Ferguson: Continued challenges in King County Investment Pool show need for advisory panel

Metropolitan King County Councilmember Bob Ferguson said recent announcements of further downgrades within the $4 billion King County Investment Pool makes the Council’s creation of an Investment Pool Advisory Panel all the more important.

“Over the past two months, we have seen three downgrades that exposed vulnerabilities with our investment pool,” said Ferguson, chair of the Council’s Operating Budget and Fiscal Management Committee and the Council’s representative on the Executive Finance Committee. “An independent examination of our investment pool policies will verify that we are taking the appropriate steps to help ensure that these taxpayer investments are sound.”

On Friday, Standard & Poor’s announced it has further downgraded two of the Investment Pool’s commercial paper investments. Cheyne Finance was downgraded from A-2 to D and Rhinebridge, LLC was downgraded from A-1+ to D. These sudden and unprecedented downgrades were prompted by continuing turmoil in the credit markets and declining market values of the assets associated with each investment.

In September, the County was notified of the downgrade of Mainsail LLC, an investment representing $53 million in the portfolio. Since the downgrade had the potential to impact the pool’s high credit rating, the County’s Executive Finance Committee segregated Mainsail from the rest of the pool’s investments. In doing so, the County assumed complete responsibility for recovering the principal of the Mainsail investment, thereby protecting pool members and the County’s overall pool rating.

At the time, Councilmember Ferguson agreed that Mainsail should be segregated to protect the pool. However, he was the sole vote against the County assuming complete liability for any future losses, arguing that a limit should be placed on the amount of loss the County would sustain on behalf of the other pool members. He did vote to return Mainsail to the pool if other pool investments were downgraded below investment grade. Following the downgrades of Cheyne and Rhinebridge, the Mainsail investment was returned to the pool on Friday, Oct. 19 in line with this policy.

The King County Investment Pool was established in 1989 and invests the cash reserves for all King County agencies and nearly 100 other public entities in the county, including school, fire, sewer and water districts. It is one of the largest investment pools in the State of Washington.

Creation of the Investment Pool Advisory Panel reflects expectations expressed at the Council’s Citizen Engagement forums earlier this year. Citizens voiced desires that they have real input into the direction that the County was heading and insisted on greater fiscal accountability when taxpayer dollars are involved. The panel will consist of citizen experts who will help the County direct responsive and prudent financial investment policies.

Members of the King County Investment Pool Advisory Panel will be experts in the financial industry, selected for their knowledge of financial markets and instruments, public investment pools, and macroeconomics. The advisory panel will review the King County Investment Pool for best practices in five areas:

• The investment goals of the Pool, including risk tolerance, liquidity targets, and rates of return.

• The membership goals of the Pool, including the size of membership, the value of maintaining a high credit rating with a national rating agency, and the roles and responsibility of members in sharing risks and returns.

• The investment policies of the Pool, including maturity, duration, liquidity, and diversification policies, as well as the types, creditworthiness, and limits on the securities held by the pool.

• The portfolio of the Pool, including how well investment goals are maximized and policies are followed.

• The management structure of the Pool, including how day-to-day operational and investment decisions are made and the role of the Executive Finance Committee. The pool’s structure shall be reviewed for its inclusion of financial expertise and the availability of objective advice when establishing investment policies and practices.

The advisory panel will also examine whether other financial experts should be available to help guide the policy and operational decisions of the Pool, and will review the county’s written investment manual.

The Council set a date of October 29, 2007, for appointment of the three panel members. The advisory panel will convene by December 3 and present a work program to the council by December 14, with a final report due back to the Council by March 3, 2008.