Investing Public Funds - Regulation and Education Is Needed

Yesterday I commented on the the significant losses incurred by several Wisconsin school districts when they took public money, some from the taxpayers and some borrowed, and lost over $150 million in high risk financial ventures, Risky Wisconsin School District Investments.

I am sure that most of the school board members and the respective staffs of the districts involved are bright people and probably do not deserve the agony they are presently experiencing in return for their efforts at public service.

They screwed up and the damage is extensive, which points to the need for a combination of regulation and education to make sure this does not happen again.

First , every elected official in the state needs some sort of training in these matters. School boards, city council members, village presidents and county supervisors need a short course on the risks of managing public investments. The training can come from a number of sources. Professional associations, the State Treasurer, the State of Wisconsin Investment Board, and the various associations of public officials can take on this responsibility. Some are already doing it, but obviously it is not going far enough.

Secondly, we need stiff regulation and punishment for brokerage houses and investment firms that sell these kinds of risky investment vehicles to government bodies. While it is impossible to outlaw and identify every type of investment that creates this risk, certainly a well crafted statute can describe the consequences, require disclosures, and provide penalties.

There is too much at stake and this happens too often for it to be ignored any longer.

Clerealy the elected and appointed school officals must take responsibility but this os one of those situations where blame does not rectify the problem and bring the funds back to the scool distrcits.  It is the taxpayers, the students and the employess who need the protection, especailly when the public officals are not up to the task.

The Government Finance Officers Association (GFOA) has many valuable Recommended Practices  that cover this subject. Here are two:

• Use of Derivatives by State and Local Governments for Cash Operating andReserve Portfolios (1994 and 2002)  ...   The Government Finance Officers Association (GFOA) urges state and local government finance officers to exercise extreme caution in the use of derivatives and to consider their use only when they have developed a sufficient understanding of the products and the expertise to manage them...

 

•  Market Risk (Volatility) Ratings (1995)  State and local governments have long relied on credit ratings as an independent analytical source to gauge the credit risk of an investment option. However, credit risk analysis alone is not sufficient to safeguard against the assumption of other risk components, including market, interest rate, and liquidity risks...
  GFOA encourages state and local governments to augment information they receive from brokers, dealers, or advisors with independent research when conducting due diligence of potential investments. Information sources include historical trading ranges, trend and volume data, brokerage firm research, cash flow and present value analysis, andcredit ratings and research.
  

   

   

Comments

[Dave Gawenda]

Paul, you and others may also find an article in this morning's Wall Street Journal interesting. Here's the link (hope it works):

http://online.wsj.com/article/SB122290590988096397.html

It describes the closing of a $9.3 billion fund that was designed for liquidity that found out it's not liquid anymore. It's likely the schools will eventually get their money, but in the meantime they're going to have to figure out how to pay their current bills.

There is a direct link between the problems with the Florida investment pool last year and what is currently freezing up the credit markets. Most of the dots that would need to be connected for people to see the linkages are very much beneath the surface of public consciousness. Really smart people probably could have figured out that Florida was not the end, but the beginning. (I'm not smart enough to have known that.)

Also, your Sara might find this Slate article interesting:

http://www.slate.com/id/2201318/

It explains why Sarah P. sounds like somebody from Brainerd, Minnesota.

[antpoppa]

Could we wait on the bailout until gas prices fall below $3.00. Speculation and derivative cover bets seem to be driving the price, at least in my ad hominem speculations.