THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, December 18, 1994 TAG: 9412170143
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
LENGTH: Long : 109 lines
As treasurer of the commonwealth, Ronald L. Tillett had to field telephone inquiries earlier this month from investors wanting to know about Virginia's investment practices.
Orange County, Calif., had disclosed that its investment fund had suffered $1.5 billion of bond-related losses and that the county would file for bankruptcy.
The task of distinguishing Virginia from Orange County isn't over. On Tuesday, Tillett is scheduled to meet in Washington with the President's Working Group on Financial Markets to discuss state and local investment practices.
In addition to being Virginia's treasurer, the 38-year-old Norfolk native serves on the executive committee of the National Association of State Treasurers.
As treasurer, Tillett is responsible for investing the commonwealth's money, issuing its debt, disbursing its checks and procuring its banking services. He oversees a staff of 95 in Richmond.
Last week he spoke with staff writer Tom Shean about the department's investment activities and the impact of Orange County's losses.
-Will situations like the one in Orange County emerge in other counties or cities?
Yes, I think there will be more of those problems, more than we'd like to think. But I'd be surprised to see anything blowing up like it has in Orange County.
I don't think you'll see much happen in Virginia. You are not going to see anything happen at the state level. Most people in government understand the public trust - that these are taxpayers' dollars and that we're not supposed to gamble with them.
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Did Orange County's experience cause you to re-examine any of your investment practices?
No, because we didn't subscribe to those investment strategies, and we didn't invest in that manner.
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Derivatives have been blamed for some of the losses that Orange County's investment fund suffered. What's wrong with using derivatives?
Derivatives in and by themselves are not necessarily bad. But you need to understand the structure of the investment - how it will react to changes in market conditions and what kind of index it may be tied to. You may have risks that you are not able to define properly. That's where you will have a problem.
In the case of Orange County, the treasurer continued to bet that interest rates would fall when Federal Reserve Chairman Alan Greenspan had raised rates five times. The county treasurer was 100 percent at odds with what the Federal Reserve was trying to do.
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If large corporations are using derivatives for their investment activities, why shouldn't a large city, county or state use them?
Procter & Gamble Co. suffered some losses earlier this year on their use of derivatives, but they had shareholders' money and the expectation of making a profit. State and local treasuries are not expected to make a profit. That's not what government is all about. Our first and foremost obligation is to protect the principal.
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But when a state is in an economic slump and its tax revenue is reduced, isn't there a temptation to stretch your investment criteria in hopes of getting a higher return?
Back in 1990, 1991 and 1992 we were in the throes of a recession, and there was a $2.2 billion revenue shortfall in Virginia.
Our average investable balance today is $3.5 billion, but in 1990 and 1991, it got down to $500 million. It was a little scary, but we did not change our investment strategy one bit. Even in the worst of times, we didn't stretch for higher yields. I don't expect that we'd do it in the best of times.
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How much money does Virginia's Department of Treasury manage?
We have a general account of $3.5 billion. About $2.2 billion of this is the commonwealth's operating cash. Another $1.3 billion is in special funds with specific requirements for use of the money.
There is also a local government investment pool of $812 million that we manage on behalf of 150 entities, including counties, cities and public service authorities. This is short-term cash, and participation is strictly voluntary. The pool provides a way for smaller entities to use investment professionals here and not have to pay higher costs for outside money mangers.
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How are funds in the state's general account invested?
As of Oct. 31, almost 64 percent was in Treasury securities and federal agency securities like Fannie Maes and Ginnie Maes. Another 30 percent was in bankers' acceptances and commercial paper. Slightly more than 6 percent was in repurchase agreements.
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Are the funds in the local government investment pool invested any differently?
The types of investments are about the same. About 50 percent of the pool is invested in Treasury securities.
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What kind of scrutiny do your investment decisions get?
There is a Commonwealth Treasury Board with seven members who establish investment guidelines, including the types of suitable assets, the percentage of asset allocations, and the credit quality of investments. Three of the members - the tax commissioner, the treasurer and the comptroller - are ex officio members. There are four citizens appointed to the board by the governor.
Also, the general account and the local government investment pool are audited annually by the state's auditor. by CNB