State Treasurer Ron Crane’s office made inappropriate transfers that cost taxpayers $10.2 million, but the hit to public funds could rise to $27 million, according to an audit that concluded Idaho’s money manager overrode internal controls meant to contain financial risks.
Legislative auditors said in a report Crane’s office should strengthen measures designed to keep Idaho from losing money. Following its release, lawmakers Jan. 31 also called for new oversight on grounds Crane now has too much authority to shift investments without guidance of others.
The losses result from investments in mortgage-backed securities hit by the housing bubble’s collapse. Crane shifted these investments between accounts in 2009, exposing state taxpayers to the risk, auditors say.
Crane’s office “inappropriately transferred investments…resulting in a disproportionate share of investment losses incurred by the state,” according to the report issued by April Renfro, a certified public accountant who oversees Idaho’s Legislative Audits Division.
What’s more, auditors wrote, Crane’s office still oversees $2.9 billion in the accounts hit by the losses – “without the aid of independent oversight to review investment activity and to ensure fiduciary duties have been considered.”
Crane, a four-term treasurer whose management has drawn fire from auditors in the past, including spending thousands on limousines during trips to New York, didn’t immediately return a phone call Jan. 31.
But in a written response, Crane says he disagrees with the finding. “It is only through the lens of hindsight that the decision is being evaluated,” he wrote.
The situation emerged in around 2008.
That’s when ratings agency Standard and Poor’s threatened to downgrade the rating of a fund Crane manages – called the Local Government Investment Pool – that allows cities and counties to pool cash they don’t immediately need.
Standard and Poor’s cited the vulnerability of mortgage-backed securities in that fund. At the time, housing values were dropping, people across the country were defaulting on their mortgages at historical levels – and the securities that backed those home loans were going bust.
Though those mortgage-backed securities had a face value of $31 million, their market value was far lower, only $19 million.
To protect the local government fund’s rating, according to the report, Crane’s office shifted those distressed securities into another fund, Idaho’s so-called Idle Pool, where state government parks cash it doesn’t immediately need.
Instead of accounting for the securities at their market value, however, Crane took $31 million in cash from the Idle Pool and put it into the local government fund – a full $11 million more than the securities were worth at the time to investors.
“This is an exchange transaction that should have been handled at arm’s length (and) should have had adequate internal controls in place to protect the interests of both parties,” auditors wrote. “The transactions were completed at amounts in excess of fair market value.”
Last year, when Crane liquidated the securities, he booked a $10.2 million loss for the state. The local government investments, meanwhile, lost nothing.
They have “no exposure to any remaining risk of loss,” according to the report.
However, an even bigger hit could still come: “The two remaining securities…were in an unrealized loss position of approximately $17.4 million at June 30, 2013,” according to the audit that concludes Crane’s activities undercut his fiduciary duty.
Crane vehemently denies unnecessarily exposing Idaho taxpayers to risks.
“The assertion that the state treasurer’s office’s internal control were overridden is false,” he wrote in a strongly worded three-page response. “In this case, the investment and management decisions were made after due diligence and consideration of the circumstances known at the time.”
Reached Jan. 31, Renfro reiterated auditors’ conclusions Crane’s office exposed Idaho taxpayers to risk and broke its fiduciary duty to state taxpayers, all to protect the credit rating of the local government fund from a downgrade.
“We stand behind my report and my auditors’ conclusions,” Renfro told The Associated Press.
Sen. Dean Cameron, R-Rupert and a co-chairman of the Joint Finance-Appropriations budget committee, said the losses show Crane’s office has too much latitude to make investment decisions absent adequate oversight from a professional board – much like Idaho’s existing Endowment Fund – tasked with ensuring he fulfills his fiduciary obligations.
“It calls into question the entire process,” Cameron said. “There’s a lack of transparency and a lack of communication. This raises the question of whether there needs to be a different system. We have no other state entity that invests funds with the authority of a single person.”