TBO.com - TBO is Tampa Bay Online

Closer Oversight Sought For Fund

ADVERTISEMENT

By BAIRD HELGESON, The Tampa Tribune

Published: December 8, 2007

TAMPA - Crisis is not new to the agency that oversees Florida's multibillion-dollar investments of pensions and other large taxpayer funds.

In recent weeks, local governments that invested more than $25 billion in a state investment pool got spooked by news that the State Board of Administration used some of their money to back potentially risky mortgages.
Local governments essentially made a run on the bank and yanked $10 billion from the account in two weeks before Gov. Charlie Crist and other state leaders temporarily halted withdrawals to prevent the fund from going bankrupt.

The agency's director, Coleman Stipanovich, abruptly announced his resignation amid concerns about the investments and poor communication with state leaders and local governments that had money in the fund.

It was the second time in the past five years that uncertainty over investments and poor communication swamped the agency, renewing calls for better accountability.

Wayne Blanton, executive director of the Florida School Board Association, said the agency went beyond what he considered acceptable risk.

"They've got to have better parameters - starting immediately," he said.

Enron Losses Fund's 1st Hit

In 2002, Gov. Jeb Bush was criticized when the agency lost about $334 million by using state retirement money to buy Enron stock as its value plunged. Bush had a long friendship with Enron's founder, Ken Lay, and had profited from investing in at least one of its subsidiaries. Enron and its related companies were big contributors to Bush and the Florida Republican Party.

Unions blasted Bush for appearing to put political friendships ahead of employees' pensions. Florida lost more money in Enron's collapse than any other institutional investor.

As the debacle unfolded, state leaders were furious that the head of the agency, Tom Herndon, couldn't say how much of the $100 billion pension fund a state-hired investment firm dumped into Enron stock.

Herndon retired in the midst of the crisis, saying the losses didn't play into his decision.

The agency then named second-in-command Stipanovich to the top job, pledging more vigorous oversight. He is the brother of lobbyist and Republican strategist J.M. "Mac" Stipanovich.

The 25-year-old pool is essentially a money market account in which local governments can invest, but still have easy access to their money for salaries, bond debt or other needs. The advantage for investors usually is lower fees than Wall Street firms.

These incidents highlight why some municipal finance experts advise that governments stay out of the complicated investment schemes that states like Florida have bought into.

They said that the complex investments can be lucrative, but are risky. Investing forces state leaders without nuanced financial expertise to decide what areas of the economy will thrive and which will falter, said Mike LaFaive, a municipal financing expert at the Mackinac Center for Public Policy.

"Even the best minds in Wall Street can't do better than the S&P 500," LaFaive said of the collection of stocks chosen to reflect the economy.

While the investment can yield healthy returns - Florida's investors got returns averaging around 5.3 percent this year - government leaders could be alarmed by the detail of the investments.

In Florida, these include structured investment vehicles, which generally include some subprime mortgages. These mostly offshore investments are at least partially to blame for the large losses at some of the world's largest lending institutions.

As the market tanked, bankers began selling them to officials who oversee pools of taxpayer funds. Florida's $25 billion pool, the largest in the United States, has invested $2 billion in structured investment vehicles and other subprime-tainted debt, according to Bloomberg News service.

Part of the problem is that state officials take risks with money that isn't theirs, LaFaive said. Usually their pay isn't correlated to the performance of the investments they manage.

"Even with governmental checks and balances, there is an inherit tendency to take risks that they wouldn't otherwise take with their own money," LaFaive said.

For instance, Orange County, Calif., declared bankruptcy in 1994 after the county treasurer lost $1.7 billion investing in risky Wall Street securities.

Investment Comfort Level

Florida Sen. Jeremy Ring, D-Margate, said those responsible for watching the fund might not have paid enough attention during the past six months as the mortgage crisis worsened.

"It could be possible that everyone got comfortable with the performance and took their eye off the ball," said Ring, who sits on the Senate Fiscal Policy and Calendar Committee.

State Chief Financial Officer Alex Sink, who serves on the three-member board that oversees the agency with Crist and Attorney General Bill McCollum, said a good share of the blame falls to the lack of information that came out of Stipanovich's office as the investors began pulling their money.

The agency hired BlackRock, a New York investment company, to guide the shaky investments and calm investors' concerns for the next three months.

The state chose BlackRock because it was one of the last big investment firms that didn't already have a tie with the state's investment pool, Sink said.

An ongoing feud between the state and local governments might have worsened the statewide investment crisis, experts said. City, county and school district officials are upset with state leaders who say they need to better control spending and for pushing a property-tax amendment that would mean less money for local communities.

News that some of the pool could be invested in shaky subprime mortgages caused local governments to panic, even though little or no actual money was lost.

"You can certainly see that once someone got spooked, the others surely would, too," said Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness. "It would explain why the reaction was so eyebrow-raising."

For state leaders, the key to keeping the fund solvent might come down to their ability to repair fractured relations with local governments.

Said Chris Doolin, who represents consortiums of small schools districts and county commissions: "Some cities and counties, as far as coming back into the fold, may be saying, 'Why should I step back up when all they have been doing is criticizing us?'"

Reporters Marilyn Brown and Catherine Dolinski contributed to this story. Reporter Baird Helgeson can be reached at bhelgeson @tampatrib.com or (813) 259-7668.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT