A culture of duplicity remains within the top ranks of the Florida State Board of Administration, the agency that oversees billions of dollars of investments for the state pension and other government agencies. The seeds were sown in the Wall Street furor, when the SBA's top managers abandoned prudence and due diligence for the lure of the fast buck. But an investigation by the St. Petersburg Times has found that despite a change of executive director, the agency's top managers, throughout the current market downturn, have repeatedly misled clients and investors — even when lower-ranking employees balked at the misinformation.
In the private sector, such deception could qualify as fraud. But the SBA trustees, after nearly 18 months of ineffective hand-wringing, have failed to respond. The trustees — Gov. Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum — need to demand more transparency from the agency or insist on more changes within the top staff. They also need to engage in a broader discussion about governance and creating a better way to oversee billions in public investments.
The roots of this deception trace to December 2006. Over the next year, financial advisers from three Wall Street firms persuaded the SBA staff to buy billions of dollars of risky securities. By the summer of 2007 — as the subprime debacle unfurled — SBA staff began to mislead pension plan members, SBA's appointed advisers and local government investors about the mounting losses.
The scope and breadth of the deception, which Times reporters Sydney P. Freedberg and Connie Humburg detailed Sunday, is discouraging. Consider that in June 2007, at an advisory council meeting, SBA senior investment officer Rob Smith told the panel the SBA had "zero" exposure to the subprime lenders. Then-executive director Coleman Stipanovich piped up, "We dodged that bullet." In fact, that very day the SBA was holding $929 million of Countrywide securities and $284.3 million of Washington Mutual, two large subprime players.
Throughout the fall, Stipanovich was still trumpeting SBA's success publicly while junior staff members were hitting alarms. When a November 2007 article by Bloomberg News detailed the extent of the SBA's exposure to risky securities, the agency downplayed the report but couldn't stem the withdrawals from the Local Government Investment Pool. Some investors, local governments, said the SBA staff had avoided their questions. SBA trustees, fearful of a complete run on the bank, froze the pool hoping it would rebound. Since partially reopened, the pool does have additional disclosures on investments.
But the Times also uncovered communications that in August and as recently as February, the agency was disseminating incomplete information in response to inquiries about holdings in the pension and other funds. The culture — despite all the scrutiny and the October appointment of new executive director Ash Williams — has not entirely changed.
The SBA's governance may be part of the problem, because elected politicians have a conflict between doing what is politically expedient and what is in the best interest of the investors. Netting higher returns can reduce pension costs and lower the burden on taxpayers. But trustees also have a fiduciary responsibility to act in the best interest of investors or pensioners, which can mean more conservative holdings. Other states have embraced oversight boards that have a blend of membership that includes financial professionals and retired public employees.
It's not yet clear what sent the SBA down the path of obstruction. Even Sink complained last year that the agency wasn't forthright with her office. But it's clear that Sink, along with Crist and McCollum, have yet to find the entire answer. They need to make it a priority.