Newspaper article St Louis Post-Dispatch (MO)

Council Adopts Policy on Investment Practices `Safety of Principal' Emphasized with Cash Reserves

Newspaper article St Louis Post-Dispatch (MO)

Council Adopts Policy on Investment Practices `Safety of Principal' Emphasized with Cash Reserves

Article excerpt

St. Charles County's finance officers are not likely to indulge in the high-flying investment practices that landed Orange County, Calif., in bankruptcy court.

The St. Charles County Council has adopted an investment policy that emphasizes "safety of principal" when investing cash reserves. The policy specifically forbids investing in derivatives.

By triple-leveraging investments, Orange County's treasurer last year used cash reserves to borrow and invest in bonds and derivatives in anticipation that interest rates would fall. But interest rates went up, and the once-wealthy county racked up about $2 billion in losses.

Bond prices decline when interest rates go up. Derivatives are financial agreements tied to fluctuations in underlying assets such as bonds or commodities.

On any given day, St. Charles County has between $30 million and $40 million invested, says County Finance Director Joe Kernell. He explained the county's new 11-page policy last week to the County Council. The council unanimously passed the policy in the form of a resolution.

The writing of a county investment policy was begun by Terry Alexander, the former county treasurer who was replaced by Kernell this year under terms of the county charter. The writing was completed by Kernell.

The policy provides that public money is to be invested to provide "the highest investment return with the maximum security while meeting the daily cash-flow demand of the county."

The word prudence appears early in the policy statement. The concept of prudence, the policy says, "discourages speculative transactions and attaches primary significance to the preservation of capital and secondary importance to the generation of income and capital gains."

Safety is the most important objective of the investment program, Kernell said. Kernell said, "We don't want to lose any public money," as he emphasized the word any.

To achieve maximum safety, the policy says, investments must be diversified so that "potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. …

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