Metropolitan King County Councilmembers Bob Ferguson, Jane Hague, Kathy Lambert and Larry Phillips today expressed concern that actions taken to maintain the high rating of King County’s Investment Pool will increase the County’s exposure to unnecessary financial loss due to a lack of a prudent cap on financial liability.

The King County Investment Pool invests cash reserves for all King County agencies and over 100 special districts and other government entities such as school, fire, sewer and water districts, and other public authorities. It is one of the largest investment pools in the State of Washington with an asset balance over $4 billion. Currently, King County would assume approximately 40 percent of any losses based on the County’s financial contribution to the pool. The remaining participants would assume the other 60 percent based on their contributions.

The County last week learned of downgrades to Mainsail, a commercial paper investment that represents $53 million of the $4 billion portfolio. Since the downgrades had the potential to impact the pool’s high market rating, the County Executive Finance Committee (EFC) segregated Mainsail from the rest of the pool’s investments so that the County would assume complete responsibility for recovering the full principal and interest of the Mainsail investment, thereby protecting pool members and the county’s overall pool rating.

Councilmember Ferguson, who chairs the Council’s Operating Budget and Fiscal Management Committee and represents the Council on the Executive Finance Committee, agreed that Mainsail should be segregated to protect the pool, but did not agree that the County should put itself in a position of assuming complete responsibility for covering all of any potential Mainsail losses.

“I consider this a one-time action by the County,” said Ferguson. “The County cannot continue to accept responsibility for other sliding investments. Members of the pool realize that investments can be inherently risky, and in the future, we must all absorb the risk if other investments are devalued.”

Ferguson said he remains interested in maintaining good relations with other jurisdictions who are members of the pool but expressed concern that assuming this liability would send a signal that the County is willing to accept responsibility for other pool investments should they decline severely.

Ferguson offered an amendment to the Mainsail segregation agreement to provide protection for the County. Specifically, Ferguson proposed to cap the County’s exposure and losses at no more than 20 percent of the principal to protect the County’s own financial strength. Any additional losses would have been distributed based on each member’s percentage of the pool. The three other members of the County Executive Finance Committee rejected that amendment.

“This issue could be the tip of an iceberg,” said Councilmember Jane Hague, vice-chair of the Operating Budget Committee. “The Council needs to deliberate this financial policy issue and consider potential long-term damage control options.”

“This is not just a local issue. Many municipalities across the country are also potentially facing this problem,” said Councilmember Kathy Lambert, vice-chair of the Capital Budget Committee. “We will continue to monitor and work together with other municipalities to make sure we have explored all possible methods to protect our investments.”

“The benefit and risk of an investment pool is that all parties who participate share any gains and losses together,” said Councilmember Larry Phillips. “The Finance Committee’s actions fully protected the balance of the pool’s members by forcing additional potential liability onto the taxpayers of King County. I support Councilmember Ferguson’s actions to try to limit King County’s exposure to its fair share. I am concerned the action of the Finance Committee will set a precedent for King County bailing out other pool investors any time there’s a financial downturn. That’s unacceptable.”