Friday, December 15 , 2017, 12:32 pm | Smoke 74º Santa Barbara Challenge

Safety, Liquidity and Yield Remain Santa Barbara’s Investment Priorities

Federal agency securities account for $102 million of the $230 million the city has invested

[Noozhawk’s note: This is one in a series of articles on Noozhawk’s Santa Barbara Challenge, our public-engagement project on the city of Santa Barbara’s budget. Related links are below.]

Like many people, Jill Taura checks an online bank account every morning to see what checks have cleared. But unlike most of us who monitor our personal accounts online, Taura is watching over the city of Santa Barbara’s transactions. And instead of a paltry personal amount, she’s managing $230 million of investments as the city’s treasury manager. It turns out the city invests money, just like individuals, but is a different kind of investor — with different goals.

While individual investors have a plethora of choices about what to invest in, the city is on a tighter leash. According to the city’s investment policies, officials have three main objectives: safety, liquidity and yield.

“We’re really restricted under state law, and even under the city’s own investment policy, which is more restrictive in some cases,” Taura told Noozhawk.

That’s the way the city wants it, because the investments aren’t designed to turn a quick profit.

“We are custodians of public funds,” Taura said. “It’s really the citizens’ money.”

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Some of Santa Barbara’s money sits in the Local Agency Investment Fund, or LAIF, which is part of the Sacramento-based California State Investment Pool and serves as the city’s overnight money account. Keeping short-term money in LAIF allows the city to get a better rate there than at a bank account. Taura takes money from the account, according to the municipality’s cash needs, and runs through the city’s purchases and deposits when she gets to work each morning.

But if Santa Barbara has grappled with deficits in the past, where’s the money to invest coming from? Many of the city’s funds, including the General Fund, have reserves set aside — an emergency fund, of sorts. If that money isn’t immediately needed for cash flow, it’s invested to bring a higher interest rate than what a bank could offer, Taura said.

“Rather than just letting that money sit there, whatever we don’t need immediately for operations, we invest so we can create a stream of income to help do more,” Taura said.

Some groups have called attention to the city’s investments, calling for them to be used for ongoing expenses — salaries, for example. But according to Taura, putting this money toward operating costs “is not sound budgeting practices and not what our city policies are about.”

“You’ll run out of money and then at the end of the day, you’re still going to have a structural imbalance,” she said.

The largest amount of Santa Barbara’s investments — about $102 million — are invested in federal agency securities. About $40 million of that is invested in securities with Freddie Mac and Fannie Mae, the troubled mortgage companies sponsored by the federal government. Taura said Santa Barbara is invested in bonds with the companies, not stocks, and are well within the city’s allowable investment grade.

“In some ways, we’re certainly earning less than some people would in the market during boom times,” she said. “But we also didn’t lose anything, except interest rate, when the market downturn occurred.”

That means no stocks, no futures, no derivatives and no mortgage-backed securities.

The city can have anywhere from $140 million to $160 million in cash invested at any given time, according to finance director Bob Samario, and the city has never recorded any investment losses because of the buy-and-hold strategy. The only losses they’ve seen have been lowered interest rates.

Even so, Santa Barbara has changed its approach somewhat since the downturn. Taura said the city has stopped buying corporate bonds, because of the volatile market.

“We stopped doing that with the whole economy going so crazy,” she said.

Santa Barbara has also increased the percentage of callable notes, allowing them to shorten the average days to maturity, “so that when things do turn around, we’re not locked in three, four, five years,” Taura said.

With respect to the General Fund, Taura said Santa Barbara has used one-time money to do “soft-landings” each year, in hopes of giving the economy a chance to turn around.  But the city is still short $7 million to $8 million in terms of its reserves.

“It’s clear at this point that we just have a big structural deficit,” she said.

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Noozhawk staff writer Lara Cooper can be reached at .(JavaScript must be enabled to view this email address). Follow Noozhawk on Twitter: @noozhawk or @NoozhawkNews. Become a fan of Noozhawk on Facebook.

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