King County Investment Pool Advisory Panel

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Management of the $4.5 billion King County Investment Pool would be brought in line with the best practices of the industry under legislation unveiled May 28 by King County Councilmembers Bob Ferguson and Larry Phillips. The legislation would create a work group to examine implementation of reforms recommended by a Council-appointed advisory panel that today urged “rapid and forceful action” to address what it called “significant deficiencies” in the governance and operations of the pool.

The King County Investment Pool invests the cash reserves for all King County government agencies and nearly 100 other taxing districts, including school, fire, sewer, library, water and other districts within King County.

More than 30 recommendations are contained in a 75-page report issued today by the King County Investment Pool Advisory Panel, a group of three local financial experts appointed by the County Council to conduct a comprehensive review of the County investment pool. The Council created the Advisory Panel in the wake of recent financial market turmoil that led to the default of $207 million of commercial paper investments held by the pool. Restructuring of these investments is currently being pursued to reduce or substantially eliminate any potential losses to the Pool.

Advisory Panel members reviewed the investment pool’s policies, structures, and systems to ensure that they are sufficiently robust for the continued prudent investing of public funds in today’s rapidly evolving financial markets. Their report makes recommendations in three areas:

Governance:

• Create a governing board that includes representation from both County and non-County participants, and industry experts.
• Update investment policies and goals,
• Retain an independent advisor to guide decision-makers.

Infrastructure:

• Hire an external fund manager to advise the county in its investment decisions.
• Improve the operational infrastructure of the pool by:
  • updating technology to automate portions of the daily investment process,
  • consolidating assets with a single custodian bank,
  • creating an internal capacity to analyze credit for investment risk, and
  • adding sufficient staff to eliminate operational risk.
• Update reports to improve transparency and accountability with the public, participants, and management.
• “Bifurcate” the investment pool to ensure accurate accounting for impaired investments.

Accountability:

• Adopt a comprehensive set of metrics to track and manage risk and performance.
• Improve accounting procedures and institute an annual outside audit.
• Review the structure of fees charged to participants for investment services.
• Improve communications, including the use of enhanced reports and a Web site.
• Seek reinstatement of a top rating by one of the three national credit rating agencies.

The legislation introduced by Ferguson and Phillips calls for appointment of a joint Council/Executive work group that by July 1 would create an action plan for bringing the Investment Pool in line with industry best practices for a governmental investment pool, and by September 1 would examine the panel’s recommendations and report back to the Council with options for implementing any needed reforms.

The legislation also calls upon the County Finance Director to hold annual meetings with pool participants to discuss investment performance, solicit input, and outline the investment strategy for the coming year.

While the panel report recommends hiring an external fund manager, state law does not currently allow complete outsourcing of investment pool management. “We plan to explore how we can leverage the capacity and expertise of professional fund managers,” said Ferguson. “For example, it appears that state law permits the county to hire investment advisers.”

The legislation acknowledges the panel’s recommendation to segregate four impaired investments worth a total of $207 million into a separate fund, and requests that the Executive Finance Committee consider this issue by July 1. Ferguson and Phillips said such “bifurcation” would help improve transparency and ensure accurate accounting for the impaired investments while the County pursues its options to recover value on them.

The three volunteers on the Investment Pool Advisory Panel were appointed by the County Council on Nov. 13:

• John Rose is the former President and Chief Executive Officer of Seattle-Northwest Securities Corporation, the region’s largest underwriter of bonds. He served as the King County Budget Director in the early 1980’s under County Executive John Spellman. He is the current Mayor of the Town of Beaux Arts Village and a member of the Board of Directors of McAdams Wright Ragen brokerage firm.

• John Dobrowolski was most recently the Senior Vice President and Division Executive of Market Risk for Washington Mutual. He has also worked as a Portfolio Manager for GE Financial Assurance, a unit of General Electric, a Financial Risk Management Specialist for the International Finance Corporation, a member of the World Bank Group, and Vice President of Structured Products for Greenwich Capital, a unit of the Royal Bank of Scotland. He has 30 years of experience in capital markets, derivatives, risk management, and portfolio management.

• Mary Ellen Mullen is a Principal at Bridgebay Consulting LLC. She provides investment consulting services to institutions, focusing on treasury, endowment/foundations, and retirement plans. She has over 25 years of institutional investment experience including research, trading, portfolio management, client service, and sales at Loomis Sayles, Seafirst/Bank of America /Seattle Capital Management, and Wells Fargo/Wells Capital Management. She is a member of the Investment Committees of the Pacific Science Center and the City of Bellevue. In addition to the Association for Financial Professionals, she is a member of the CFA Institute and a director of the Western Pension & Benefits Conference Board.

Created in 1989, the King County Investment Pool is one of the largest of its kind in Washington state. It is currently overseen by an Executive Finance Committee that consists of:

• The County Executive or his designee,
• The County Finance Director,
• The County Budget Director,
• The Chair of the King County Council or her designee.

The Executive Finance Committee establishes County investment policies and oversees the investment portfolio to ensure that specific investments comply with County policies and Washington State law. The pool is only allowed to invest in certain types of low-risk, highly-rated securities including certificates of deposit, U.S. Treasury obligations, federal agency obligations, municipal obligations, repurchase agreements and commercial paper. Since 1995 participants have averaged 5 percent annual returns on their investments. The pool has historically outperformed the state Investment Pool, with $195 million of extra earnings for county pool participants since 1995 or $15 million per year.