Grand Rapids remaining prudent when investing

January 14, 2011
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According to the city treasurer’s report, Grand Rapids earned nearly $3.63 million from its investments during the previous fiscal year. The general operating fund, which pays for most of the city’s services, earned almost $700,000 in interest revenue.

To no one’s surprise, those 2010 fiscal-year earnings were down from 2009. And a lower-return rate means the city is exercising more caution in its investing, while still looking for a better yield.

“I’m pleased that we’re judiciously investing the money and maximizing the return that we can get using the prudent-person role. I know that there are different things that we passed on because we just don’t want to take any risk, in that the preservation of our capital is paramount for us,” said Al Mooney, city treasurer.

The par value of the city’s certificates of deposit, commercial paper and government securities was roughly $423 million during fiscal year 2010, which ended June 30. Many of the investments the city purchased last year rolled over and some investments were required to satisfy bondholders who bought water- and-sewer-system securities from the city. The investments earned 1.75 percent for the year, down from a return of 2.61 percent the previous year.

“But I’m pleased with how we’re doing in such a low-interest-rate environment. We’ve benefitted from some of the local financial institutions wanting to get a piece of our investment portfolio,” said Mooney.

Mooney said the city’s policy focuses now on shorter-term investments, like one-year instruments from sound fiscal institutions that meet other criteria. But he added that some investments the city bought are for a longer term, as an effort to raise the overall yield. Staying mostly liquid in today’s economy is a key investment criterion for the city. Risk avoidance, however, is also a top priority following the near total collapse of the financial market in 2008.

“Security is always a main factor, and especially now when you have 157 bank failures that the FDIC has to step in on in 2010, and 140 in 2009. That makes it very critical for us to evaluate that, in light of what our investment choices are,” said Mooney.

The city made about two-thirds of its 2010 investments with Huntington Bank, Mercantile Bank and The Private Bank, which has offices in Bloomfield Hills and Grosse Pointe Farms. The Private Bank is part of a holding company, Private Bancorp Inc., that serves 10 states and mid-sized communities.

A little less than a year ago, Mooney received permission from the City Commission to join Kent County’s Investment Pool to diversify the city’s short-term portfolio. He said he would invest from $20 million to $25 million in it. He hasn’t made that investment yet, but still plans to do so.

“We had some documents going back and forth and, at that point in time, we stayed within our own maturity structure and we haven’t yet placed the funds with the county,” he said. “I do still plan to get that up and running. There were just a couple of considerations that we needed to iron out.”

The city’s fiscal year runs July 1 to June 30. That means the city is already halfway through its year, so the Business Journal asked Mooney whether he thought the city’s portfolio would see a higher return over last year. He said he didn’t think that would be the case.

“I think we will have a potentially lower average yield on our portfolio just because any of the longer-term securities we would have had that would have maintained a higher yield have matured. We’re having to reinvest those monies at lower rates now,” he said.

“So at one point in time, we were looking at not wanting to buy any one-year-or-less maturity at 1.25 percent. Now we’re saying we can get 1 percent on a one-year maturity. At least that’s meeting some of our needs after we’ve taken into consideration the capital risk elements of the party with which we’re investing.”

Mooney went though this lower-return saga as city treasurer when the dot-com bubble burst just about a decade ago. But like most in his field, he sees the latest bust, which was driven by the mortgage and investment industries, as harsher.

“Then you had both long-term and short-term rates flatten out considerably. This is a much more severe financial crisis than we had back in 2001. But what you saw occur is that the longer-term rate started to go up and the yield curve got steeper. Then the shorter-term rate started to come up,” he said of the days that followed the dot-com crisis.

“I know that the Federal Reserve would love to have the flexibility to raise the short-term rates, and you’re seeing some of that overseas with some of the other big players in the financial marketplace worldwide. But I don’t have a specific time when that’s going to occur (here). If I knew that, then people  on Wall Street would be after me. But it has been fascinating to follow.”

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