SACRAMENTO, Calif.- Sacramento Treasurer Thomas P. Friery is doing what everyone else talks about.
For all the industry noise about expanding disclosure, bonds sold by troubled issuers are generally hard to track in the secondary market. And in California, while a real estate downturn is causing trouble for many assessment districts, hard information is difficult to come by.
Admirers say Friery has made a Sacramento assessment district the exception to the rule. Problems at Sacramento's North Natomas Assessment District have been fastidiously recounted in nearly a dozen releases sent out by the treasurer over the past two years. Moreover, Sacramento makes the releases available through an experimental national repository run by the Municipal Securities Rulemaking Board. Market participants also find that Friery calls back when they phone.
"The market respects Friery," said a New York municipal research analyst, who asked not to be named. "He is a public servant. He can go home and sleep at night."
Friery outlined his mission this way: "Whenever something of a material nature occurs that may impact security, we simultaneously provide information to bondholders so they can make an informed decision."
For him, disclosure boils down to "trying to get critical information about the district to all the people at the same time."
Friery said his philosophy runs against the grain of the public finance industry, where disclosure is still subject 'to great debate" following the March proposal by the Securities and Exchange CommisSion to amend Rule 15c2-12 of the Securities Exchange Act of 1934. The commission wants to bar broker-dealers from recommending bonds unless they have reviewed the financial information from the issuer.
At any rate, Friery's guiding principle is a lot simpler than the federal antifraud statutes, which, he said, leave issuer disclosure responsibilities murky at best.
Friery said he started out by visiting an attorney who specializes in disclosure issues. The attorney said "disclosure is not required like it is in the private sector," Friery recalled. "Although the more information you provide, the better it is going to be for you in the long run."
Sacramento is among a handful of issuers that provide notices of material events to the Municipal Securities Rulemaking Board's continuing disclosure information pilot program. Friery faxes the releases to the national repository, which are then made available to subscribers and the public.
"I take a personal interest in explaining stuff to the public," Friery said, noting that bondholders or others with questions about North Natomas debt can leave a message with his assistant, and he will return calls weekdays between 9 a.m. and 10 a.m.
So what is North Natomas, and how did it run into trouble?
According to Friery, North Natomas Assessment District No. 88-3 contains 47 parcels of land totaling 1,473 acres. It is part of the greater North Natomas area, which includes 7,200 acres bounded on the south by the American River and on the west by the Sacramento River. The district is in northwest Sacramento, six miles from the state Capitol.
In 1989, the city issued $38.4 million of limited obligation improvement bonds to pay for public improvements in the assessment district. The improvements included roadways, bridges, traffic signals, street lighting, landscaping, storm drains, sewer, water, and underground improvements.
The district has made bond payments in a timely fashion, but the real estate downturn has caused a number of landowners to be delinquent in paying assessment levies securing the debt.
The district's special reserve fund has remained at its original level of $3.64 million, but sooner or later the district may have to dip into the money, Friery said.
"If there were to be a rash of delinquent assessment installments, or if the people who are delinquent now stay delinquent, it becomes a mathematical game how long it would be before you tap the reserve account," Friery said. The delinquent assessment installments, which have run as high as 55%, are now down to 35%, he says.
"The real issues that surround North Natomas are the weakening of the California real estate market plus job exodus," Friery said. "People have been unwilling to make commitments to come here." That won't stay the case, he said. He envisions a bustling community filled with commuters to Sacramento's downtown -- a future for which the district has to prepare now.
"The infrastructure costs of North Natomas could be up around $600 million," he said. "This is tremendously important to the future of Sacramento. Clearly, it is a priority for us to have developed." Originally used for growing rice, the district is now zoned for residential, commercial, and industrial uses. "It still remains a field of dreams," Friery said.
Of course, there are obstacles. The area lies within a 100-year floodplain, which means, in Friery's words, that "a storm should occur once every 10.,0 years and the existing levy system would not be sufficient to hold back the water." But the problem is regional rather than limited to North Natomas. In fact, Friery said, at least 85% of Sacramento "could be three feet or more under water" in such a flood.
Guarding against such a disaster is a major issue for the region. Solutions being discussed include getting Congress to approve construction of the proposed Auburn Dam, adding more water storage capability to the already-built Folsom Dam on the American River, adding a drainage canal, and raising existing levies.
"If you fix it, this flooding problem goes away," Friery said, "and if it goes away, North Natomas would be a very good place to live."
