November 10, 2011

TO:    Commissioner Fritz

FR:    Rich Goward, Chief Financial Officer

CC:    Jack D. Graham, Chief Administrative Officer

          Tim Crail, Policy Advisor

RE:    Question Concerning City Investment of Funds

This is in response to your question concerning investing City funds in Credit Unions and local banks.  Investments are made in accordance with the City's Investment Policy as well as Oregon Revised Statutes.  The objectives of the portfolio are to preserve the principal and serve the liquidity needs of the City while generating the maximum return within those confines.  In order to achieve that objective, the City invests in a diversified portfolio of conservative investments, most heavily in US Securities or US Backed Securities.  While the vast majority of City funds are invested in federal securities, there is an element of our portfolio that invests money in banks.  As of October 31st, 2011 the City maintained the following bank balances:

When it comes to bank investments the City, under Oregon Statute, is allowed to invest in any bank authorized to transact business in the State of Oregon up to the limit of insurance (FDIC).  The City can invest funds in excess of that limit if the bank meets certain collateralization requirements and is approved by the Oregon State Treasurer.  This collateralization of funds in essence provides additional security for the City's deposits should the bank fail.  As such all banks deposits listed above, including the $22 million in Wells Fargo and $30 million in Umpqua, have securities pledged as collateral to backstop those deposits based upon State Statute.

As it pertains to Credit Unions, the current law only allows local governments to invest up to the limits of the Credit Union's insurance (NCUA) which are currently at $250,000.  This will change in 2013 when HB 3700 takes effect, allowing Credit Unions to become approved by the State Treasurer if they meet the same collateralization requirements as banks. 

As stated above, the City places its investments based upon its investment policy and attempts to maximize the return on investment within the confines of the policy and State Statute.  Of the bank investments that the City currently holds, almost $30 million is with Umpqua Bank, which is an Oregon based Community Bank, and represents over 55% of the City’s bank deposits.  As to the use of Credit Unions, the investment limit is so small that from a practical asset management standpoint it has not been cost effective to pursue this is an option.  Once HB 3700 goes into effect, that landscape may change and we would reevaluate this option as Credit Unions become authorized by the State Treasurer.  In any case, we would continue to perform due diligence on each financial institution that the City does business with to ensure we get the best return with the least amount of risk to our funds.

To your specific question of local investing in Banks and Credit Unions, the City follows prudent investment actions within the confines of the investment policy and State Statute.  For us to invest above the FDIC insured limit, banks need to be on the Oregon State Treasurer's approved list, must meet collateralization requirements as defined by statute, and the investment must be optimal within the City’s Investment Policy in light of the existing mix of the investments and market conditions.  For example, the City might want to invest more heavily in conservative Federal Securities in times where banks are struggling.  This approach maximizes the protection of City Assets and contributes to the strong financial footing that has earned the City consistently high bond ratings.

I hope this answers your questions and I would be happy to discuss this with you in person.