Idaho books $8 million loss on distressed investment cited in critical audit

The state of Idaho has exited two investment funds dating from the 2008-2010 financial crisis at a cost to state agencies of nearly $9 million.

The loss does not affect operating agency budgets but could affect future spending. The loss to the state Department of Transportation, for example, is more than $600,000.

An outside investment advisory board, created last year to advise and assist the state treasurer on investments, voted to close out the money-losers at a meeting in April. The overall loss was officially recorded in June, before the end of the state’s fiscal year.

To defray the loss without hurting the fund, the advisory board voted to seek approval to draw on $21.5 million Idaho received in February as part of a $1.4 billion national settlement between investors and Standard & Poor’s over the ratings agency’s role in the financial crisis. State Treasurer Ron Crane received no response from legislative leaders regarding the request, according to draft minutes from the advisory board’s April meeting, so the loss was assessed to the state agencies that participate in the funds.

Crane, through a spokesman, declined to discuss the closeout and its impact.

An $8 million loss, plus $866,000 that had been set aside as a reserve, is roughly half what the state faced 18 months ago when a legislative audit criticized the treasurer’s decision to transfer what was then a $17 million liability from one investment portfolio to another. The distressed investments in asset-backed securities, a type of investment widely implicated in the overall financial crisis, have recovered since the January 2014 audit and peaked in value this spring.

What brought criticism from the state auditors was not the investment loss itself but how the treasurer’s office handled it. The auditors said the office transferred the loss arbitrarily to protect one fund over another. The office kept the liability on the state’s books as an unrealized loss and moved it to a portfolio of unallocated state agency funds, known as the IDLE fund, from a pool of state-managed local government funds. That effectively held harmless the local government investments at the expense of state agencies.

At the time, Crane and his office defended the move on the grounds that it was done to forestall a threatened investment downgrade by S&P of the local government fund. The IDLE portfolio is not similarly subject to ratings.

The treasurer’s office said its decision was criticized only in hindsight because it involved an investment loss. Legislative auditors countered that they would have challenged the transfer even if it had booked investment gains.

Idaho’s treasurer manages about $3.5 billion in investments between the two portfolios, divided roughly 50-50. The state manages the money flowing in and out of state agencies so losses or gains do not affect current operations. But those gains or losses can have an impact on future spending.

The $8 million state loss was spread among 62 agency accounts, representing an average 0.5 percent loss to each. The treasurer’s website, which lists month-to-month investment returns, shows that the IDLE fund has averaged monthly returns of approximately 0.4 percent since January 2014.

Besides the Transportation Department, which incurred a loss of $621,406, other individual agencies that took big-dollar hits were the public schools, at $865,541, and the Department of Administration, at $537,673. The overall hit to the general fund was $1,849,989.

Though protested by Crane and his office, the audit’s findings did result in a tightening of investment procedures and policies, and the creation of the Investment Advisory board, with Crane and five outside investment professionals appointed by the governor.

The subject remains a sore one for the office. A request to interview Crane was referred by his office to Mike Tracy, a public consultant retained by the 26-person office.

Tracy said Crane would not be available for questions and complained that media coverage had been “unfair” and “dishonest.”

The audit findings and the treasurer’s response are in the state’s Internal Control report for fiscal year 2013, located here (see pp. 14-21).

This story was originally published July 23, 2015 at 8:02 PM with the headline "Idaho books $8 million loss on distressed investment cited in critical audit."