In today’s less-than-perfect economy, it’s not easy to keep a county’s finances in optimum health. Unprecedented low interest rates – and the often-unpredictable needs of county governments – can make public funds investing a tough, even dangerous game to play. But there are ways to survive the current economic nadir without suffering major losses. In the face of such adverse financial conditions, many county investment officers have turned to investments that allow their public funds to stay safe, and allow maximum flexibility.

Security has been a major concern for most public funds investors since 1994, when Orange County, California lost $1.7 billion on its investments and declared bankruptcy. It soon came to light that county treasurer Robert Citron had invested millions in high-risk securities, in the hopes of producing gargantuan returns. When his scheme collapsed, investment officers all over the United States stopped purchasing such risky investments and returned to old standards like CDs and treasury bills. This debacle, though unfortunate, was a good learning experience for county investors, said investment consultant Bob Ross of Houston.

“The painful mistakes of the past, in conjunction with the improved educational process for investment objectives … have finally led most county treasurers away from the risk-tainted universe that is always associated with stretching to search for high yield,” said Ross, whose investment firm works with about 30 counties throughout Texas.

This trend toward security is certainly apparent in Texas, where many county investment officers say their primary concern is maintaining their principal. Williamson County Treasurer Vivian Wood said the fall of the nation’s economy and the decline of the technology industry in the Austin area have encouraged her to be more careful when investing. The county’s portfolio is split between a state-sponsored investment pool exclusively for local Texas governments, and repurchase agreements – both fairly secure investments.

“We have always been on the side of being conservative,” Wood said.

“We’re cautious about what we invest in.”

And often, such low-risk investments don’t always mean nonexistent yields. Counties that negotiate good depository contracts with local banks can be somewhat sheltered from plummeting interest rates. Jefferson County Treasurer Linda Robinson said her county’s contract, inked in 2001, gives them interest rates of 3.7 percent on fixed-rate CDs.

“You can’t get 3.7 in the marketplace today,” Robinson said. “You have to hunt for a 2 percent (CD).”

Also benefiting from an advantageous depository contract is Pecos County, whose treasurer Barry McCallister chose a 4.5-percent fixed interest rate on its CDs, rather than agreeing to a variable rate. Interest rates dropped 11 times after the county signed the contract. In retrospect, McCallister said he couldn’t have made a better decision, especially since recent world events have caused Americans to lose some faith in the economy. “The economy is pretty stable, but people are leery, not knowing what’s in store,” he said.

But right now, Ross said, county investment officers should not become preoccupied with finding the best interest rates. The emphasis should be on safe investments that are liquid enough to be accessed quickly. Committing to a long-term CD or other investment for a slight interest-rate advantage is risky, because interest rates eventually will go up, effectively resulting in a financial loss.

“The worst time to extend maturities or pursue other investment alternatives is the time at which the economy is at the bottom of an interest cycle,” Ross said. “It’s a fairly straightforward conclusion – the prudent posture right now is to try to stay short in maturities. It keeps the funds available for alternative investments when the interest rates go up. And they will go up.”

Counties that commit to long-term investments are also sacrificing the flexibility and liquidity of their funds, which are needed quickly in emergency situations. Quality training for investment officers has made such long-term public investments less common, especially since today’s interest rates do not reward investors for selecting longer maturities. In fact, Ross said, they’re harmful because interest rates are expected to rise soon.

Wood said Williamson County is trying to keep most of its money in “overnight” accounts and earn most of its interest income through bond issues. The county isn’t interested in long-term investments for the time being, she said.

“We’ve been fairly liquid because rates on short-term (investments) have been as good as anything we’ve had,” Wood said. “We’re trying to hedge against what’s coming. We hope.”

County investors may find it advantageous to re-evaluate their portfolios when the economy does change for the better. Ross said longer-term securities would probably become more attractive as interest rates climb and investors become less likely to settle for lower yields.

“Investors will not be willing to buy 90-day treasury bills at the same yield as overnight rates, if they expect overnight rates to go up within the next 90 days,” Ross said. “At this juncture, if you have your funds in overnight investments, you will see the opportunity to evaluate buying slightly longer-maturity securities, if you see enough yield advantage to do so.”

At 10 years old, TAC’s CIO Training Still Going Strong

With so many investment possibilities for public funds these days, even the most experienced county investment officer can get a little confused. Investment laws, the state of the current market and many other factors must be taken into consideration when developing a county’s financial strategy. But proper and frequent training can keep public funds investors from getting overwhelmed.

That’s the purpose of the Texas Association of Counties’ county investment officer certification program. Though totally voluntary, the program provides valuable instruction to those who manage public funds, keeping seasoned professionals updated on the latest market trends and providing basic instruction to those just starting out. And as the program completes its 10th year of operation, it’s better than ever.

TAC Director of Education Karen Norris said the idea for an investment training program was born in the early 1990s, when a group of county treasurers suggested that TAC provide some continuing education for officials that managed county coffers. Around this time, many counties were just starting to invest public funds, rather than simply depositing them in a bank account – and guidance was needed.

“They were being approached aggressively by brokers with investment opportunities and having to make decisions on their own,” Norris said. “And they weren’t ready for that.”

The first training course, led by TAC’s investment consultant Schultz, indoctrinated several county treasurers on the basic principles of investing. But at the conclusion of the seminar, it was apparent more intensive instruction was needed.

“That’s where the concept of certification came up,” Norris said. In 1992, the first official CIO certification program took place. weeklong course put students through hours of classroom instruction and gave them a written examination at the end. Once the exam was passed, the student received a CIO credential, under procedures established by the National Commission for Certifying Agencies for Approval of Certification Programs. This system is still used today.

Norris said TAC strives to keep these initial certification classes small, so instructors can work with students on a more personal level. “The ideal class is less than 20, because it’s technical and in-depth material,” Norris said.

To maintain the CIO certification, CIOs must have 20 hours of continuing education credits per year. These are offered by TAC at various times and places throughout the year, but most notably during the Texas Public Funds Investment Conference, held annually in Houston. Basic and advanced-level courses are both held at this event, so investors of all skill levels can benefit.

Williamson County Treasurer Vivian Wood said the basic courses are valuable because they prevent novices from getting lost in a stream of financial jargon and unfamiliar concepts. Wood said the beginners’ track helped her when she was working toward her CIO designation in 1996.

“One of the first things Ron (Schultz) said to us – he started talking about the yen, and I had no idea what it had to do with investments in Williamson County,” Wood said. Schultz passed away in 1999.

Jefferson County Treasurer Linda Robinson said the courses may also prevent public funds investors from breaking the law or making egregious mistakes that jeopardize a county’s financial welfare. “How to put together an investment policy, how to do your reporting, how to manage your risk – those are critical for public funds investors,” Robinson said. “You’ve got to stress primarily, safety of principal.”

In the future, county investors expect to see TAC expand its CIO certification program. Norris said TAC plans to hold three weeklong courses in 2004 – presently, only two are offered in even-numbered years. In the meantime, instructors will search for ways to improve the course curriculum and further tailor it for relevance in today’s economy. Above all, Norris said, those who are thinking about participating in the program should not come in expecting heavy-handed, onesided lectures.

“We don’t say, ‘Don’t do this, don’t do that,’” Norris said. “We try to make people understand how securities work and let them realize for themselves what to do.” For more information on TAC’s CIO program, log onto http://www.county.org/education/CIOprogram/index.asp or call the education department at (800) 456-5974.