In all the hubbub surrounding Oceanside’s elected treasurer Victor Roy, now under investigation following various complaints lodged by the city’s treasury manager in an email that later circulated online, city officials said one giant claim will not be investigated: That Roy lost millions of dollars on risky city investments.

“The cities (sic) portfolio under your ‘oversight’ was full of investments that put the city at risk and ending up costing the taxpayers millions when interest rates began falling to all-time lows in March 2019,” wrote Treasury Manager Steve Hodges in an email to Roy and other city officials in June of this year. “When I started, I immediately changed our investment policy in 2020 to prevent something like this from ever happening again.”

Oceanside’s Assistant City Manager Michael Gossman said the city would not probe Hodges’ financial allegation partly because Roy does not have unilateral ability to make investments.

Voice of San Diego reviewed Oceanside city financial filings, budget documents, quarterly investment reports and other city records to assess whether Hodges’ claim was true. We also viewed city committee meeting videos, which shed more light on his concerns.

So, did Oceanside taxpayers lose millions of dollars on investments under Roy’s oversight? Yes, but it’s complicated. The reason: Callable securities.

When reached by phone, Roy hung up. Hodges, who joined Oceanside’s ranks in 2019, did not respond to multiple interview requests. 

Oceanside Voters Choose Treasurer

Roy came to the treasurer job initially in 2018 with no financial background and he faced no challengers in 2020. That same year, Oceanside voters rejected a ballot measure that would have converted the treasurer job to an employee position. Roy’s current elected term ends in 2024. Unlike cities like Carlsbad, the Oceanside job does not require candidates to have relevant experience or education, though that may change. Oceanside council members on Aug. 10 approved a request for “staff to develop and implement minimum education and/or professional experience” qualifications for the job.

Though Roy remains, Hodges is on his way out. Oceanside is seeking applicants for his position, and city officials confirmed Hodges will resign later this year.

The primary source of financial concern for Hodges centered on the volume of the city’s “callable” investments, which are legal investments that may be abruptly terminated before the city sees all the interest earnings initially anticipated on the loans. But when the deal is off, not all is lost.

Some background: Oceanside officials invested $506 million last year to support city operations, with state law generally limiting the investment timeline to no more than five years.

The city earned nearly $7.5 million from those investments in 2020 alone. Officials scatter those earnings across various city accounts but most goes to its general fund, sewer and water funds, according to city records. A sizable amount also goes to banking and investment fees, city records show.

So Did the City Lose Money?

With callables, the city loans money to a party willing to pay the city back principal plus interest. But the borrower can pay the money back before it has paid much interest to the city. That’s a risk the city takes. To account for that “call” risk the city received a higher interest rate compared to non-callable, or “bullet” investments available at the time. So if the city loaned the money in the “bullet” investment, it may have only gotten a promised 2 percent interest rate. But offering a callable one gives the city, for example, 2.2 percent. 

When interest rates drop, though, and a borrower can get a better deal somewhere else, the borrower can pay the city back its principal and the city has to invest the money somewhere else, likely with a much lower rate.

State law does not specify a limit on the amount of callable investments a city may have, and the latest California Debt and Investment Advisory Commission’s local guidelines do not prescribe a cap. However, in a September 2020 issue brief, the commission urged public investors like Oceanside to weigh the benefits and drawbacks of callables before investing in them, highlighting reinvestment risk and cash flow uncertainty as disadvantages of such deals.

The problem is, when a city has lots of callable investments and loads of calls come in, they are faced with an avalanche of their own returned cash without the ability to earn much money on it. That’s the reinvestment risk, or interest rate risk.

Limiting Callables

For Hodges’ taste and some other municipal financial advisors, Oceanside had way too much money in callable deals. So, when rates were incredibly low during the pandemic, they lost out on earnings. That’s what Hodges meant when he said the investments ended up “costing the taxpayers millions.” 

