News Column

Gordon Administration Acted Quickly to Protect Taxpayer Reserves

August 12, 2014



WILMINGTON, Del., Aug. 12 -- New Castle County Executive issued the following news release:

County Executive Tom Gordon has ordered the continued release of documents related to the transfer of County reserves from the previous investment managers to UBS, the world's largest investment management firm.

Shortly after taking office, County Executive Tom Gordon, CAO David Grimaldi, and the Office of Finance conducted a comprehensive review of the County's financials and investment management accounts. In doing so, the Administration discovered that one of the reserve accounts, with approximately $47 million of taxpayer reserves, was invested in seven separate mutual funds. Upon further analysis, the Executive learned that the top two holdings in the account, RiverPark High Yield Fund and FPA New Income Fund, both of which carry the lowest possible one-star rating, according to Morningstar, had significant exposure to junk bonds. The County held a $16 million position in these two funds.

Junk bonds are obligations of companies with 'below investment grade' credit ratings and carry a significant level of credit and default risk. The RiverPark High Yield Fund prospectus, for example, clearly states that "Under normal circumstances, RiverPark Short Term will invest no less than 80% of its net assets in high yield securities, also known as "junk bonds."

New Castle County reserves in question were monies accumulated through years of annual surplus and are needed to fund future County operations. New Castle County has a fiduciary obligation to invest these funds in a prudent manner and with limited investment risk. In the aftermath of the recent credit crisis of 2008, the County Executive took immediate action to protect the County reserves from the potential of significant financial loss and undo risk by directing the funds to be placed in an account representing the financial security values associated with taxpayer dollars.

The transfer to UBS greatly reduced credit and duration risk. The County no longer maintains interest in mutual funds that invest in junk bonds, derivatives, or any other speculative investment. The portfolio is limited to US Government agency and treasury bonds along with investment grade corporate bonds.

In addition the transfer to UBS saved County taxpayers hundreds of thousands of dollars in annual fees. For example, in 2012, the County paid more than $200,000 in investment management fees alone to two separate investment management companies. New Castle County does not pay investment management fees to UBS.

Mutual funds carry another layer of fees, which cost the County hundreds of thousands of dollars per year. Those fees too were extinguished with the transfer to UBS as the County no longer invests in mutual funds but makes direct investments in the underlying fixed income securities. Doing so, lowers investment costs and provides greater transparency.

Contrary to the public comments of a few, New Castle County Council was notified of the change and it was discussed before a public Finance Committee meeting on November 26, 2013, when several members of Council expressed their gratitude for the Administration's financial oversight and reduction of portfolio risk.

The following documents provide irrefutable evidence of the County's exposure to junk bonds, the annual investment management fees, Council notification, and the statutory authority of the County Executive and Chief Financial Officer to direct County investments.

2012 Year-end Financial Statement (http://www.scribd.com/doc/236504873/2012-YE-Financial-Statement) of account # 646-239XXX

* RiverPark Short Term High Yield Fund (RPHIX) and FPA New Income Fund (FPNIX) are listed as the top 2 holdings in the account, with over $16 million of market value as of December 31, 2012.

* Both funds are assigned the lowest possible, one-star rating according to Morningstar and include junk bondholdings.

RiverPark Short Term High Yield Fund Prospectus (RPHIX (http://www.scribd.com/doc/236504930/RiverPark-High-Yield-Fund-RPHIX-Prospectus))which states:

* "Under normal circumstances, RiverPark Short Term will invest no less than 80% of its net assets in high yield securities, also known as "junk bonds" The fund may invest in securities of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy and liquidation proceedings."

* As of December 31, 2012, the County had a $7,497,522 position in this fund

FPA New Income (FPNIX) Prospectus (http://www.scribd.com/doc/236505024/FPA-New-Income-FPNIX-Prospectus)which states:

* "Up to 25% of the Fund's total assets, calculated at market value at the time of investment, may be invested in: (a) non-convertible debt securities that are not rated in the highest two grades by Moody's or S&P these debt securities may include "high yield" or "junk" bonds."

* As of December 31, 2012, the County had a $8,845,724 position in this fund

PIMCO Unconstrained Bond Fund Prospectus (http://pe.newriver.com/summary.asp?cid=PIMCOLL&cusip=72201M487&doctype=spro&oldurl=%2FRegulatory%2FExternal%20Documents%2FPIMCO_Unconstrained_Bond_SP.pdf)

* According to its "Principle Investment Strategies" section, at least 80% of the funds assets are invested in "Fixed income instruments of varying maturities, which may be represented by forwards or derivatives such as options, future contracts or swap agreements."

2012 Year-end Financial Statements (http://www.scribd.com/doc/236505126/YE-Financial-Statements-Fees) for the two reserve accounts, which list West Capital Management as "Advisor."

* Account # 379-800XXX charged New Castle County$155,998.43 in "transaction costs, loads and fees."

* Account # 646-239XXX charged New Castle County$46,965.53 in "Transaction costs, loads and fees"

* The combined investment management fees for 2012 were in excess of $200,000 and do not include the fees charged by the various mutual fund companies.

* The majority of the investment fees were paid to a third investment management firm, Sit Investment Associates. According to records recently gathered by the Office of Finance, SIT was paid $151,957.84 for the year 2012. The remainder was paid to West Capital Management.

New Castle county Council Finance Committee Agenda (http://www.scribd.com/doc/236623949/NCCo-Council-Finance-Cmtee-Agenda): November 26, 2013

* Audio file of the presentation can be found HERE (http://councilaudiofiles.nccde.org/FinanceMeeting2013-11-26.wma)

* Current UBS Statement of holdings and credit ratings (http://www.scribd.com/doc/236505165/Current-Investment-Portfolio-Holdings-UBS)

* The County no longer has exposure to junk bond securities

* Delaware State Code (http://delcode.delaware.gov/title9/c013/sc05/index.shtml) clearly states that the Officer of Finance, managed by the Chief Financial Officer may

* "Invest funds deemed by the Chief Financial Officer available for temporary investment in such obligations or in such a manner as the County Executive may authorize."

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