A Fiscally Responsible City Manager Loan

Your City Council recently encountered an interesting problem. We selected Rod Foster as our new City Manager out of a great pool of candidates, negotiated a fair and reasonable compensation package and were ready to have him start, but he lived in the Inland Empire, and we really wanted him to live here in our community. In fact, we thought it was so important that the City Manager live under the same rules he would administer, we made it a condition of employment that he relocate to Laguna Niguel. Running a city isn’t the same as running a company where a 2 hour commute would be a choice the executive would have to make. Truly being in touch with the city requires eating, working, playing and sleeping here, and that’s what we wanted. It is the same approach the first city council took 22 years ago when we hired Tim Casey as our first city manager, and it is the approach we wanted to take again. He can just move here, right?

Wrong. In case you hadn’t noticed, the residential lending market has been in a tailspin for the past few years and the effects are still lingering. That doesn’t matter so much for those of us who live here and like our loans, but it matters a great deal if you are trying to refinance or move in. Qualifying can be very difficult, and lenders are not really making many jumbo loans at all. We could either wait for him to sell his house and get a loan, or we could offer him a loan to speed things up.

Of course, we are not in the business of being lenders, we are in the business of fiscally responsible leadership and not wasting the city’s assets. The only way I was willing to make a loan was if our return on investment was actually in the financial best interests of the city. When looking at our reserves, it is clear that we needed to achieve an investment return at least as high as what we were getting. That was actually easy, since the lending market for the loan was just over 3% and our return on reserves was just over 1%. The hard part was assessing risk.

Investments of city reserves in real estate is not new, but our investments are usually indirect. We have millions of dollars invested in real estate through Fannie and Freddie debt securities. These massive pools have broad exposure across the country, but as we have seen recently, they are not without risk. When I sit back and think about which real estate we should be investing in, the answer is very clear. Invest right here! We have direct control over many of the factors that make Laguna Niguel such a wonderful place to live, and everything we do is focused on keeping your quality of life excellent and your property values high. There is no more appropriate place for a city to invest in real estate than right within its borders.

What about the risk of default? This is where we are in much better position than virtually any other lender. We are, of course, the first lender on the property, but that is only the beginning. As his employer, we know exactly what he will be making, and we take his mortgage payments right out of his paycheck. If he is ever fired, he is required to sell the house and pay off the loan. How about the amount? We originally authorized a loan of $850,000, but rising prices made Rod come back and request an increase to $925,000. That is certainly a lot of money, but we were not focused on telling him which house to buy or deciding how much of his salary he wanted to put toward mortgage payments. Those are decisions we all make. Based on the salary we were paying him, he could afford the payment, and we required that he get homeowners, title and earthquake insurance to be sure. As long as the investment was secure, we get a good rate of return and it is secured by land in Laguna Niguel, this seemed like a good investment of city funds that would pay a healthy rate of return.

So, at our last council meeting we reset the interest rate on the loan to make sure it was a market rate of interest and voted 5-0 to approve the investment. Special thanks to Councilman Slusiewicz, our resident financial advisor on the council for running the numbers for us. It was a sound investment of city funds, we will get paid a better rate of return on the money that we would have gotten otherwise, and we get a City Manager who can start right away and live in the city. I’m happy with the result, and I think you will be too.

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