Richard Ellis

Treasurer Bill Lockyer of California is pushing the bond rating agencies to eliminate separate rating scales for tax-exempt and corporate bonds. In March, he circulated a letter to all state treasurers asking them to join him in his efforts. His work has not gone unnoticed by the rating agencies (at least Moody’s and Fitch). Even Congress has held hearings regarding this topic.

His argument is based on default rates. A single A rated tax-exempt issuer has a similar default history as that of a triple A rated corporate issuer. Single A municipal issuers end up purchasing bond insurance so they can receive the lower interest rate associated with a triple A rating (that was before the recent implosion of the monoline insurers). A common scale would eliminate this cost for lower rated municipal issuers because they would be triple A.

Having a global scale seems to make some sense then. However, the rating agencies consider factors, other than default rate, when assigning ratings. Four general areas are considered in a rating agency analysis: 1) Economic factors; 2) Debt structure; 3) Financial factors; and 4) Management strategy.

So what does this mean if Treasurer Lockyer is successful in his quest? We would see all issuers of bonds, both municipal and corporate, on the same rating scale. But I wonder if the world is unchanged in practical terms.

From Shakespeare’s Romeo and Juliet we read, “What’s in a name? that which we call a rose by any other name would smell so sweet.” The same applies here. Municipal credits will still need to be differentiated from one another. Both California and Virginia could be triple A, but they are still not the same credit. It doesn’t matter what you call them there is a difference in the credits. As a bondholder, I would much prefer a Virginia bond over a California bond. The rating agencies will still have to differentiate by expanding the scale to quadruple A or adding a 1-5 designation to the triple A scale.

This leads to market pricing. Even if the credits have the same rating, I have to believe that the market will continue to price credits differently. Large institutional buyers do their own credit analysis. They will make their own differentiation. The best credits will continue to issue debt at an interest rate that is lower than the weaker credits. Will the best credits get an even lower interest rate? I doubt it. Municipal bond credits will continue to trade at the same levels as they have historically. Again, the need for bond insurance will continue.

This will play out over the next several months. The nice thing about Utah is we don’t have a dog in this fight because we already have a gilt-edged AAA bond rating. It saves us millions of dollars per year.

One of the main functions of the State Treasurer’s office is managing the investments of the Public Treasurers’ Investment Fund (PTIF). The PTIF has operated in its present form since the early 1980s. It has become the primary investment vehicle for most public treasurers in the state.

The PTIF operates similar to a money market fund. Its investments are short-term in nature with an average maturity of less than 60 days in today’s market environment. Participants are able to transfer money into or out of the fund daily. All General and Education Fund moneys of the state are invested in the PTIF. In addition, all of the counties, higher education institutions, school districts and most cities, towns and special service districts in the state participate in the PTIF. In all, more than 450 government entities participate in the PTIF.

The balance of the PTIF has peaked at more than $11.0 billion in the past several months. All the investments are limited to those authorized by the Money Management Act. The PTIF is attractive to public treasurers for several reasons. First, public treasurers are able to benefit from the investment expertise of the State Treasurer’s office. Second, they receive same day liquidity but are able to take advantage of extending out the yield curve to enhance their return. Third, aggregating the investments of all public treasurers allows everyone to enjoy economies of scale by purchasing investments in larger block sizes thereby minimizing transaction costs. 

For the fiscal year that began July 1, 2006 and ended on June 30, 2007, the PTIF earned more than $480 million of investment income for its participants. This represents $480 million available for appropriation that did not come from taxpayer pockets in the form of taxes or fees. This helps keep taxes down. Of course, this amount fluctuates because of the relative level of interest rates. Recent interest rate cuts by the Federal Reserve Bank will directly impact the interest earning of investments in the PTIF.

In future blogs, I’ll discuss some of the challenges that local government investment pools, similar to the PTIF, are facing in very tumultuous credit markets.

I went to dinner with a good friend several weeks ago and he asked me several probing questions about the office of State Treasurer and why I was running. His conclusion was, “You are running for an office for which there is a limited political platform, and in which no one shows much interest.” I was impressed with how quickly he cut to the core elements of the campaign. Let me provide some background about the office.

The result of the Utah Constitutional Convention was the establishment of five constitutional officers. I suppose that five were created to provide an additional check and balance within the Executive Branch. Three of these, the Attorney General, State Auditor and State Treasurer were given very simple, yet professional roles. The Attorney General is the “legal adviser of the state officers.” We would expect that the Attorney General hold a law degree and be an experienced attorney.

The State Auditor is to “perform financial post audits of public accounts.” We would expect the auditor to be a Certified Public Accountant and experienced in performing audits.

The State Treasurer is designated as “the custodian of public moneys.” Again, we would expect the treasurer to have a degree in accounting or finance and some expertise in both the collection and investment of money. As a custodian, the treasurer is entrusted with guarding and keeping safe taxpayers’ moneys. With this comes a fiduciary duty.

Each of these three offices is also directed by the constitution to “perform other duties as provided by statute.” Note that their roles are not that of a policymaker, but rather to perform professional duties requiring certain expertise and experience.

The State Treasurer’s office performs four basic functions: 1) Manages the banking relationships and contracts for the state; 2) Invests public funds; 3) Issues debt as authorized by the Legislature; and 4) Administers the Unclaimed Property program.

I believe the citizens of Utah aren’t looking for a treasurer to politicize the office by grabbing headlines or pushing an agenda as a stepping stone to higher elected office. In Utah, we have a long tradition of electing a treasurer that has a background as a treasurer at a city, county or other organization.

So, as we work our way through the next several weeks and months to narrow the field of candidates, I leave you with this question:  Is it important to have a qualified, experienced State Treasurer to protect your tax dollars? If you believe, like me, that this is a professional position, then your job as a delegate or voter is to peel back the layers of rhetoric and uncover the core competence and experience of the candidates. The choice will be obvious.

Welcome to my blog. I thought this would be a means by which I could discuss current issues that are relevant to the State Treasurers office. On a weekly basis, I will update the blog with my thoughts regarding current events or topics that will aid you in deciding on the best candidate for Utah State Treasurer.

I hope you’ll spend some time on my website getting to know me and what I bring to the table. The State Treasurer’s office plays an unsung role in state government. However, its role helps keep taxes down by generating investment income. It’s the only office in state government that generates substantially more revenue than it consumes in expenses. That should be important to taxpayers.

Current turmoil in the capital markets directly impacts the things we do – invest money and issue debt. We’ve been able to navigate through the land mines very successfully the past year. However, the longer the liquidity crisis exists in the market, the more difficult it is to find a safe haven to invest the state’s moneys.

So, come back on a weekly basis. Hopefully you’ll find my thoughts useful as you decide who you want to invest your tax dollars.