City charts independent course for its investments
PRESCOTT - Despite a declining stock market and a sluggish economy, revenues continue to grow in one City of Prescott category: its investments.
Prescott Budget and Finance Director Mark Woodfill reported to the Prescott City Council this week that the tens of millions of dollars that the city regularly has in reserve in its budget generated about $5.4 million in interest revenue in the 2007 fiscal year.
And in the 2008 fiscal year, which just ended on June 30, the reserve money should generate $3.7 million. Woodfill cautioned, however, that the recent fiscal year is still under audit, and the total could change.
The rate of return, which is greater than the results that the city could expect from "benchmark" investments such as three-month Treasury bills, depends upon the city's management of its reserve money.
At any given time, the city has between $60 million to $65 million on hand in reserve accounts and pending-project accounts.
That money, while obligated for various purposes, is idle at the time, and Woodfill's department regularly invests it as a means of generating interest revenue for the city.
Woodfill explained that the city uses a basic strategy for its investments that emphasize: safety of principal; low price volatility; stable returns; and consistently beating three-month Treasury bills.
That means that the city concentrates on investments such as 10-year amortization agency Mortgage Backed Securities, which Woodfill's presentation to the City Council indicated are "direct United States Federal agency obligations," which are "backed solely by prime single-family first mortgages."
On the other hand, the city does not invest its money in: securities backed by sub-prime mortgage loans; Collateralized Debt Obligations; and the state investment pools - all of which Woodfill said are riskier.
The city's investment policy changed dramatically in 2002, Woodfill said, after the city lost about $1 million by putting its money in the state investment pool, which took a large loss over collateralized debt that he said "was backed by fraudulent medical receivables."
"These are things we don't want happening to us again," Woodfill said, adding that similar situations have occurred recently in Montana and Florida.
Since 2002, the city has been doing virtually all of its own investing, Woodfill said, in an effort to keep a close watch on where its money is.
"An important point is that we don't do this just to make more money," Woodfill said, noting that with state pools, local governments might not always know exactly how the pool will invest the money.
Under the city's current procedures, he said, "We know exactly where our money is."
City Manager Steve Norwood expressed support for the city's policy of relying on its own investments, rather than the state pool. "I think we do a much better job," he told the City Council this week.
Even though the stock market has dropped considerably in recent months, Woodfill noted that the city's investments are "only tied peripherally to the stock market," by the impact it is having on the Federal Reserve System's decisions about interest rates.
Contact the reporter at firstname.lastname@example.org