It seemed like a sound investment at the time, but the city of Española’s decision to transfer $2.5 million from Valley National Bank to an investment pool run by the state Treasurer’s Office has backfired.
A money market fund holding almost a quarter of the Office’s Local Government Investment Pool tanked in September. The fallout: about $84,000 of the city’s investment is frozen at least until further notice, and no one knows until then how much of that it will recover, Scott Newman, the pool’s interim chief investment officer, said.
The failed fund’s managers have said investors will get back up to 92 percent of the frozen funds, Newman said.
The remainder of the city’s investment is unfrozen and earning only 0.48 percent in interest, Newman said.
“Would we have pulled (our money) out?” Acting City Manager Veronica Albin said. “Hindsight’s great, but who knows?”
Meanwhile, $2.5 million the city left with Valley National Bank is earning a 1.05 percent fixed interest in 120-day certificates of deposit that mature in June, according to account statements. During the 120-day term that matured in late February, the same investment earned 3.1 percent and paid the city a return of $26,680.
The city had $6 million in a checking account at Valley National Bank until February 2008. That month, former chief financial officer Elias Martinez and former city manager Gus Cordova transferred $2.5 million to the state pool and invested $2.5 million in certificates of deposit. The remaining $1 million stayed in the city’s checking account.
The invested money comes from the cash balances of several city funds, including its general, enterprise and utility funds. The funds are used for the operation of several departments, though state law allows the city to invest them in low-risk investments.
The state pool holds $1.44 billion in investments from more than 136 local governments. When the city transferred its money there last February, the fund was paying investors a 3.285 interest rate, compared to about 1.5 percent in its checking account at Valley.
Bankrupt Fund
The failed money market fund, called the Reserve Primary Fund, fell from a AAA credit rating to a D rating in the course of a day, according to a Jan. 9 letter from Joelle Mevi, the pool’s former chief investment officer, to all local government investors.
“The Reserve Primary Fund was the nation’s oldest (federal Securities and Exchange Commission)-registered money market fund and widely considered one of the most conservative ‘AAA’ rated funds,” Mevi wrote. “A seven-level drop in credit quality rating of a money market fund in a single day was unprecedented.”
Newman said the Office chose to invest in the Reserve Fund because it was low-risk — it’s AAA rating was the safest possible. Plus, it was a privately-owned fund that offered investors more transparency than other funds. While most publicly-traded funds disclosed their holdings only once a month, the Reserve Fund reported on its underlying investments every night, Newman said.
“That transparency was its downfall,” he said.
Investors were able to see that about 1.1 percent of the Reserve Fund’s holdings were in securities issued by the Lehman Brothers investment firm, which went bankrupt Sept. 15. The next day, the Primary Fund wrote off its Lehman Brothers investments and its credit rating dropped.
“That caused a panic among investors,” Newman said. “It created a run on the fund. The fund was overwhelmed by deposit requests, although there was nothing fundamentally wrong with it.”
In response to the panic, the fund’s assets were frozen Sept. 18 until it could liquidate them, according to Mevi’s letter. The Reserve Fund issued a liquidation plan in early December that estimated the state pool would lose $5.7 million of the $381 million it had invested in the Reserve Fund.
Mevi sent the pool’s investors a letter in January announcing the pool would spread that loss over 10 months, during which investors’ interest rates would drop by .3465 percent. The pool as a whole earned an average 1.086 percent in January, but individual investors’ rates varied based on their daily balances, Newman said.
Then, on Feb. 25, the Reserve Fund reneged on its December liquidation plan, saying it planned to set aside $3.5 billion — or about 8 percent — of the fund to cover lawsuits from disgruntled investors, according to a letter Newman sent the city and other investors Feb. 26. The city’s share of that is about $50,000. The Fund also announced it may take even more assets for legal defense if it needs to, the letter states. It would also return to investors whatever it has left after the lawsuits at an undetermined date, Newman said.
The Reserve Fund plans to return the remaining 91.7 percent to investors — including the city — in October, Newman said.
No one watching
The state pool was the city’s first foray into investing.
“Before (Cordova), nobody had ever developed an investment policy for the city,” Mayor Joseph Maestas said. “He actually developed one.”
The policy, established Sept. 1, 2007, calls for the city’s chief financial officer to oversee the investments. But that position has been vacant since Martinez resigned June 18. And though the policy was drafted, Cordova never signed it or submitted it to the City Council for approval, Albin said.
Albin said she, Finance Director Josie Lujan and Grants Administrator Lupita Herrera reviewed statements from the state pool on a monthly basis.
“I wasn’t here,” Lujan, who recently returned from three months of medical leave, said. “And Lupita had been reconciling the statements, but that’s about it.”
Albin acknowledged no one was paying close attention to the health of the investment.
“We don’t have the staff,” she said.
The city is currently interviewing candidates for a finance manager, who would oversee the Finance Department.
It remains to be seen whether the city would have benefitted from withdrawing its money from the state pool in January, when the city learned of the Reserve Fund’s collapse. Newman said some investors pulled their money from the fund then, but received only 97 cents for every dollar they had deposited.
“There’s no way right now to calculate what the loss is,” he said. “So whether you were paid then what you should’ve been paid, that’s speculation. There’s no way to tell.”
Newman said whether the city receives more than 97 cents on its dollar or less than that will depend on how much of the $3.5 billion the Reserve Fund returns to investors, if at all.
This story required a correction.
The original story cited Scott Newman, interim chief investment officer for the state Treasurer’s Office Local Government Investment Pool, as saying 23 percent, or roughly $600,000, of the city of Española’s investment in the pool had been frozen by an investment fund.
Newman did say that portion of the city’s investments had been frozen in September. He did not say the fund had subsequently released 85 percent of that amount in three payments between October and February. Newman said Monday he thought a statement obtained by the SUN the day he made that statement included that information. As Newman agreed later, it did not. Just over $84,000 of the city’s investments remain frozen until further notice, according to Newman.