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An investment plan backed by the outgoing administration of Mayor Regis McLaughlin would not comply with state law governing city finances, according to a report from an attorney overseeing McKeesport's recent deal with the sewerage authority.

However, a memo from bond counsel Ron Brown does recommend that UBS Financial Services --- the firm suggested by McLaughlin and City Administrator Dennis Pittman --- should be allowed to compete for the chance to invest the money.

At last night's council workshop meeting, Pittman and incoming mayor Mike Cherepko again argued over plans to invest $14 million in proceeds from the sewerage authority's early payment of debts owed to the city. But the discussion was not heated, unlike the angry public dispute that Cherepko and Pittman had at a budget hearing last month.

The money is currently being held in an escrow account at M&T Bank of Buffalo, N.Y. It is not earning interest.

Councilman Dale McCall suggested that if a competitive bidding process is going to take several months, the money should be shifted into a short-term investment such as a savings account immediately.

"How long is it going to take?" McCall said. "I think we need to make this money work for us right now. Let's move it into an interest bearing account until the investment plan is in place."

. . .
McLaughlin and Pittman have recommended that the city accept a proposal from UBS that they say would earn taxpayers about 2 percent interest through 2015, helping to balance future budgets and wiping out $10 million in debt by 2016.

But in a memo yesterday to McLaughlin and city council, Brown, an attorney with Grogan & Graffam P.C. of Pittsburgh, said the UBS proposal violates the state's Third-Class City Code because about $12.9 million would be invested in securities issued by the Federal National Mortgage Association and the Federal Home Loan Bank.

Under Section 1804.1 of the Third-Class City Code, municipalities may invest public money only in U.S. Treasury bills and bonds, savings accounts or certificates of deposit (CDs) backed by the Federal Deposit Insurance Corp., or in bonds issued by local and state government agencies that are backed by the "full faith and credit" of those government agencies.

Although the FNMA --- commonly known as "Fannie Mae" --- and the FHLB are both government-sponsored entities, they are not arms of the federal government. Indeed, "Fannie Mae" has been sharply criticized for its alleged role in the subprime mortgage crisis that began in 2007.

. . .

"While these investments may be attractive as to their possible rate of return, neither the Federal National Mortgage Association securities nor the Federal Home Loan Bank securities are backed by the full faith and credit of the United States Government," Brown wrote.

Brown recommended that city council accept a proposal from The PFM Group of Philadelphia to obtain competitive bids on U.S. Treasury-backed securities, but added that UBS "should be afforded the same opportunity as other securities providers" to bid on the contract.

McKeesport is a so-called "home rule" community. City Controller Ray Malinchak questioned why McKeesport is being held to the provisions of the state Third-Class City Code instead of its own home-rule charter.

"There are certain areas where Third-Class City Code takes precedence over the Home Rule Charter, and investment of city funds is one of them," said city solicitor Craig Alexander of Bruce Dice and Associates.

. . .

Pittman and McLaughlin have been critical of council for --- they say --- taking control of the escrow account out of the hands of the administration, and putting it into the hands of The PFM Group. PFM charged the city $12,500 to provide a legal and financial analysis of the city's investment options.

The mayor and city administrator say that they have been blocked from moving funds out of the escrow account until the city pays $12,500 to PFM.

"If their advice is to 'buy securities and CDs,' we could have done that," Pittman said Tuesday. "We don't need PFM to do that." He called it "a public disgrace to pay a fee just for that advice."

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But Cherepko called the administration's objections "ridiculous," adding that "this procedure should not be held up any longer."

If McLaughlin and Pittman had signed paperwork provided by PFM, the money would already have been put into an interest-bearing account, Cherepko said. Pittman has countered that the required paperwork wasn't supplied to the city until Nov. 4.

Council is expected to vote tonight on a plan to release $151,482 from the escrow account to balance the 2011 budget. The meeting will be held at 7 p.m. in council chambers at the public safety building (the old Municipal Building), 201 Lysle Blvd. at Market Street.

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