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State Audit Widens To Pension Fund

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By CATHERINE DOLINSKI, The Tampa Tribune

Published: December 13, 2007

TALLAHASSEE - Auditors investigating last month's run on an investment fund for local governments need to scrutinize Florida's $137 billion pension fund as well, the fund's top administrator said Wednesday.

Retirees have no cause for panic, said Department of Management Services Secretary Linda South, who administers the Florida Retirement System, but the small percentage of downgraded assets in that mammoth portfolio demands a closer look.

At the behest of state Chief Financial Officer Alex Sink, the State Board of Administration's audit committee met Wednesday to map out a plan for probing how and why downgraded mortgage-backed securities wound up in the local government pool's investment portfolio, which the SBA oversees. Revelations about the risky investments sparked panic last month among investors, who withdrew $10 billion from the now-$12.2 billion fund over the course of two weeks.

"Who knew what when, and when was it reported?" asked Melinda Miguel, chief inspector general for Gov. Charlie Crist who chaired the audit committee.

Among other things, the SBA's auditors will investigate the ratings of downgraded assets at the time of their purchase by the state, whether fund managers violated SBA investment policy, whether that policy had changed and whether anyone exerted undue pressure to influence investments.

South appeared at Wednesday's meeting to ask the auditors to extend their investigation to the Florida Retirement System's portfolio of 14,000 securities.

State law guarantees pension payments to retirees, regardless of investment results. South said she learned about downgraded assets in the pension portfolio late last week. It is not unusual, she said, for such assets to appear in large, long-term and diverse funds; in the case of the pension fund, those assets make up less than 1 percent of the total. Had the government investment pool not experienced last month's crisis, she said, "we might not be having this conversation."

"My primary concern is to ensure that we have continued liquidity we need to make the 990,000 pension payments every month that we do to the people of Florida who dedicated their careers to serving the fine people of Florida," she said. "I have no concerns, and no indications that there is a liquidity issue; I, however, am not interested in relying on how I feel. I need to know."

South's concerns about the pension fund's holdings echoed those of Sink, who asked the committee in a letter to expand their investigation to other state funds and wants the results of the audit by the time the SBA hires a permanent executive director. The board appointed former CFO Bob Milligan this week as interim director, replacing former director Coleman Stipanovich who resigned after the run on the local government investment fund.

News of the pension fund audit was welcomed by the Florida chapter of the American Federation of State, County and Municipal Employees, which so far has reserved judgment about the health of the pension fund's investments.

"We haven't panicked; we don't have enough information for a panic," said AFSCME lobbyist Doug Martin. His union, he said, has told concerned members that the pension fund "is OK so far."

Martin said he hopes the auditors look closely at political pressures that may have resulted in fund managers making risky investments. He noted that, as was reported recently on Forbes.com, Lehman Brothers sold much of the risky commercial paper to Florida, and also employs former Gov. Jeb Bush as a consultant. As governor, Bush was a sitting trustee of the SBA.

"Did the SBA go political? That's a very serious question," Martin said.

Lehman Brothers did not respond to a call seeking comment.

While the SBA auditors launch their probe, lawmakers will look closely at the SBA's investment practices, too. Rep. Carl Domino, alternating chair of the Joint Legislative Auditing Committee, said the panel will hold a hearing in January about the circumstances that led to the run on the local government investment fund.

"We want to try to understand what went on, and see what policy-level changes are appropriate," said Domino, R-Jupiter, an investment manager by trade. "Is there legislation that would have helped this situation? It's not clear there was. It might have just been a case of bad investments."

Reporter Catherine Dolinski can be reached at (850) 222-8382 or cdolinski@tampatrib.com.

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