We reported Friday on Idaho closing out two distressed investments that ended up costing the state nearly $9 million in all. Here’s a little more background on the subject and how we reported it.
The investments involved asset-backed securities that tanked amid the financial crisis of the last decade. That type of asset -- home mortgages, for example – was widely responsible for the financial crisis when overvalued investments crashed to earth, along with the financial companies that oversold them to unsuspecting investors.
Investment losses happen. A $9 million hit is nothing to sneeze it, but to put things in perspective, the state manages about $1.7 billion in investments of state funds that are not immediately needed or allocated for operations. The state manages about the same amount in funds from local governments around the state and their related entities. So the loss was about half a percent of the total state fund, and that’s how much each participating agency lost.
It was not the loss itself that the Legislative Audit office cited in a critical January 2014 finding. Rather, auditors faulted the state Treasurer for shifting the loss from one fund to another, and not retiring it to boot. (Read the finding, and the treasurer’s response, on pp 14-21 of this report.)
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This happened in mid-2009. Because of the underwater investments, the local government fund was facing a ratings downgrade from Standard & Poor’s. A higher rating means less risk, making an investment safer and more attractive.
Rather than get hit with the downgrade, the Treasurer’s office moved the liability to the state investment portfolio, which isn’t subject to the same ratings. (Nor, for that matter, does it have to earn interest.) That put the state on the hook for the loss instead of local governments. Participation in the local government pool is voluntary – participants can pull out if they wish. The state fund is not voluntary.
The treasurer’s office transferred what was, in accounting terms, an unrealized loss – meaning it was still valuing the securities at their original cost, not what they were worth at the time of the transfer. That’s the money quote (so to speak) from the auditor’s report: “The transfer of assets at original cost instead of fair market value does not provide appropriate consideration for the risk to which the (state investment) pool was exposed and eliminates any investment risk that the (local government pool) should have borne had the assets remained in their respective pools or been sold through an arm’s length transaction.”
Holding onto the loss position turned out not to be a bad move: the investment recovered in value. At the end of the state’s fiscal year in June 2013 , the loss weighed in at $17.4 million. What the state forfeited in the close-out last month was a little under $8.9 million - $866,000 in reserve funds, and the remainder parceled out among state agencies and the general fund.
Protesting the criticism, the treasurer’s office said it acted to protect the local government fund’s credit rating. It said it was being second-guessed after the fact because an investment went south. The auditors, responding, said they would have called out the transfer as inappropriate even if it had involved an investment gain.
All this led to tighter controls on investment procedures and policies, and the creation, by the Legislature in 2014, of an Investment Advisory Board to help the Treasurer’s office with investing. Meeting in April, the board, comprising state Treasurer Ron Crane and five governor-appointed investment professionals, moved to liquidate the underperforming investments, which had peaked. Notice of the pending distribution of loss to agencies in the state investment pool came last month, and we chose to write a story on the close-out.
The treasurer’s office staff was helpful in explaining and providing documentation on how the loss was distributed – up to a point. When we tried to speak with Treasure Crane, we got a callback from Mike Tracy, a PR consultant who has a $4,000 a month retainer with the Treasurer’s office.
After an initial conversation, Tracy told us Crane would not be available for comment, and when we protested, went into a lengthy harangue about the auditors and how the media coverage of the issue had been “unfair,” even “dishonest.” This tirade continued even after he was reminded that the conversation was all on the record.
“You’ve got everything you need to write your story,” Tracy said.
The next question for an office that handles the state’s investments might be why the state Treasurer, who is elected statewide and presides over an office of about 26 people, has a pricey and politically connected consultant as his gatekeeper.