City development fund takes $13 million hit

Investment income no longer available to subsidize projects

Stock market losses have slashed the city's "Hilton fund" by $13 million in three years -- dropping the initial $40.5 million investment to $27.4 million as of Sept. 3, city officials say.

The fund came from the proceeds of a 1999 sale of the city's interest in the downtown Hilton Hotel, 1001 Marquette Ave. The Minneapolis Community Development Agency had used the fund's investment income to support development projects, said Patrick Born, the city's finance director. To date, it has generated roughly $1 million in two-plus years.

Because the Hilton fund's principal has fallen, city officials decided to reinvest and not spend any more investment income until a market recovery, Born said.

"We have been careful to construct a budget for them (MCDA) so we don't need to draw on this fund," he said. "While we are not happy about where we are, we are in a position to be patient and wait for the market to improve over the next five to 10 years."

The city's involvement with the Hilton Hotel dates back to the Minneapolis Convention Center's construction in the late 1980s, said Jack Kryst, MCDA manager of project planning and finance. The city wanted a first-class hotel to support the Convention Center -- and had to invest in one to make it happen.

"Suffice it to say the city got involved and retained an interest in the hotel, which paid handsomely over the years," Kryst said.

In 1999, the hotel's owners purchased the city's interest for $40.5 million.

Steve Cramer, then the MCDA's executive director, recommended that the City Council invest the Hilton money "to maximize investment earnings consistent with protecting the principal," according to a July 1999 memo. He recommended using the investment earnings to support MCDA's community development program, and using the principal as collateral for housing programs.

Fund income would offset declines in two other sources of city development money -- tax-increment financing and federal aid, he said.

The city cannot invest money in the stock market, but the MCDA can, Born said. The MCDA operates under a different set of state regulations. The MCDA held an investment advisor competition and selected Galliard Capital Management Inc., a subsidiary of Wells Fargo, Born said.

The MCDA invested 80 percent of the Hilton money in stocks and 20 percent in bonds, Born said. It got in just as the stock market had hit its peak in March 2000.

The city bought three mutual funds: the Wells Fargo Stable Income Fund, the Wells Fargo Index Fund (which mimics the S&P 500) and the Wells Fargo Large Company Growth Fund.