Flooding is not North Natomas' only problem, according to Sacramento's disclosure releases. They say that four land parcels in the assessment district are contaminated with toxic chemicals and pesticides left by a now-defunct crop-dusting service. The city is now foreclosing on the contaminated parcels, whose lender is late on assessment payments needed to cure tax delinquencies.
Playing a big part in hopes for developing the district is the
17,000-seat Arco Arena, completed in 1988 and home of the Sacramento Kings basketball team.
Next to the arena, Friery said, "is a 65-foot hole in the ground with $20 million of infrastructure" that could be used to support a football or baseball stadium.
Eventually, two planned but unbuilt interchanges will connect North Natomas with I-5 and I-80, two nearby interstates, Friery said. For now, the district's streets are "like a maze" and can't handle the auto traffic following basketball games, he said.
Friery is coping with these uncertainties by showing the market his cards, a policy that should be "a model for other cities," said Tom Walsh, senior research analyst for Franklin Advisers Inc., which owns North Natomas bonds. Sacramento is "one of the better issuers out there in terms of disclosure. And the market views it favorably."
"Tom's diligence has allowed a secondary market to be maintained" in the North Natomas bonds, said Edward Schilling, a partner with Stone & Youngberg, the San Francisco-based municipal bond firm and underwriter of the North Natomas bonds.
The North Natomas bonds are trading in the low 80s, a discount to par, but, Schilling said, "you wouldn't expect them to be trading at par, given the history of the district. It is not that bad of a price."
Friery's disclosure releases appear to have some minor impact on the bonds' trading prices, Schilling said. "If it is good news, it tends to bring the price up a little bit in time -- when somebody is ready to make a trade. Or, if the news is bad, it brings it down.
"But the price really doesn't move immediately on the information updates Tom has provided," Schilling said. "It doesn't happen that directly. Perhaps because there aren't trades precipitated by the publication of the information .... Most investors in these bonds are buy and hold."
Friery's drive to be out in front on disclosure stems from his desire to be "very innovative," he said.
A motto on his office wall also shows a concern for hardheadedness. "Nothing is as easy as it looks," says one, and another: "Everything takes longer than you expect. If anything can go wrong, it will, at the worst possible moment."
"Those are the primary points of Murphy's law," Friery said. "You have to remember them when you manage money."
He became Sacramento's treasurer in 1978, and, for three years in the early 1980s, invested 1% of the city's retirement system portfolio in metals.
"One year we had a 127% return, and it added 1.27% to the bottom line," Friery recalled. "We retired from it. For 1% of the portfolio, it was consuming way too much of my time, and it was more speculative than regular investments."
His duties include management of about $1 billion of city obligations, trust funds, and local agency funds. "My day in the sun could be over tomorrow if I don't continue to perform," Friery said, adding that the city council, which appoints him, views the treasurer's office as "a profit center."
A native of Cleveland, the 51-year-old Friery began work as a computer programmer in the check collection division of the Cleveland Federal Reserve. He moved to California, where he became an assistant investment officer for state Treasurer Ivy Baker Priest. He relocated to Berkeley, Calif., where he was investment officer for the retirement and endowment funds of the University of California Regents.
Friery later worked as a financial consultant for the California auditor general's office, and, while "looking around for a money management job," landed a position as assistant treasurer with the Washington Public Power Supply System.
In December 1978, he was selected as Sacramento treasurer from a pool of 150 candidates.
While disclosure is only one part of his responsibilities, Friery said that working on North Natomas has given him insight into the world of public finance.
The week after a press release is distributed, the number of investor calls jumps from four to six to between 30 and 50, he said.
"People who are calling me are upset," he said. "They've put $25,000 of their money into bonds for their grandchildren's education, or they are living on the money, and they see these press releases that say the bonds are not a city obligation.
"The people didn't know what the heck they bought," Friery said, sighing. "The person who sold it to them is gone.
"It used to be the individuals who bought our bonds were pretty sophisticated institutional investors with high-level skills," Friery said. "I am finding that people thought they were buying city of Sacramento securities. They had no idea they were buying a land-secured investment."
"A lot of the salesmen at brokerage houses are doing a poor job," he said. "They're not looking at who the public is. They're not giving them enough information. They don't understand the products they are selling."
By disclosing material developments, "the last thing you want to do is make people nervous," he said. "But, at the same time, I don't sleep very well knowing that some of my investors living in Chicago and elsewhere are not going to see a local newspaper" when it reports on bond-related events.
"A lot of people think that what I am doing is kind of wacky," he said. "They tell me, 'You don't have to do all that stuff.'"
"Bull. That is my answer. Nothing could be more important for the city."