It wasn’t so much that the city lost its investment as much as the city didn’t earn as much as Hodges felt it should have had the money been invested in more reliable ways.

Hodges explained a bit more at the city’s Citizen Investment Oversight Committee meeting on May 24.

“And so, when interest rates dropped to record lows all of our portfolio, or a good percentage of our portfolio, got called, so we had hundreds of millions of dollars to invest at record low interest rates,” he said during the meeting. “Basically, what I am doing is getting rid of the risks we had that causes us to have those losses and making sure it doesn’t happen again by laddering the portfolio, making sure we are diversified and not all in at one time in one particular investment.” 

According to city treasury reports, Oceanside saw at least $206 million in investments called between January 2019 and September 2021. That is different from losses, though. That is how much principal was returned.

Here’s where the city’s callable investment volume was at before and after the calls came, both in dollars and as a percentage of all investments, according to figures reported in Oceanside’s quarterly investment reports.

Illustration by Ashly McGlone.

Click here to view Oceanside’s callable investment volume in a new tab.

In 2019, 44 percent of Oceanside’s portfolio was in callable investments. That dropped to 14 percent in December 2021 as borrowers sent the city back its principal and borrowed again to take advantage of lower interest rates. From April 2020 until March 2022, a key benchmark called the federal funds rate was at or below 0.1 percent – nearly rock bottom.   

By June of this year, the city still had about 20 percent of its portfolio in callable investments, twice the level that one government investment advisor recommends to his clients.

 “They were reaching for yield,” said Rick Phillips, founder of the Government Investment Officers Association and president and chief investment officer of Las Vegas-based FHN Financial Main Street Advisors. Phillips said he encourages clients to stay at or below 10 percent callables with the caveat that, “Not all callables are created the same.” Some, for instance, have lockout periods which do not allow calls for years while others might allow calls every month.

Still, Phillips said most municipal investment advisors share his caution and recommend “very low callables,” partly because in the long-run, they do not make as much money as the simpler call-free options.

“Callables function when rates go up, not when rates go down,” said Phillips. “Interest rates cycle and it’s timing.”

While Oceanside’s callable volume struck Phillips as high, he had one municipal client come to him during the Great Recession with an investment portfolio containing 70 percent callables. All of those were also called due to low interest rates at the time.

Now, Oceanside faces limits on the volume of callable investments it can enter.

Oceanside officials added a 25 percent limit for callable investments in its investment policy in 2020, records show. The council approved it without public discussion. That’s the policy Hodges took credit for changing.

Phillips estimated less than 50 percent of cities have a limit on callable investments in their investment policies, though he would not be surprised if more cities formalized such limits. 

“That discussion is happening,” he said. 

Voice found a cap of 30 percent in the investment policies for the city of San Diego and Escondido.City records show Escondido’s callable cap was added in 2017.

San Diego officials added their callable cap to city policy in 2007. 

“Callable securities can be very volatile when interest rates move rapidly. This change was implemented, so the first two primary objectives of the City’s Investment Policy (i.e., Preservation of Principal and Liquidity) were adhered to instead of simply increasing the Pool’s overall yield,” said city of San Diego spokeswoman Racquel Vasquez.

According to Vasquez, “The City Treasurer’s Investment portfolio does not currently contain callables.”

How Much Was Lost?

Again, it’s more a question of how much the city could have made with different investment decisions.

To figure that out, you would have to know the initial interest rate received on them compared to what else was available at the time, and factor in the new lower interest rates the city reinvested in. That’s a tall order and no city report routinely provides such analysis. Oceanside treasury officials told Voice it didn’t have such analysis, either. 

However, Oceanside did report a $2.7 million decline in total investment earnings from fiscal year 2020 to 2021, when earnings went from nearly $7.5 million to $4.77 million. The general fund alone saw a $939,000 decline year to year, while sewer funds lost $704,000 and water funds saw a $479,000 decline in 2021. Calls undoubtedly contributed to those losses.

View Oceanside’s top investment earning allocations in a new tab.

