Some school years we experience State fiscal crises, some school years we experience national fiscal crises.
And then there are years like 2008-2009 when we get to experience both.
It looks like the Wall Street meltdown will hit our District in the bank account pretty hard. The County Treasurer’s office had invested, as of July, about 11-12% of the District’s funds in debt instruments issued by Lehamn Brothers. While they were liquidating that position over the last few months, they still had about 6% of the funds invested in Lehman paper when Lehman declared bankruptcy. The value of those holdings is unclear. It’s certainly possible that they will be worth nothing.
If they do prove worthless, the District will stand to lose about $640,000 of its cash-on-hand.
That’s about 5% of the District’s total financial reserves, unspent/leftover Measure E construction bond funds, and recently collected property taxes and state/federal aid. Others stand to lose much more (you can download a PDF of the latest schedule of losses by clicking here).
This is clearly not a good situation. Why is the District investing its funds in these kinds of investments? What can be done about it?
The District is required, by law, to invest its cash through the County. This requirement was presumably put in place because most districts, including San Carlos, don’t have the financial acumen to manage an investment portfolio, or the expertise to evaluate alternative third-party portfolios. The same rule applies to other school districts, including those running community colleges.
Like all investment portfolios, the fund the County runs on behalf of school districts has contractual constraints it must follow. Specifically, the County is required to manage the fund so as to achieve the following goals, in the following order:
- Preservation of capital (i.e., don’t lose money);
- Liquidity (i.e., make sure money is available whenever districts need it); and,
- Yield (i.e., make as much money as you can)
This is a prescription for a pretty conservative fund, which is what you would expect, since school districts are always pinching pennies.
Based on what I’ve learned about the investments made by the County I have my doubts as to whether or not those goals were being closely followed. As you can see from the following pie chart, even as of September 24, 2008 the fund was more concentrated than I would have expected (click on the chart to see a larger version of it):
investments by issuer
I’ve never been a fund manager, but this doesn’t look well-diversified to me. Besides the concentration in specific companies, many of those individual companies are in the same industry, financial services. That’s apparent when you break down the investment holdings by industry (again, click on the chart to see a larger version of it):
The vast majority of the portfolio is invested in financial services, if you’ll allow me to consider “companies” like Fannie Mae and Freddie Mac as belonging in the financial services sector. Given what’s been happening in the banking world this past year, that’s downright odd.
But there’s an even bigger question here.
Hindsight is wonderful, but I really have to wonder why, if capital preservation and liquidity are goals number one and two, the fund is investing in anything other than US Government Treasuries. In fact, I don’t understand why the fund isn’t managed simply by matching its participating district’s inflows and outflows to Treasuries that mature on or around those dates.
The Board will be meeting this Thursday evening to discuss the situation and talk about options. I’ll post follow-ups as I learn more.
Stay tuned…