | SPECIAL TO THE TIMES

Although Claremont stands to lose about $1 million in Orange County's ill-fated investment pool, the San Gabriel Valley's 30 other cities are breathing easy, having put no money in the ravaged fund.

Most area cities play it safe, keeping their money in plain-vanilla portfolios, but a few pursue spicier deals to get a bigger bang for their bucks.

The most daring of the cities put tax dollars in mutual funds, which do not guarantee return of principal, according to investment records obtained by The Times. Another handful of cities has even experimented with the riskier ventures that brought down Orange County's pool--derivatives and inverse floaters.

But aside from Claremont, none of the cities have lost money on their portfolios in recent years because they maintain adequate liquidity and adhere to the policy of holding securities to maturity, the date the issuer pays them back in full, financial officers said. They also limit the amount of riskier, potentially more profitable investments, officials said.

Pasadena, with one of the valley's largest portfolios, has the area's most aggressive investment strategy and the highest rate of return--7.2% last year.

The city's strategy includes investing about 20% of its $159-million portfolio in mutual funds, which may offer higher yields.

The mutual funds selected by Pasadena invest in U.S. government securities. But investments in the funds are not guaranteed, and Pasadena could lose principal.

Indeed, the fortunes of many mutual funds have tumbled since last February as interest rates have risen. Pasadena's mutual fund investments are worth about 6.5% less than what the city paid, said Assistant City Treasurer Vic Erganian.

But Pasadena officials say they don't expect to take a loss. With about $37 million in other investments that can be tapped within 24 hours, Pasadena has enough liquidity to meet demands and leave its mutual fund investments intact until values rebound, said Finance Director Mary Bradley.

"There's a small (principal) risk, but I wouldn't say there's a big risk," Bradley said. "All you have to do is make sure you don't invest the money you need for liquidity."

The city made its impressive returns on the strength of long-term investments, which were locked in when interest rates were higher, Erganian said.

Liquidity problems plagued Orange County's highly leveraged investment fund. The portfolio lost $1.69 billion after creditors forced the sale of investments that had plunged in value.

A few smaller cities have invested in mutual funds as well. San Gabriel has had $250,000 of its $4.9-million portfolio in mutual funds since 1986.

San Gabriel's investment in mutual funds is worth about $200,000 at today's market prices.

"I don't like them because you can essentially lose your initial investment, . . . but since we're basically underwater in that mutual fund, I am not willing to pull out," said Tracey L. Butler, San Gabriel's finance director. Butler said the investment was made before she became finance director and, luckily, only accounts for 5% of the city's holdings.

Arcadia dabbles in exotic ventures, such as derivative bond securities, investments with floating interest rates that also contributed to Orange County's problems.

The city's $42.6-million portfolio includes $2.5 million in inverse floaters, securities that lose value as interest rates rise, as they have in the past year. If Arcadia had to sell its inverse floaters today, it would lose $750,000, according to its records.

But Arcadia Treasurer Jerry Parker said his city won't lose a cent because it has sufficient liquidity and will hold the bonds until they mature. The city has about $3.3 million in short-term investments, 14% of the city's operating budget.

"I've been in the business 13 years, and to date we've never lost a nickel," he said.

Parker said Orange County's problems have given derivatives a bad name, when the culprit was really the county's practice of leveraging, or borrowing, to make investments.

Locally, West Covina officials borrowed to invest last March, entering into a so-called reverse repurchase agreement, a transaction also used in Orange County. In a reverse repurchase agreement, the investor pledges a bond as collateral to get a loan with the hope of earning a higher interest rate on the borrowed money.

West Covina borrowed $13 million from Dean Witter for 30 days, putting up two 30-year bonds as collateral.

Although an aggressive investment, market experts say, the risk in this case was low because the borrowed money was invested in a conservative State of California investment pool. The state's Local Agency Investment Fund allows same-day withdrawal, which meant that West Covina would be in no danger of defaulting on its loan from Dean Witter.

"We made $5,000 in 30 days," said Basil Panas, deputy city treasurer.

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