Oceanside officials said the earnings loss did not lead to budget cuts as total general fund revenues exceeded the budget in recent years.

Neighboring Carlsbad also saw a landslide of calls in its investment portfolio at the same time, totaling roughly $200 million. Those calls were a major driver of its lost earnings, according to its 2021 annual investment report. Carlsbad’s investment earnings totaled $14 million that year, a decrease of $3 million from the previous year.

“This decrease can be attributed to investments being called, or bought back, by the issuer early throughout the last two years with reinvestment in lower interest securities,” the Carlsbad report says.  

Carlsbad’s investment policy does not currently limit callables.

To estimate Oceanside’s lost earnings opportunity another way, Voice compared Oceanside’s average monthly portfolio yield to other cities at different points in time.

Oceanside’s yield did not fare too poorly compared to some nearby cities, like Carlsbad, but when compared to some cities with little to no callables, the difference was notable.

View Oceanside’s yield comparison by city in a new tab.

And the differences add up when multiplied against Oceanside’s portfolio, which has grown from roughly $400 million to $500 million in book value in the last two years.

For instance, Oceanside’s investment portfolio saw an average yield to maturity of 1 percent in June 2021. Anaheim, one of Phillips’ clients, saw 1.75 percent. That 0.75 percent difference would have meant another $256,000 in earnings for Oceanside’s $410 million portfolio at the time for that month alone. The June prior, there was a 0.36 percent difference in monthly yield between the two cities. That would have beennearly$117,000 more for Oceanside’s then-$393 million portfolio that month alone. Multiply each of those numbers by 12 and you get a rough, albeit imperfect, sense of the nearly $4.5 million Oceanside hypothetically missed out on in 2020 and 2021.

Closer to home, Vista’s investments did not do as well as Anaheim, but they did outperform several local cities including Oceanside. If Oceanside had done as well as Vista in June 2021, with 1.43 percent average yield instead of 1 percent, that would have been another $145,000 for Oceanside that month. The June before, Vista’s yield was 0.23 percent higher, worth about $74,000 to Oceanside at the time. The differences across two years would have meant $2.6 million more for Oceanside.

Was It the Treasurer’s Fault?

So while the exact losses are difficult to pinpoint, it is clear Oceanside did lose out on millions of dollars due to legal callable investments, and it happened on Roy’s watch with his signoff.

“There’s an element of truth in it, for sure,” said Lisa Washburn, managing director for the Massachusetts firm Municipal Market Analytics, who formerly worked at Moody’s Investors Service. “If you have no callable securities, then their investment earnings would have held up better … and reduced investment earnings means they need to make that up with something else.”

But Washburn said the public should temper its outrage, because callables do not pose the same level of risk as other financial products that have gotten governments into trouble, like capital appreciation bonds, pension obligation bonds or interest rate swaps.

“There are so many worse things,” she said. “All of that stuff is much more costly than potentially having to reinvest at the current market rates… I’m a muni bond analyst and my bonds get called all the time.”

Ashly is a freelance investigative reporter. She formerly worked as a staff reporter for Voice of San Diego.

Tigist Layne is Voice of San Diego's north county reporter. Contact her directly at

Join the Conversation

1 Comment

  1. Sounds like Hodges has a personal vendetta against Roy. While the City got a lower rate of return in a falling interest rate environment, it also made more money in previous years during stable interest rates ( by being in callable bonds).
    In hindsight anyone could make this argument. If fact you could make the same argument AGAINST Hodges new policy – had he kept City funds in liquid investments, the City could now be investing at much higher rates ( in a rising rate environment) — does that mean the City lost money? Of course not , it simply could have earned more elsewhere that it did under BOTH Hodges and Roy’s strategies.

Leave a comment
We expect all commenters to be constructive and civil. We reserve the right to delete comments without explanation. You are welcome to flag comments to us. You are welcome to submit an opinion piece for our editors to review.

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.