Investors big and small have been battered in this financial meltdown, so it's no surprise that the city of St. Petersburg has seen one of its major investment instruments lose money. What is disturbing is that the city lost $15.8 million at a time when city administrators were failing to follow safeguards aimed at ensuring sound financial oversight. City officials have made changes since then. Now they need to ensure they follow through.
As St. Petersburg Times staff writer Cristina Silva reported, city officials ignored oversight procedures in recent years even as the city was investing in a financial instrument a previous consultant had warned carried significant risk. Roughly half of the $400 million that the city had invested was in the securities lending market — a complex series of transactions in which the city lends some of its holdings in exchange for cash that it then can reinvest. Last year, when an outside auditor warned the city that some of its holdings were too risky, Mayor Rick Baker and his staff canceled nearly $62 million worth of securities lending deals, losing $800,000. Another $15 million remains tied to the floundering Citibank, and another $15 million is ensnared in the Lehman Brothers' bankruptcy. The Lehman Brothers investment is assumed lost. The full council was informed of the decision after the fact.
Now the city is contemplating suing Wachovia Bank, which ran the city's securities lending account, saying it may have violated city investment policies. But the city's finance director, Jeff Spies, received daily and monthly reports on the city's securities transactions. He did not he share the information with the mayor, City Council or the citizen Investment Oversight Committee. And rarely did his required quarterly financial reports mention anything about the securities lending account — despite the fact that its annual returns fell below the expected $160,000. In fact, Spies claims he did not have time to oversee Wachovia's dealings. That would seem to be a critical part of his job.
St. Petersburg expects to end the year roughly even because of gains in the balance of its portfolio, and it has made responsible changes. Baker and his staff have initiated new oversight steps, including more robust involvement by the Investment Oversight Committee and an end to the securities lending program. The finance director now reports directly to a deputy mayor. And Baker has moved nearly all the city's assets to government-backed instruments to ride out the current instability in the market.
Local governments can't expect to be investment gurus who manage their own finances on a daily basis. That's why investment firms are hired. But the city, like any client, is responsible for making sure the investment firm follows the guidelines that have been established. The mayor and the council should deliver nothing less in the future.