The state's management of an investment fund has faded from the front pages in the five months since some local governments struggled to pay bills after the account was temporarily shut down amid concerns about its troubled investments. But there has been plenty going on behind the scenes, and enough troubling questions have been raised that federal and state regulators should keep poking around. Taxpayer dollars and the credibility of the state's investment practices are at stake.
The State Board of Administration trustees — Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink — temporarily shut down the local government investment pool in December after its assets plummeted. The run on the pool was triggered by revelations about downgraded investments indirectly tied to the subprime mortgage crisis, and the fund reopened after some 14 percent of its assets were segregated from the healthier investments. It soon became clear that the SBA managers did not follow their guidelines for disclosing troubled investments, and the executive director of the board resigned. But that's not the end of the story.
When the fund's problems first surfaced, state officials said there was no indication anyone acted improperly or that managers of the investment pool strayed from their guidelines. Now that assumption appears to have been premature:
• The U.S. Securities and Exchange Commission has requested a mountain of state records dealing with SBA's investment guidelines, due diligence in purchasing specific securities (including those troubled investments now walled off in the local government investment pool) and communication with brokers. The request was first disclosed last week by the Bond Buyer.
• A performance audit by outside accountants hired by the state questioned whether three state funds, including the local government investment pool, met the requirements to purchase certain securities, including some that were downgraded. The state disagrees.
• Former Comptroller Bob Milligan, the interim executive director of the SBA, has hired an outside law firm to determine whether the state should sue the brokers who sold investment-grade securities that were quickly downgraded after the state purchased them. Yet Sink and McCollum oddly refused to go along with Crist's prudent suggestion Tuesday to block two of those investment firms, Lehman Brothers and J.P. Morgan Chase, from doing other work for the SBA until the investigations are complete.
The lack of transparency and failure to follow state procedures for responding when investments are downgraded has been well-documented in recent months. Now there are two broader themes still to be pursued.
Looking backward: Did the SBA or the brokers who sold the downgraded investments do anything wrong?
Looking forward: Does Florida need to change the way it oversees the investment of billions of dollars in the state retirement fund, the local government investment pool and other accounts? With only three members (the governor, attorney general and chief financial officer), the SBA trustees are a significantly smaller panel than similar boards in other large states that oversee state retirement funds and other public investments. And in an era where financial transactions have become increasingly complex, none of those three trustees is required to have investment experience.
Expansion of the State Board of Administration trustees is a constitutional question that requires further thought. Sink, for example, recommends amending the state Constitution to add two appointed financial professionals to the SBA trustees. But who can or should be held accountable for the local government investment pool's problems requires more immediate investigation — and state and federal regulators should keep at it until there is a clear answer.