It’s Called Accountability

A number of months ago a group of San Mateo County school districts began a legal action against the County Treasurer and the County seeking compensation for their mismanagement of funds invested with the Treasury. Recently, several articles in the San Mateo Daily Journal covered developments in that action, but, in my opinion, told the story pretty much only from the County’s perspective. This prompted me to write a guest perspective that appears in today’s Daily Journal. Here it is as I submitted it.

A recent Journal article about the lawsuit between several school districts and the County showed that disregard for accountability is alive and well in San Mateo County. While I am a trustee for one of the districts bringing that suit, it’s as a private citizen that this most disturbs me, and causes me to share my perspective on the facts and issues.

State law generally requires school districts to invest funds not needed to pay bills with their county treasurer’s office. That’s because the Legislature decided districts aren’t investment experts. The presumption was that a treasury’s full-time professionals would know what they’re doing.

The contract between the County Treasury and the public agencies whose money they managed declares that maximizing safety and liquidity are the first and second, respectively, goals for the fund. Earning a high rate of return comes after those two goals are met.

Most people know Lehman Brothers’ bankruptcy cost the County $155 million. But few people know our Treasury had invested four times as much in Lehman securities as any other county in the entire country. In fact, it invested more money in Lehman than the next eight counties combined. Shortly before the bankruptcy announcement more than 10% of the fund was invested in Lehman securities. More than 80% was invested in the financial services industry, a sector which subsequently collapsed.

This bordered on the insane. It is an axiom in the investing world that you never concentrate a “safe & liquid” portfolio that way. Any college freshman finance major knows this. The only reason I can imagine for doing so is to boost yields.

If that’s what the Treasurer’s office was doing – and I believe it was – then, in my opinion, they were violating the contract with their clients. The fact that Lehman securities paid well meant the financial markets saw Lehman as a poor bet. So did many financial journalists. Numerous articles written more than six months before Lehman’s collapse highlighted just how risky it was becoming. Its eventual demise was hardly unheralded. A prudent and diligent fund manager, pledged to preserve safety above all else, should never have allowed a portfolio to become concentrated the way San Mateo’s was.

Worse than the Treasury’s mistakes, however, is the notion that merely because it isn’t contractually overseen by the County Board of Supervisors, the County can wash its hands of the situation.

I expect my elected officials and the staff they employ to protect our public interests, regardless of whether there are contracts involved or not. The very first thing my Board did when confronting this crisis was recognize we could have kept a closer eye on what the Treasurer’s office was doing with our money, even though we have no control over investment policy. If a State legislator or an official from a neighboring jurisdiction proposes something that would harm San Mateo County, county officials have a duty to speak out against it, and try to stop it. Had the County exercised reasonable oversight of the Treasury in the Lehman situation we would have avoided the specter of taxpayers paying for the Treasury’s mistakes by preventing the problem from occurring in the first place. So far as I can tell, the supervisors and county staff never raised concerns about the Treasury’s mismanagement, even though they were the appropriate level of government to do so.

The idea that no one is accountable for what happened has been a feature of this crisis from the beginning. Shortly after Lehman’s bankruptcy I attended a meeting hosted by the Treasury. As you might imagine, many pointed questions were asked by organizations that had lost money. So many, in fact, that the then Treasurer reminded attendees he was only a messenger. That caused one person to leap to his feet and ask “But don’t you manage the fund? How can you just be a messenger?” The former Treasurer hemmed and hawed his way through to an admission that, well, gee, he guessed he was more than just a messenger.

When an elected official of the previous Treasurer’s tenure makes such an outrageous statement it’s a sure sign he doesn’t understand what accountability means. Since leaders set the tone for an organization, it’s no wonder the Treasury has sought throughout this unfolding drama to dodge accountability for its actions. But it’s even sadder to see disregard for good governance demonstrated by others within County government.

Defendant’s counsel Gasner said, “This is a lawsuit that ought to end as soon as it can.” He’s right, it should: by the Treasury, and the County, taking responsibility for their mistakes –of commission and oversight – and compensating the plaintiffs, who entrusted money needed to educate our children to “experts” who had a duty to know better.

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