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UTAH PORTFOLIO ISN’T LIKELY TO GO BELLY UP

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Restrictive laws and conservative investment philosophies protect Utah's public treasuries from the type of debacle that hit Orange County, according to one of the state's top investment managers.

Deputy state treasurer Larry Richardson, who has helped manage Utah's public portfolio for more than 14 years, said state law prohibits many of the investment practices that are being blamed for Orange County's troubles.An investment strategy that relied heavily on leveraging and so-called "derivatives" has cost Orange County an estimated $2 billion and forced it into bankruptcy.

Jon Bronson, associate vice president and manager of the Salt Lake City public finance office of Dain Bosworth, shares Richardson's confidence in Utah's public portfolios.

"The equivalent scenario (of what happened in Orange County) can't happen in Utah if public treasurers are following the law," Bron-son said.

That law is the Utah Money Management Act, which Bronson described as a "good tool that provides guidelines for investments that are safe and secure." For example, it doesn't permit leveraging or investments in volatile and risky securities, including many derivatives, he said.

Derivatives are a complex variety of new investment products derived from traditional products.

Most local governments in Utah invest their money through a pool arrangement with the state treasurer's office. The state investment portfolio has averaged between $2 billion and $2.4 billion during the past year and has earned more than $1 billion in the past 15 years.

Richardson, who is also Salt Lake County treasurer-elect, said the state's money management act applies three simple principles to public investments: "safety, delivery vs. payment and matching."

By matching, he means "funds cannot be invested for a longer period than the cash flow anticipates having those funds." For example, if a treasurer has $10 million to invest and must meet a $10 million payroll in two weeks, he or she may invest the money for only those two weeks.

In Orange County, investment managers apparently leveraged available funds by using them as collateral to borrow cash to buy more securities, which were also used as collateral for even more investments. Called "repurchase agreements," these investments allowed Orange County to leverage its $7.5 billion portfolio up to $20 billion.

Delivery vs. payments means that investment managers must take delivery of securities rather than payment, which offers protection against unscrupulous brokers who might otherwise take the public money and run.

State law also prohibits investments in volatile derivatives and other high-risk securities, Richardson said, adding, "I don't know of any treasurer in the state who is doing that."

However, Richardson concedes the emphasis on safety comes with a price: lower yields. In the investment world, higher risks generally earn higher yields. Orange County, for example, was sometimes earning 8 percent when everybody else was getting 4 percent.

"There is always that tradeoff," Richardson said. "But what we've always said is, judge an investment first of all on safety, then liquidity and only then on yield."

Although the Orange County fiasco has sent shock waves through the public investment sector and damaged its "rock solid" image, Richardson expects some good to come from it.

"I see the rating agencies asking more questions and becoming more cautious in the future," Richardson said.

From Utah's standpoint, the closer scrutiny won't make much difference because the state has routinely disclosed the kind of information and adhered to the kinds of practices that rating agencies and investors are looking for, he said.

Bronson, whose firm has handled some of the biggest public bond issues in the state, said the national financial markets have "high confidence" in the state's public investments and offerings thanks to low debt ratios and conservative philosophies.