Wednesday, March 04, 2009

Invest In This Pool

A newly-created state investment pool into which local governments and school districts can deposit their funds has tanked according to the AP:

State officials had high hopes for an investment pool created last year to give Indiana's school districts and local governments a safe, short-term place to deposit taxpayer money and earn interest.

Then the economy tanked.

The account's daily interest rate fell from 3.23 percent last February to just 0.53 percent today. Its balance dwindled from a peak of more than $1 billion in December to $473 million — and that includes $200 million the state government invested to demonstrate that the fund is secure.

There's a story behind this so-called investment pool. Back in the 1990s when I was lobbying for small community banks, State Treasurer Marjorie O'Laughlin was rapping up her last year in office and had this big legislative proposal she wanted enacted before she left office. She wanted to do away with a state law that required local units of government to deposit public funds on a pro-rata basis with area banks and create this state investment pool under the State Treasurer's office whereby a private investment manager would be contracted to invest collective investments of participating local governmental entities. One of her employees at the time, Brian Burdick, helped put this idea together and it promised much greater investment returns for the participating local governments.

The small banks I represented at the time went ballistic. They pointed out that local governments and school districts were their largest depositors. If these funds were pulled out and put in this pooled investment fund at the state level, their loan-to-deposit ratio would be adversely affected, meaning that fewer funds would be available to extend loans to local homeowners and businesses. As I explained to lawmakers at the time, it would result in a shift in investments from main street to Wall Street. Additionally, there had been debacles in Orange County, California and elsewhere with local governments being enticed into these alternative investment schemes such as something called derivatives and the taxpayers wound up holding the bag. The conservative-minded legislators agreed and Marje's big retirement plans were dashed.

A short time after the legislature adjourned that year I was at a friend's party. I find myself in a discussion with this guy who used to work for Sen. Lugar. As soon as he heard my name, he went ballistic. "You're that guy who killed my business plan," he shouted. As he explained it, Bob Grand had it all set up. As soon as the legislation went through, his business would get the contract with the Treasurer's Office to manage the investment pool and he would make all kinds of money. I did such a good job misinforming the legislature about the virtues of his investment pool plan that I caused the idea to be defeated. O'Laughlin didn't go away quietly. Until the final day of the legislature, she could be seen with Grand and Burdick at her side button-holing legislators and trying to find a vehicle bill on to which to sneak her proposal. O'Laughlin later that year was replaced by Joyce Brinkman and Brian Burdick went to work for Bob Grand at Barnes & Thornburg. Brinkman refused to go along with the investment pool plan and wouldn't allow Grand to control all of the bond work for her office as he had intended. Grand vowed to make her a one-termer and, indeed, he succeeded in that, although Joyce played her own part in hanging herself politically.

I had pretty much forgotten all about the investment pool legislation until I read today's AP story. Yeah,Bob Grand and Brian Burdick finally found a State Treasurer and a complicit legislature to go along with this ill-conceived idea. "Nearly 130 schools and local governments are investing in the account, said state Treasurer Richard Mourdock," the AP reports. "He's been pitching the plan to local leaders, but said it's been difficult persuading them to become new investors." "There's a natural pushback," Mourdock said. "At some point — we're not there yet — it will be selling itself based on the word of mouth of its users. We have to keep earning credibility every day." My message to all of you local government officials--keep pushing back. Invest your money in local banks that offer assurances of making loans to help your own communities. A statewide investment pool is nothing but an invitation for all of the Bernie Madoffs of this world to crawl out of the woodwork and screw over not so savvy government officials charged with investing these funds.

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