Wednesday, October 19, 2005

Lunchtime Notes: Questionable Logic At Council

by Tom Bozzo

From the Daily Page account of last night's Madison city council session on the Overture refinancing deals, a couple things caught my attention:
Erm, if it will cost more than projected to maintain Overture, won't that also increase the break-even rate of return for the trust fund?

And this:
So much for "historical performance, particularly short-term performance, is no guarantee of future returns." It's worth noting that the lackluster post-bubble performance of the market is not, in fact, simply poor years. Based on the returns of Vanguard's Total Stock Market index fund, it's actually been a combination of bad years (2000, 2001), a terrible year (2002), a great year (2003), a good year (2004), and a poor-to-date year (2005), for a five year average annual return of -0.63% through the end of September.

In any event, the recall effort is even more clearly misdirected than it's been to date. I would happily recall any alder who was reassured by the investment advisor's reported presenation.
With regards to to the second point, Zach Brandon basically made the exact same argument as you do when he spoke against the refinancing plan, even pointing out the small print ("historical performance...") in the graph.
what is up with austin king? he knows mayor dave's stance, votes for the other plan, but then says if mayor dave decides to veto, he won't vote to overturn the veto. What kind of logic is that?
Anon: Thanks for the info.

Bryan: It can be a way of expressing a weak preference; King as much as said he was the marginal vote for the plan. It can also be a way of handling votes where, for political or personal reasons, you want to side with the majority but not necessarily get your way. (Happens a fair amount at the state level as some Dems will join Republican majorities on matters in the state assembly but then vote to sustain the Doyle veto.)
Note also that although the Overture endowment had to weather several down years, they also underperformed their own benchmarks.
Tom, there is one piece of information that people so far have, to my knowledge, failed to notice: there are triggers in the bond issuance from the banks that require a move to cash positions if the endowment slips to a certain level. This means that if, say, there is one bad year and the total endowment slips to a certain level, the banks will force conversion out of equities and into cash. Thus, it is literally impossible for the endowment to "make up" a bad year in certain circumstances.
Anon: Interesting point. In some cursory searches, I haven't been able to find much out about the trust fund's finances. You wouldn't happen to know of any readily accessible sources, would you?
Ah, documentation you say...I'll see what I can find for you. I believe the trigger is around $90 million. Note also this little understood fact: the endowment has already fallen such that were the bonds to be called and the building paid out, there would exist a significant shortfall. That is, someone would have to make that up no matter what.
Anon, sorry to have assigned blog homework -- thanks for the info, and thanks in advance for anything further.

It was my understanding that the current shortfall is in the $5-10 million range -- not huge in the grander scheme, but lots if anyone (other than Mr. Frautschi, maybe) has to come up with it quickly.
You are correct in your estimation, although it is at the high end. Presumably, the city would not be on the hook for the shortfall at the time the postions were unwound. Instead, it would be the benefactor. Given that fact, it is an open question why that same benefactor does not offer to bring back the endowment to the original level (i.e. the level needed to pay off the bonds) so as to give the endowment a fighting chance in the markets in the case of refinancing. That proposal has been described as a non-starter. Given the trigger however, and the current hole the endowment must work from, the refinancing option begins to look very risky indeed.
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