Chicago Treasurer Kurt Summers issued a press release Wednesday titled “Treasurer Summers doubles investment returns in 2016.”
The first (italicized) paragraph announced:
“Treasurer’s Office beats expectations, generates over $102m in total revenue to reduce the burden on Chicago’s taxpayers with 50m in additional, un-budgeted money.”
Sounds good, but a closer look raises some questions.
For example, that $102 million hasn’t been achieved, yet. Further down in the text, we learn that this is the amount that is forecast for the year as a whole, based on performance year-to-date.
Thus far in 2016, investment returns may have risen significantly. The press release cited “modernization” of the Treasurer’s office operations, including “additional training for portfolio managers, optimizing cash flow management to create new investment opportunities, and adopting national best practices…”
One thing the press release didn’t cite was a significant change in the composition of the investment portfolio.
In finance, returns are a function of risk. Higher risk portfolios tend to offer higher expected returns – even in “cash” management. Money market instruments tend to be safer than longer-term bonds. And among longer-term investments, corporate bonds offer higher yields than government bonds, mainly because of their risk.
In the slide deck for the latest Chicago “earnings call,” we can see one of the likely reasons for higher investment returns this year, at least thus far. The slide for the city’s investment portfolio (slide 10) shows a marked decline in investments in money market funds and government agency securities, along with a large increase (from $950 million to $1.5 billion) in investments in corporate bonds. Compared to a year ago, the city’s portfolio allocation to government agency securities has fallen by roughly 50%, while its allocation to corporate bonds has risen over 300%.
“There’s no such thing as a free lunch,” the saying goes.
This could be a good topic for the next Chicago earnings call.