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Politics

State dissects run on fund

An audit committee begins to look into how and why risky investments were made.

By STEVE BOUSQUET, Tallahassee Bureau Chief
Published December 13, 2007

TALLAHASSEE -- Questions flew fast and furious Wednesday as state financial experts began probing the root causes of a raid on a state-managed investment fund by worried cities, counties, schools and universities.

Prompted by Chief Financial Officer Alex Sink, the three-member audit committee of the State Board of Administration had one overarching question: Who steered the SBA into making risky investments in mortgage-backed securities that in some cases defaulted?

Those investments put billions of taxpayer dollars at risk and led to a collapse of investor confidence in the Local Government Investment Pool, used as a money market account by governments. That triggered a run of more than $15-billion and shrank the fund to a third of its former size.

Frantic state officials quickly hired an outside financial adviser, imposed a temporary freeze on withdrawals that briefly prevented investors from getting their money, and long-time SBA executive director Coleman Stipanovich resigned his $182,000-a-year job.

"Our charge here is to find ways for this to not happen again," said Doug Darling, an audit committee member who runs Sink's auditing division. "We're trying to build a picture here."

Darling urged the SBA's internal auditors to look for e-mails from brokers steering money managers into making investment decisions that violated the state's own guidelines.

The review that began Wednesday is both a search for what went wrong and a message to the fund's investors and to Wall Street that Florida is not taking the problem lightly.

Among the panel's many questions directed at the SBA's internal auditors: Who sold the SBA those downgraded securities, when and why? Did that violate the agency's own policies? What other SBA-managed funds made questionable investments?

The latter question led the audit committee to expand its review to include a portion of the state pension fund's cash assets, which also hold downgraded securities. Nearly 1-million retired public employees rely on the stability of the pension fund's portfolio.

Linda South, the state official who acts as the $137-billion pension fund plan administrator, voiced strong confidence in the SBA's stability, and the state's new financial adviser, BlackRock, has praised the fund's $19-billion surplus and "outstanding" track record of high returns.

"We have a pension fund that is the envy of corporations worldwide," said South, who said there was "no indication at all" that the pension fund would have trouble making its monthly payments.

But South agreed with Darling that the pension fund's portfolio required a closer look-see.

"If the pension fund is fully funded but we have securities that have been downgraded, then the actuarial valuation is going to be lower than if we didn't have those bad investments," Darling said. "So we have to look at that."

Besides Darling, the other audit committee members are Melinda Miguel, Gov. Charlie Crist's inspector general, and Kimberly Ferrell, chief auditor of the Medicaid Fraud Control Unit, which is under Attorney General Bill McCollum.

Crist, Sink and McCollum are the SBA's three trustees with fiduciary responsibility for protecting the state's investments.

Steve Bousquet can be reached at bousquet@sptimes.com or (850) 224-7263.

[Last modified December 12, 2007, 23:40:11]