There is a little bit of Wall Street in the basement of the Cuyahoga County administration building in Cleveland.
A cluster of eight traders monitor U.S. Government securities markets on computer screens, buying and selling in search of profits. The operation is a "professional trading program, just like on Wall Street in New York," said Francis E. Gaul, Cuyahoga County's treasurer.
The difference is that the trades are being done by county employees with government money. The goal of the program, Secured Assets Fund Earnings, is to swell the investment funds of the county and of any other Ohio locality that signs on.
"The basic principle of the SAFE program is that all profits on public dollars belong to taxpayers, nobody else," Gaul said. "My job as treasurer is to maximize those profits."
Back in the 1970s, Cuyahoga County started an in-house investment department to "streamline and modernize the county's cash flow," Gaul said. In 1991, SAFE was initiated to allow other governments to invest their money along with the county's.
Since then, more than 63 cities, villages, school districts, and other governmental entities have joined the pool, which currently invests about $800 million of public money. And the county recently began a new program to generate more investment earnings through SAFE by investing the proceeds from taxable tax and revenue anticipation note issues.
Counties in California have had investment pools since the 1950s, but elsewhere the programs are scarce, officials at the National Association of Counties say. The association plans to present the Cuyahoga County program with an achievement award at the group's annual meeting in Chicago this month.
Gaul said the county began the program, the only one in Ohio, because many localities there are "crying the blues" about having to raise taxes or cut services.
"Every day in the paper you read about people knocking off services, cutting out school lunches or closing pools in the middle of summer," he said. Cuyahoga County's program "is the option we give them so they won't have to do those things."
Some government officials said they were drawn to the program because of its performance when measured against the 90-day Treasury bill. SAFE outperformed the yield on the 90-day bill by 240 basis points in 1991. and by more than 400 basis points this year, Gaul said. Despite current low interest rates, SAFE has been giving participants a 7% to 8% return.
Gaul attributed much of the superior performance to the county's security trading operation. During the first quarter of this year, the program earned nearly $11 million for its participants. While $7.5 million of that amount came from interest earnings, the remaining $3.3 million represented trading profits.
Gaul said governments traditionally invest through banks and other institutions that may be offering a 2.3% to 3.5% rate of return. Those institutions then turn around and invest the money in higher-yielding investments, pocketing the difference. Cuyahoga County's program allows governments to benefit from what happens to their money once they hand it over, Gaul said.
The governments' funds are invested only in U.S. securities with short-, intermediate, or long-term maturities. The average maturity of the investments as of June 1 was 2.3 years. "We never invest in things we can't hold until maturity," Gaul said.
Lorain Joins Cuyahoga
Lorain County, Cuyahoga County's western neighbor, is to date the only other Ohio county to join SAFE. Daniel Talarek, Lorain's treasurer, said that steel and auto cutbacks have given the county one of the highest unemployment rates in the state, and voters there have no desire to increase taxes. He said his county elected to join the program because of the return. He pointed to a 7.17% return on investment in May, which netted Lorain a 6.87% return once 30 basis points were subtracted for the administrative fee.
Talarek said the county has made about $190,000 from the $35 million it has invested with the program -- probably double the profit it could have earned elsewhere, he said.
The biggest participant in the pool, outside of Cuyahoga County itself, is the Gateway Economic Development Corp., a nonprofit group that is building a partially bond-financed baseball stadium and basketball arena complex in downtown Cleveland. Tim Offtermatt, Gateway's chief financial officer, said the rate of return and the professionalism of the investment staff were two top reasons why the group has about $125 million invested with the SAFE program.
"They, really know what they're doing." Offtermatt said. "They work with significant pools of cash and they've done a hell of a job."
Gaul said some public money managers have been reluctant to join the pool, believing that it would encroach on their roles. But Gaul argued that the program makes them look better by giving the governments "the best bang for their buck."
But Is It Legal?
Other local government officials have questioned the legality of turning their public funds over to the county treasurer. But both the Cuyahoga County Prosecuting Attorney's office and Ohio Attorney General Lee Fisher have issued opinions that the SAFE program is legal. The program is also audited by the state of Ohio and by an independent auditor, Gaul said.
Robert Miller, treasurer of Cleveland Metro Parks, said the park district felt safer with the program than with outside investment advisers because the pool is run by an elected official.
Governments are guaranteed the full amount of their principal at withdrawal, minus an administrative fee for the program services. That fee ranges from 20 to 50 basis points, depending upon the amount of money a government has invested with the program. Gaul called it "probably the most minuscule fee in the world of finance."
Gaul explained that by having a larger investment pool, the SAFE program can garner more competitive prices for its investments, as well as lower fees for executing trades.
"Because our funds are part of the funds that are invested, a better return is given to us because we've invested in a much larger pool," said Cuyahoga County Commissioner Mary Boyle.
Gaul said he hopes the investment pool will reach $1 billion. In the meantime, Cuyahoga County invested the proceeds from an issue of $131 million tax and revenue anticipation notes. The deal, sold June 29, was done on a taxable basis to avoid arbitrage rebate and because the county is not anticipating a cash-flow deficit over the next six months, according to Dennis Golem, a managing director at McDonald & Company Securities, the senior manager for the issue. Moody's Investor Service rated the notes MIG-1.
Earnings from investment of the proceeds in the SAFE program will more than make up for the higher taxable interest rate on the notes, Gaul said.
Investing the note proceeds could earn the county $2 million to $2.5 million by the time the notes mature on Dec. 30. They carry an interest rate of 3.6%. Golem said.
Golem said that he and other underwriters are talking to local governments about copying Cuyahoga County's note and investment deal.
"We're looking at the same potential to earn them additional investment dollars." Golem said. "The key is really [Gaul's] pool and the return they'd be able to generate from the pool."
