Friday, September 14, 2012

Audit faults state treasurer's investment practices UPDATE

Posted By on Fri, Sep 14, 2012 at 9:15 AM

MARTHA SHOFFNER: Criticism of her investments.
  • MARTHA SHOFFNER: Criticism of her investments.
The special audit of Arkansas Treasurer Martha Shoffner's investment practices was released a few minutes ago and it's not flattering.

Her investment practices — heavily concentrated with one broker as past news coverage here and elsewhere reported long ago — cost the state money ($58,000 in 11 scrutinized sale/repurchases). She sold bonds and replaced them with bonds that wound up paying less. She let state money sit in low-paying money market accounts for too long. She bought callable bonds with high interest that were called earlier than hoped and required replacement purchases. (This generates more commissions for the broker.)

I'm not on hand, but I'm guessing the Legislative Joint Audit Committee is giving her a working over, if not now, soon.

UPDATE: Shoffner herself did not appear, but sent deputies. A friend of mine on the scene said unhappy legislators are subpoenaing her to appear.

UPDATE II: David Goins at Fox 16 says committee has recessed until 1 p.m. to give Shoffner time to woman up and show up. She can run but she can't hide. Might as well face the music. Staffers have told people I know that Shoffner thought she could delay an appearance and the situation would calm down in time. Bad call, if so. Her disappearing act and the resulting game of "Where's Martha" guarantees a further legislative hearing next week and bigger headlines. A fairly complicated financial story is suddenly lead TV news.

The State Police have the duty of locating Shoffner to serve the subpoena to appear.

UPDATE III: Waldo still not located. Decision made about 1:10 p.m. to recess until 2 p.m. Monday while the search for Shoffner continues. Womanhunt focuses on her home territory in Jackson County. Audit Co-Chair Tim Summers said that if Shoffner didn't appear Monday, the committee would take "appropriate action."

UPDATE IV: Shoffner's office says she'll be there Monday. They claim she had a conflict this morning. Uh huh.

UPDATE V: The state coppers ran Shoffner to ground in Newport and served the subpoena at 3:26 p.m.

One squib from the audit:

Since July 1, 2008, the Treasury has purchased a significant proportion of its bonds from an individual broker associated with two different Arkansas securities firms: Apple Tree Investments Inc. (May 2008 to May 2009) and St. Bernard Financial Services Inc. (June 2009 to present). DLA staff obtained purchase records from the Treasury for July 1, 2008 to March 31, 2012 and summarized the purchases by firm in Exhibit II on page. 4. During this period, a single firm sold the Treasury $1.69 billion in bonds, with the next largest firm selling the Treasury $886 million in bonds. In order to determine potential financial benefit of the Treasury's concentrated use of this single firm, DLA staff calculated the dollar value weighted average yeld by firm at June 30, 2011, as seen in Exhibit III on page 4. Based on this analysis, the individual firm with the Treasury's largest amount of purchases did not have the highest dollar value weighted aveage yeild. This firm's dollar value weighted average yield was only .02 percent higher than the fourth and fifth largest yields received. Therefore, no advantage to the Treasury's concentrated use of this one firm was apparent.

In addition, the three firms that sold the most bonds to the Treasury for this time period (St. Bernard Financial Services Inc.; Morgan Keegan and Company Inc.; and Bank of Oklahoma investments) are the same firms involved in the transactions discussed in Exhibit I that 4resulted in the Treasury's economic net loss of $58,172.

Auditors recommend that Shoffner "consult a third party money manager regarding investment purchase decisions and obtain input from the state Board of Finance before changing significant investment practice."

Shoffner was allowed to respond before release of the report and her response is included. She said, "In today's volatile investment climate, the challenge Arkansas faces requires cooperative efforts to explore possible opportunities to enhancement while providing uncompromising safety, operating liquidity and wealth building yield.

Yeah, life ain't easy on the investment street.

As to specifics, Shoffner said she'd tried to obtain the best yields, but added:

In 2009, because of declining economic conditions, Treasury felt it obligatory to try a different approach to generate more money. One area of consideration for potential yields on the bonds Treasury sold were step up bonds. Based on historical data, none of these bonds ever increased to the higher yield; therefore, selling the bonds at a profit was a logical choice. However, as reported, the yield was not as anticipated due to the low interest rate of the money markets. Treasury has not sold any bonds since February and will not sell again until there are better yields in money markets for the time between purchasing bonds and the actual settlement date."

She said she'd consider hiring an outside money manager and a separate recommendation that the state Board of Finance play a larger role in Treasury investment oversight.

Here's Legislative Audit's separate review of the state Board of Finance investment policy and Arkansas State Treasury investment practices. The board meets generally twice a year to set investment police and approve a rate for Treasury CDs. Members are the governor, treasurer, auditor, bank commissioner and state finance director. The report notes that the state board is bound by more conservative investment policies than, say, teacher and public employee retirement systems and must have greater liquidity. Thus, the retirement systems earned around 7.5 percent on fixed income investments, while the treasury's rate of return was 2.74 percent. Each 1 percent on state holdings would have produced an additional $32.6 million per year, the audit noted. Modification of existing policy — which would require changes in the law — clearly could provide financial benefits, the audit noted. The Board of Finance, too, might benefit from outside managers, the audit said. This could be done without a law change.

The audit recommended 1) contracting with an investment consultant; 2) placing some money with outside money managers; 3) developing a new investment policy; 4) a more active role for the finance board; a law change by the legislature to expand board of finance membership to include private citizens with financial expertise.

The response here was the same as that Shoffner supplied to the audit on individual investing by the treasurer.

SEARCHING: Joint Audit Chairs Bill Pritchard (left) and Tim Summers says Martha Shoffner will appear personally, one way or another.
  • Brian Chilson
  • SEARCHING: Joint Audit Chairs Bill Pritchard (left) and Tim Summers says Martha Shoffner will appear personally, one way or another.

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