Howard County government's investment performance isn't spectacular, but it's safe, officials said.
"It shouldn't be spectacular," said Dale B. Neubert, deputy director of the Department of Finance. Spectacular performance almost always means spectacular risk, she said.
Ms. Neubert and other county investment officials assured the County Council last week that Howard County does not take risks with its financial portfolio and is protected against the kind of huge losses that occurred this summer in Charles County, and more recently, in Orange County, Calif.
In both of those cases, the financial demon was the same: use of volatile investments known as derivatives to earn a higher rate of return than could be achieved through more conservative means.
The strategy backfired for both of those jurisdictions, which had invested heavily in highly speculative forms of derivatives. Charles County lost $7 million; Orange County lost $2 billion and, facing more losses, has declared bankruptcy.
Howard County officials found the Orange County loss especially frightening because, like Howard, the southern California county one of the wealthiest in the nation and its bonds, like Howard's, were among the most highly prized on Wall Street.
Howard County also buys some types of derivatives, but less speculative types, Ms. Neubert said. A total of $14.5 million, or 6 percent of its $255 million portfolio, is invested in derivatives backed by U.S. government securities, she said. Such derivatives "are not considered risky, especially in times of rising interest rates," she said.
Orange County also used other kinds of highly speculative investment strategies to gain high rates of return, which Howard County has not done, Ms. Neubert said.
"We've done our homework and gone beyond what other Maryland counties have done" to assure safety and still earn a modest return on investments, she said.
The county's goal is to earn a return equal to or slightly greater than the yield on 90-day U.S. Treasury bills -- and it appears to be achieving that goal. For the period ending Sept. 30, the county's rate of return was 4.78 percent. The rate for a 90-day T-Bill maturing Sept. 30 was 4.7 percent.
"Our policy is built on three things -- safety, liquidity and [limiting] risk," Ms. Neubert said. Safety means you never lose the principal, liquidity means you never have a cash flow problem, and risk means you limit the amount of your long-term investments, she said.
In Howard County, most of the investments -- 85 percent -- mature in a year or less to assure liquidity. The maximum maturity allowed is five years.
Ms. Neubert said the county is the only one in the state, and only one of 11 municipalities in the nation, to have an investment policy certified by the Municipal Treasurers' Association of the United States and Canada.
After receiving the certification Sept. 1, the county wanted to know if its investments accurately reflected its investment policy. It asked the research center of the Government Finance Officers Association to make an evaluation.
In a lengthy report provided to Ms. Neubert earlier this month, the association concluded that Howard County's investment program "recognizes the risks of an active investment strategy and incorporates the necessary safeguards and controls recommended for the prudent investment of public funds."
"That says it all," Ms. Neubert said. "We're doing a good job."