CFO Sink’s Letter to the SBA Audit Committee
December 10, 2007
Ms. Melinda Miguel
Chief Inspector General, Office of the Chief Inspector General
Executive Office of the Governor, PL 05, The Capitol
400 South Monroe Street, Tallahassee, FL 32399
Mr. Douglas Darling
Division of Accounting and Auditing, Director, Department of Financial Services ,200 East Gaines Street Fletcher Building, Suite 516, Tallahassee, FL 32399
Ms. Kimberly Ferrell
Chief Auditor, Medicaid Fraud Control Unit, Office of the Attorney General, PL 01, The Capitol, 400 South Monroe Street, Tallahassee, FL 32399-1050
<<SENT VIA HAND DELIVERY>>
Dear Ms. Miguel, Mr. Darling and Ms. Ferrell:
The growing national subprime mortgage crisis, a lack of investor confidence and inadequate transparency led to the recent instability of a state-managed investment pool. Managed by the State Board of Administration (SBA), the Local Government Investment Pool (LGIP) is a short-term investment fund used by a number of counties, school boards, and other government entities in Florida, which have relied on the pool’s stability and liquidity for nearly twenty-five years.
This instability led to investors withdrawing more than $14 billion from the once $27 billion pool. In an effort to protect remaining investors, the Trustees of the SBA (Governor Charlie Crist, Attorney General Bill McCollum and I) met November 29, 2007, to take appropriate action to temporarily suspend withdrawals and hire an experienced, independent financial firm to develop a plan of action with the input of the pool’s investors. Last Tuesday, December 4, 2007, the SBA Trustees enacted a plan to isolate the pool’s distressed assets into a separate fund, allowing the investments to mature with the goal of returning investor premium.
The majority of the LGIP’s assets (86 percent) remain in a high-quality money-market type fund, which will be rated and conservatively invested. An independent financial management firm will manage both funds; some liquidity has been made available for all participants and the Trustees have stressed the need for increased transparency and communication between the SBA and its investors.
While this new plan provides the best opportunity to reach the goal of returning investors’ principal, many questions remain. When investors display such an extreme lack of confidence and a “run on the bank” scenario follows, it is essential that the state does all it can in an attempt to restore confidence if the LGIP is to continue.
As members of the Audit Committee of the SBA, you have a role in restoring this confidence. As an independent and objective party, the Audit Committee is most appropriate to review the circumstances regarding the LGIP that resulted in our current situation. I understand that you will be meeting Wednesday, December 12, 2007, and I ask you to delve into the many unanswered questions that remain for both the Trustees and investors alike. Please include the following in your review:
• What are the LGIP’s investment guidelines and were assets acquired below those guidelines?
• Who sold the SBA the “distressed assets” in Fund B, when were they purchased, and what were their ratings at the time of purchase?
• When were the “distressed assets” downgraded, and what were the SBA’s actions following these downgrades?
• What are the SBA’s disclosure requirements and policies regarding downgraded assets, and what actions were taken to inform investors?
• How frequently was the SBA communicating with investors, and how much detail was provided to the public about the pool’s investments?
• Was the LGIP investing in riskier assets than communicated to investors or than the pool’s stated objective?
• What other funds managed by the SBA include these type of investments?
• If other funds do include these “distressed assets”, what actions, if any, are recommended/planned by the SBA?
I applaud you for your service in assisting the Trustees of the SBA in fulfilling their oversight responsibilities. I am sure you will be exploring other actions and decisions in addition to those suggested above. Please let the Board know when you will be prepared to submit your report, along with any recommendations of potential changes in policies and procedures.
Chief Financial Officer
State of Florida
cc: The Honorable Charlie Crist, Governor
The Honorable Bill McCollum, Attorney General
The Honorable Ken Pruitt, Senate President
The Honorable Marco Rubio, Speaker of the House