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St. Petersburg officials had lax oversight before city lost $15.8 million

ST. PETERSBURG — The city lost roughly $15.8 million in the securities market, and officials believe more than just the tanking economy is to blame.

They have hired two outside law firms to determine whether the city has cause to sue Wachovia Bank. They say Wachovia violated city investment policies and gambled taxpayer dollars in high-risk transactions — without the consent of anyone in City Hall.

But a St. Petersburg Times analysis found that long before the market's downward spiral, when profits were still rolling in, city officials routinely ignored oversight procedures in place to protect taxpayers' investments.

As a result, Wachovia invested public dollars in highly complex deals that went unchecked.

"There's a lot of blame to go around," said council member Karl Nurse. "There was a time when things were on autopilot and we got bitten."

For years, Mayor Rick Baker's staff neglected to provide the City Council with regular written financial reports as required by the city's investment policy.

Last year, the City Council and the city's Investment Oversight Committee, groups designed to check and balance City Hall's authority, were left in the dark about some financial transactions until after decisions were made.

And although nearly $200 million was at stake, the city's chief financial officer said he paid little attention to Wachovia's dealings because he trusted the company to do its job.

"I don't have time to make sure they are doing everything they are supposed to do," said Jeff Spies, the city's finance director. "It's just an impossible task."

Securities lending

At any given time, the city invests roughly $400 million, or the bulk of its $594 million operating budget. Until last year, half of the city's portfolio was vulnerable to the securities lending market.

In securities lending, the city temporarily lends its assets to others and receives cash as collateral, which it then reinvests as a way to make money. It can be risky if the city makes a bad investment and loses the collateral, which it would then have to repay.

Securities lending can be a lucrative investment tool, if done correctly, said Jose Gabilondo, a law professor at Florida International University who specializes in government finance.

"It's not for novices," he said. "Cities are always vulnerable because the financial directors of cities are not as savvy as Wall Street types."

In 2000, before the city teamed up with Wachovia, outside financial experts warned the city about the potential risks. The firm William R. Hough & Co. suggested the city stay away from securities lending altogether.

City officials ignored the advice.

Securities lending was approved in April 2001 by a newly elected City Council and mayor who had little knowledge of the discussions that led to the deal.

Then, for six years, securities lending rarely came up again.

Spies received daily and monthly reports on the city's securities transactions, but he said he did not share the information with the mayor, council or investment committee.

The city's investment policy requires staff to compile detailed quarterly finance reports. Spies wrote the reports, mostly excluding any information on securities lending, but provided them only to Baker and a few administrators.

The statements indicated that the transactions were not short term, but much riskier long-term investments, some spanning one or two years.

Spies said he wasn't concerned because St. Petersburg's investment policy guaranteed the city could get out of an investment at any time and Wachovia would cover its losses. Spies said he didn't think to verify whether Wachovia was abiding by the city's detailed investment policy.

Instead, he noted the city's profits on his computer each month.

City officials were originally promised an annual return of $160,000. The securities market turned out to be less lucrative than they thought. From 2002 to 2008, the city earned a total of $993,056 from securities lending.

Spies said he learned Wachovia was violating the city's investment policy by engaging in riskier deals in early 2008 after an agent called to discuss the increasingly bleak financial market.

Wachovia had a motive to invest in the high-earning deals because the bank gets 40 percent of the city's profits.

Wachovia insists St. Petersburg was informed of its dealings.

"Most of our clients have on-line access to their accounts and receive daily statements, as well as monthly reports/statements and interim updates on specific holdings as appropriate," company spokeswoman Laura Fay wrote in an e-mail.

The city eventually asked Wachovia to sell $61.9 million of its investments in September, incurring an $800,000 loss. Its two most complicated transactions were left open: $15 million ensnared in Lehman Brothers' bankruptcy and $15 million tied to a floundering CitiBank.

Baker's staff sent a memo about the deals to the council in September. Emergency investment committee meetings were called.

Most council members were not concerned that they learned of the deals after the fact.

"None of us were sitting in the room when the decisions were made," said council member Jamie Bennett, who served as chair of the city's budget and investment committees during the securities crisis. "But we are very thankful that the mayor and the administration got us out of that as rapidly as they did. They saved us a lot of money."

Added council Chairman Jeff Danner: "I never felt we were being kept in the dark. For a while you couldn't walk down the halls without someone giving you a financial update."

Spies was dubbed a hero for pulling the plug. In 2008, he received a $2,000 bonus on top of his $127,000 annual salary.

The $15 million Lehman loss likely will be official when the deal matures next week. The Citibank deal matures in May.

Spies said that he thinks the federal government won't allow Citibank to fail and that the city will be able to recover that $15 million.

Review of city policy

This isn't the first time Spies has been at the center of a financial quagmire.

Spies nearly lost $40 million in another high-risk financial investment in 1994. He said the market eventually recovered and the city was saved from any losses.

Spies wasn't finance director at the time, but he was in charge of the city's investments. The city consequently scaled back on that investing strategy, called derivatives.

In 2005, a blistering audit discovered the city's finance department made thousands of mistakes and overestimated available cash by almost $2 million. Spies' predecessor was pushed out during that crisis and Spies became the city's finance director, said Deputy Mayor Tish Elston.

Last year, Baker hired Wachovia's independent auditors to review the city's investment policy. KPMG recommended that the city revise its investment policy so that its assets could be liquidated more easily. It wasn't until this month, 14 months later, that the administration had the investment committee sign off on the recommendations. The policy changes still haven't been run by the City Council.

"They don't really change the way we are operating so there was really nothing to talk to council about," Elston said. "But council is fully informed. The fact is, I have personally updated them every step of the way."

Baker said Spies acted quickly to ensure the city pulled out of securities lending before the market declined further and promised to verify future financial transactions.

"He acknowledges that he should have done that more," Baker said.

Dozens of cities lost money on Lehman, Baker noted.

Still, changes are in the works. The administration has pledged to abide by its investment policy and provide the council with quarterly financial reports.

Former council member Kathleen Ford has made the city's oversight lapse one of the cornerstones of her campaign for mayor. Ford, who joined the council in the wake of the derivatives crisis, called for an independent review of Spies' investments in December.

"In these challenging economic times, one would think and hope that elected officials would be paying close attention to the public purse," she said. "Clearly that didn't occur here."

Cristina Silva can be reached at (727) 893-8846 or

St. Petersburg officials had lax oversight before city lost $15.8 million 03/20/09 [Last modified: Saturday, March 21, 2009 12:13am]
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