City's portfolio shortchanged by low interest, weak economy

At the beginning of the fiscal year, City Treasurer Ron Borucki had questioned the market’s ability to recover, but was hopeful that despite two-year lows, interest rates would rise.

His hopes didn’t last long.

“Would this third year be the one where the recovery catches fire, where people go back to work, where consumer spending picks up, and where interest rates finally pick up and start to rise? Nope, not this year,” Borucki wrote in a report to the City Council.

Glendale’s investment portfolio dropped to $409 million, down $39 million from $448 million at the end of last fiscal year, according to the report. The portfolio’s rate of return was 1.43%, slightly less than the expected 1.5%. Last year’s rate of return topped that at 1.89% because interest rates were a bit higher, Borucki said.

When rates of return come in lower than the forecast, that shorts the city’s operating budget and requires finance officials to make adjustments, Borucki said.

“We did pretty good in a lousy market,” he said.

The success of Glendale’s portfolio is greatly affected by interest rates since the city invests in the bond market, where rates of return often bend with the Federal Reserve’s outlook on interest rates. The Central Bank has kept rates low to spur spending and announced plans earlier this month to keep them near zero through 2013.

“If things don’t change, I don’t see next year’s report being much different from this year’s,” Borucki said. “There’s just no way to slice and dice this. I can’t come up with a magic potion.”

While the city has a conservative investment strategy, if a good buying opportunity came up, he’d take it, Borucki added.

“It’s a spotty thing,” he said. “It isn’t a tsunami — just a couple of waves that come in and disappear.”