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Sunday, November 23, 2008

Ind. Gov't. - "Troubled by Toll Road investments"

Terese Ghilarducci, who, according to the Indianapolis Star identification at the end of the letter, "taught economics at the University of Notre Dame for 25 years, and is the Bernard and Irene Schwartz Chair of Economic Policy Analysis at the New School in New York," has this letter to the editor featured in today's Star:

Recently, we learned that $1 billion of Indiana Toll Road lease proceeds was invested in corporate junk bonds and mortgage-backed securities. Since then, the Daniels administration has scrambled to convince Hoosiers that this is perfectly normal. As a former trustee of Indiana's public employee pension fund, an economics professor, and a trustee of national multibillion-dollar long-term funds, I take exception to the administration's attempt to paint its investment decisions in the best possible light.

At least four of the things I have heard from the administration are troubling. First, I do not agree that investing 22 percent of a major fund in a single type of security -- specifically, residential mortgage-backed securities issued by Fannie Mae and Freddie Mac -- represents a prudent balance of risk and return. To place this many of the state's funds in one basket is inconsistent with good practice in public finance.

Secondly, I am surprised that State Treasurer Richard Mourdock defended the state's holdings in corporate junk bonds -- worth about $300 million -- as a low-risk investment. Junk bonds are investments on par with stocks. In a press conference, he characterized the default rate on these bonds as less than 3 percent. This is no longer true in today's market. Many experts expect corporate junk bonds to default at rates several times those cited by the treasurer. Worse, the state holds more than $42 million in bonds rated CCC or below -- the riskiest kind of speculative bond -- which one analysis recently predicted to default at a rate of more than 50 percent. If the labor and corporate trust funds I work with were seen investing in this way, it would raise red flags for possible policy violations.

Third, as a trustee of major pension and retiree health funds, I was surprised to learn that the Investment Policy Statement for the funds was not made accessible to the public until questions were raised. For a public fund this big, standard practice is to publish an extensive policy. The state's Public Employees' Retirement Fund, in contrast, is guided by a lengthy document, readily available on the Internet.

Last, Gov. Mitch Daniels has claimed that this is a technical matter housed completely within the treasurer's office. In my experience, any entity -- be it a government, a union or a corporation -- entrusted with a long-term fund this size, will regard that trust as one of its most important responsibilities. Accountability for its prudent management goes right to the top of the organization. That is the intent of the Sarbannes-Oakley legislation passed after the Enron debacle. CEOs take responsibility for management decisions.

The governor advanced Major Moves asking for a great deal of trust by the legislature and voters. He appealed to his experience as a corporate executive. The investment practices here were messy and should be fixed.

What does the Indiana constitution have to see about the duties of the Governor vis-a-viz the Treasurer?
Article 5. Executive. Sec. 1. The executive power of the State shall be vested in a Governor. He shall hold his office during four years, and shall not be eligible more than eight years in any period of twelve years. (History: As Amended November 7, 1972).

Article 6. Administrative. Sec. 1. There shall be elected, by the voters of the state, a Secretary, an Auditor and a Treasurer of State, who shall, severally, hold their offices for four years. They shall perform such duties as may be enjoined by law; and no person shall be eligible to either of said offices, more than eight years in any period of twelve years. (History: As Amended November 3, 1970)
Sec. 5. (a) The Governor, and the Secretary, Auditor, and Treasurer of State, shall severally keep the public records, books, and papers, in any manner relating to their respective offices, at the seat of government. (b) The Governor shall reside at the seat of government. (History: As Amended November 3, 1998)

Article 10 - Finance. Sec. 2. All the revenues derived from the sale of any of the public works belonging to the State, and from the net annual income thereof, and any surplus that may, at any time, remain in the Treasury, derived from taxation for general State purposes, after the payment of the ordinary expenses of the government, and of the interest on bonds of the State, other than Bank bonds; shall be annually applied, under the direction of the General Assembly, to the payment of the principal of the Public Debt.

Article 11. Corporations. Sec. 12. The State shall not be a stockholder in any bank; nor shall the credit of the State ever be given, or loaned, in aid of any person, association or corporation; nor shall the State become a stockholder in any corporation or association. However, the General Assembly may by law, with limitations and regulations, provide that prohibitions in this section do not apply to a public employee retirement fund. (History: As Amended November 5, 1996).

See also this ILB entry from Oct. 8th headed "Indiana's Constitutional provisions guiding state investments."

Posted by Marcia Oddi on November 23, 2008 08:44 AM
Posted to Indiana Government