tampabay.com

SBA audit raised risk issues

A 2007 internal audit suggested better monitoring of fixed-income state investments.

By HELEN HUNTLEY, Personal Finance Editor
Published January 4, 2008


Even as the State Board of Administration on Thursday tried to reassure investors about the future of its Local Government Investment Pool, problems deeper in the past came to light.

A 2007 internal audit made public this week had recommended that the board do a better job monitoring the risks that its money managers were taking with government funds and criticized it for relying on too few brokers to handle its fixed-income investments.

Last year a handful of those brokers sold the state's money managers investments in mortgage-backed securities that quickly ran into trouble. Local cities, counties and school boards that invested in the fund paid the price.

About $2-billion of the troubled investments have been set aside as off limits. The remaining $9.8-billion of high-quality investments is in a separate fund from which investors have been allowed to withdraw up to 15 percent of their money without penalty.

Thursday, investors found out the withdrawal limit is expected to increase to 21 percent by the end of this month and about 26 percent by the end of February, but they did not get a promise of the full refund they are demanding.

"The state of Florida absolutely needs to step up; this is a disaster," said Robert Wishner, deputy mayor of Sunrise.

He was one of a dozen local government representatives who spoke Thursday at an advisory committee's first face-to-face meeting with the board's new interim executive director, Robert Milligan.

Milligan told him to talk to legislators if he wants the state to guarantee investors will get their money back.

An audit committee is investigating how the board's investments went so far astray. Local governments thought they were investing in a safe, liquid fund managed like a money market fund.

The board's own audit of fixed-income trading recognized the potential for problems. Among other things, auditors recommended the creation of a committee to review risks, including review of the creditworthiness of the securities issuers and brokers the board dealt with. Auditors also wanted a procedure for reviewing new products, which might have meant a closer look at some of the mortgage-backed securities that created problems.

The audit also criticized the concentration of the board's business with just a few brokers. During the period audited, five brokers handled $824-billion worth of fixed-income trades, 77 percent of the total: Bank of America, Goldman Sachs, Lehman Brothers, UBS and Salomon Smith Barney.

Board managers agreed to make sure no dealer had more than 30 percent of the fixed-income business, but said only a few dealers were willing to carry broad enough inventories to meet the board's needs.

The audit also recommended limiting the size of trades one person on staff could make. During the period of the audit, Michael Lombardi, who managed the local government fund, made single trades as large as $1.4-billion. Board managers said they would require additional review for large trades.

On Thursday, Milligan outlined the steps the board is taking to get the fund on the right footing, including the hiring of a new outside manager. One item that's back on the table is the possibility of selling some of local government fund's investments to other state funds, including the pension fund. Milligan said any sales would take place at market price after a third-party review.

He said the board also will be working with Tampa-based Tucker Hall and Aon Consulting to improve its communications with investors and the public. The board's Web site now makes far more information available than it had in the past.

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.