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Investments in Vista face a rocky road

VISTA — The Investment Advisory Committee’s semiannual meeting at Vista City Hall on Oct. 15 began with just four words scrawled on a whiteboard in perhaps the biggest understatement of the year.
“The market is volatile,” finance director Tom Gardner wrote.
This was gallows humor for the benefit of the committee whose purpose it is to make sure the city’s funds are invested in accordance with the state law and the city’s investment policy.
Vista generates income from a number of sources, primarily sales tax imposed on purchases in the city. Rather than spend the money it takes in, the city purchases securities like bonds and CDs, which then return interest. Virtually all cities operate this way.
But the national economic crisis has already hit home with tumbling interest rates and uncertain revenue projections making life difficult for the city’s financial planners.
The most immediate impact, Gardner reported, was that 10 securities totaling $37.5 million had been “called,” or paid off prematurely, as interest rates tumbled this summer. This represented almost a quarter of the approximately $125 million investment fund.
Though the city didn’t lose any money on the transactions, this means it now has $35 million that must be reinvested at an unstable time. Last year, a 4 percent return on an investment was considered poor. Today, 3 percent is a good deal. Gardner has to shop carefully when buying securities, balancing rate of return with the stability of the investment.
“It illustrates the point of having to have discipline in purchasing out three years and out four years no matter what, because we can’t predict the market,” Gardner said. He pointed out that the goals of the fund were liquidity and safety before yield. “The citizens’ money in Vista, they have not lost a dime and we don’t intend to lose a dime. We may only make 3 percent, but that’s what we’re here for.”
Most of the city’s remaining holdings are in federal securities. With the rates of return dropping rapidly on new government investments, Gardner is looking at some unorthodox alternatives that offer better interest, including CDARS and municipal bonds.
Both have their issues. CDARS, lumped CDs managed by a single bank, are administratively difficult, and stable banks can be hard to come by these days. Municipal bonds don’t offer tax benefits to cities as they do to private citizens.
What will hit the city’s coffers in a more meaningful way is the decline in tax revenue and right now, no one is certain how bad that will be.
“Sales tax rates are very elastic to the economy, and I’m very worried about unemployment rates because with that comes less money,” Gardner said. “It’s hard to tell if there’s a bottom to this and what effect it will have on our revenue.”
The news was not entirely bad. Gardner said he did not expect any great drop in property taxes and, in any event, the city doesn’t rely heavily on them for funding.
“Vista’s a little more stable than some of the areas around because it hasn’t been building new construction,” member Robert Carter observed.
Member and Councilman Robert Campbell noted that despite the magnitude of the economic crisis, he didn’t think the city would have trouble making its budgets.
“My expectation is … the Prop. L projects will all continue forward on the same rate we’ve projected,” Campbell said. “(We have) quite a conservative philosophy. If you track us over a period of years, you’ll find we always underestimate income intentionally. It makes for happy surprises when it goes over.”
The next committee meeting is scheduled for April 22, 2009. Gardner agreed to prepare an interim update in December as well.