It’s a balancing act for city’s investors
EDITOR’S NOTE: This is the second installment in a series of articles examining the proposed 2006-07 Santa Monica city budget.
CITY HALL — As the City Council considers spending priorities for the next fiscal year, much attention has been paid to the city’s diverse, but balanced sources of revenue.
From property and sales taxes to licenses and permit fees, it is estimated the city will generate more than $451 million in the next fiscal year, a little more than half of which will help support the general fund, which pays for core services such as street repair, police and fire protection, libraries and the salaries of city staff. The other half, around $219 million, is dedicated to specific projects or programs, such as Big Blue Bus operations, redevelopment, and trash collection and disposal.
If approved by the council, the proposed budget will represent the largest spending package in the city’s history, showing that even in times of mild economic growth across the state and the nation, Santa Monica’s finances remain strong.
A key contributor, but one often overlooked, according to city officials, is City Hall’s investment portfolio.
While not the most significant of all sources of revenue, the collection of federal securities, corporate bonds and funds held in restricted trusts offer a safe and reliable cash flow.
City Hall is prohibited from taking significant risks with the public’s money, meaning much, if not all, of the investments offer a lower yield than what one might find playing the odds on the stock market.
Nevertheless, as interest rates continue to rise — the Federal Reserve has increased interest rates 15 consecutive times over the last three years, from 1 percent to 4.75 percent — so does the return.
From January to February of this year, City Hall’s pooled portfolio, which includes cash-on-hand and investments, increased by $2 million. Interest earnings from the pooled portfolio for the month of February were $847,009, lifting year to date earnings to just over $6.6 million, an increase of 34 percent compared to the same period last year, said Steve Stark, City Hall’s chief financial officer.
In short, the market has been good for Santa Monica and City Hall, which is sitting on more than $25,000 in petty cash, according to a financial report released in late February, which contained the most recent data.
“The economy has driven interest rates up on our allowable investments, and with that, we have been able to shift some things around to maximize our return,” Stark said. “So far, it’s been a great year for us.”
All that means is more money to help pay for services, he explained. As investments improve, so does cash flow — allowing for more projects to be funded.
According to Stark, the pooled portfolio’s yield, meaning the rate of return, has increased by seven points to 3.99 percent, due in large part to the continued re-balancing of investments, whereby securities with low-interest rates are being sold, with the proceeds reinvested in those with higher interest rates.
Since City Hall realizes a loss on such sales, the sales only occur if any loss will be offset by additional income resulting from the higher yield of the bonds purchased. In February, the latest month in which investment data was available, one investment with a value of $7 million was sold for a net loss of $161,910. However, the city stands to recoup that sum, plus an additional $43,837 over the life of new bonds purchased due to rising interest rates.
Stark said there may be more opportunities for re-balancing the portfolio in the future,but increases in spending for capital improvement projects and a leveling off of interest rates may begin to limit those opportunities.
Either way,Stark said the future looks bright for Santa Monica, which is expected to earn an estimated $1.7 million more on investments this coming fiscal year than last year, and an estimated $1.3 million more in 2007-08.
“The investments do represent a smaller portion of revenues, but they are crucial for helping us finance some pretty important projects (such as the new Main Library or the Civic Center Parking Structure),” Stark said. “Sometimes folks will criticize the investments we make because they don’t yield as high as a return … but we are investing the people’s money, and with that, we have to be cautious with what risks we take.
“That said, I believe we have made some good choices, have maintained a stellar bond rating, and that will only help us provide more services for the public.”
Originally published in the Santa Monica Daily Press print edition on May 30, 2006. Read the original PDF.