Chicago investment returns rose $8.1 million in 2015

By Harvard Zhang

The City of Chicago’s bond portfolio earnings  grew by $8.1 million, or 16.4 percent,  in 2015, the city treasurer announced Wednesday, saying that he had adopted a “responsible approach” to investing taxpayers’ dollars to maximize returns and lower the  tax burden.

“We have to be prudent in investment and protect the capital meant to operate the city of Chicago,” Treasurer Kurt Summers said in a conference call Wednesday. “We generate more returns by diversifying our portfolio and pursuing a smarter approach to duration.”

Duration measures the change in value of a bond or a bond portfolio that will result from a 1 percent change in interest rates.

The effective duration of investments extended to 1.48 years in the fourth quarter of 2015 from 1.24 years at the end of 2014.

The treasurer said he started holding quarterly “earnings calls” last May to promote transparency and accountability. The briefing includes an assessment of current economic conditions.

According to the report, the city’s investment in corporate bonds more than doubled in the fourth quarter of 2015 to $948.3 million from $445.9 million a year earlier, while the holdings in U.S agency bonds were slashed more than a half to $2.02 billion. Money market funds nearly quintupled to $1.53 billion at the end of 2015 from a year ago.

Investment yield for the fourth quarter of 2015 was 0.96 percent, slightly up from 0.93 percent in the year-ago period.

The earnings increase came as Chicago has been grappling with bulging public safety worker pensions, which weighed on the finances of the third largest city in the U.S.

Chicago Mayor Rahm Emanuel pushed through a record, phased-in $543 million property tax hike last October to address the city’s unfunded retirement benefits for first responders.

For the first time in Chicago’s history, the city requires a minimum AA-rating, the third highest on the scale, for the items in its investment basket, according to Summers. He added he didn’t feel the pressure to boost investment returns because of Chicago’s fiscal problems.

“Part of the reason why we put the minimum credit quality requirement in place for the first time in city history is that no city treasurer can feel that pressure and take action on it,” Summers said. “There’s a bit of agency risk that we’re solving for, because the higher the cost of capital for the city of Chicago, the greater the negative arbitrage on holding those funds.”

Summers said the city’s $6 billion investment portfolio had nearly $3 billion in cash when he assumed office at the end of 2014. Comparing with the national best practice of possessing $1 billion of cash, or 45 days in cash on hand, based on the guideline from the Government Financial Officers Association, Chicago had a cash equivalence of four and a half months, according to Summers. It’s a measure of capital left idle instead of producing more returns.

The city had $652.7 million in cash in the fourth quarter of 2015 and $272.5 million as of Feb. 8.

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