LITTLE ROCK — It turns out that state Treasurer Martha Shoffner’s office told state auditors last month that it earned the state $1.7 million when it sold a bond prior to its maturity, prompting the auditors to review the transaction and conclude that the state incurred a net economic loss of $835,931 from selling the bond early.
The auditors’ report has led to questions — is it unusual to sell bonds before their maturity? What sort of computations result in a gain, on one hand, of $1.7 million, and a “net economic loss” of more than $835,000 on the other?
The Legislative Audit Division has indeed determined a gain from the sale of the bond by subtracting what the state paid for the bond on July 30, 2008, ($25,107,688) from what it received when it sold the bond on Jan. 22, 2010 ($26,775,000).
Then the division said the state would have earned $3,498,909 if the bond had been held to its maturity date of June 14, 2013, but instead earned $2,662,978 from the sale of the bond and earnings from the subsequent use of the funds. Thus the effect of selling the bond early was that “net economic loss” of $835,931, according to the division’s report.
“They had a positive flow of money. They would have got more if they had held the bond,” Deputy Legislative Auditor Jon Moore said Thursday in an interview.
Robert Keenan, chief ex- ecutive officer for St. Bernard Financial Services in Russellville, which sold the bond for the state, said he calculates the state’s gain was $1.7 million from the bond sale on Jan. 22, 2010.
The bond was replaced with another bond projected to provide a net actual cash gain to the treasury of $591,087.49, but unfortunately that bond was called, or redeemed by its issuer before its maturity date, and “the projections going forward do show a lost opportunity, but not as severe as the auditor projects,” Keenan said.
“Everyone involved in this is falling into the same mental trap. There is no actual loss. It is a lost opportunity,” he said.
Moore said state auditors learned of this bond sale prior to its maturity date in the treasurer office’s initial response to the audit of the office for the fiscal year that ended June 30, 2011.
In their initial findings, auditors said a dozen bond sales prior to maturity resulted in a net economic loss of $58,172, and St. Bernard, Bank of Oklahoma Investments, and Morgan Keegan & Co. Inc. were involved in transactions that resulted in these losses.
The state’s net gain was $1,099 from the six transactions that involved St. Bernard, and its net loss was $15,152 from the two transactions that involved Morgan Keegan, and $44,119 from the three transactions that involved the Oklahoma bank, according to an audit document. The document said certain records were unavailable on the other transaction.
In the treasurer’s office initial draft response to the audit, it said that, “concerning the selected transactions, the investment practice of selling bonds is not new at the state treasury.”
“In fiscal years 2010 and 2011, seventeen bonds were sold back to five different brokers,” said the draft response.
“One of these transactions earned the state $1.7 million because it was sold at an increased price,” according to the treasurer’s office. “Additionally, the decision to reinvest these funds was based on the cash flow needs at the time. Expenditures during February, March and April are increased due to income tax refunds, affecting the treasury’s liquidity.”
Moore said the treasurer’s office disclosure of the 17 transactions led auditors to review the transaction on which the office said it earned $1.7 million, and auditors later concluded the early sale had a net economic loss of $835,931. Lawmakers have asked him to review the other 16 transactions.
Shoffner said she can’t dispute the auditors’ figures.
Shoffner told lawmakers on Monday that she couldn’t recall why her office sold bonds from its investment portfolio before their maturity dates and purchased similar bonds from the same brokers, transactions that auditors said resulted in a net economic loss of more than $800,000 to the state, a total that takes into consideration the sale of the bond in January 2010 that resulted in a net loss of $835,931.
Asked when she is going to explain why these various transactions were made, Shoffner said Thursday, “As soon as I can get it together.”
“I am waiting to hear on that from the bond people that were holding the bonds, why we sold them on each transaction,” she said.
Autumn Sanson, Shoffner’s chief investment officer, told lawmakers Monday that she advised Shoffner against selling the bonds before they matured, but Shoffner disputed Sanson’s assertion.
Little Rock attorney Reggie Koch said Thursday that Sanson has retained him “in case something goes wrong with her job.”
Shoffner agreed Monday not to make any personnel changes with Sanson, chief deputy Debbie Rogers and chief financial officer Melissa Corrigan until after the auditors complete their work.
Sanson told lawmakers that she’s kept a written log of what she said about these bond investments and when.
In response to a question about whether the Legislative Audit Division has copies of Sanson’s written notes and whether they are available under the state’s Freedom of Information Act, an attorney for the division, Frank Arey, wrote Thursday that “we respectfully decline to make the requested disclosure.”
He said unsubstantiated allegations obtained in complying with professional guidelines regarding the detection of fraud are exempt from disclosure under the Freedom of Information Act.
Keenan said Thursday that he “was very perplexed at the performance of” Shoffner and Sanson on Monday.
He said Rogers “was holding in her hand the details of the trades with us, and when the committee chairman asked Shoffner, “Why did you sell these bonds?” she said, ‘I don’t know.’ Then Sanson asked for protection [under the state’s whistle-blower act]. I was stunned.”
Rogers said Thursday that she had records of St. Bernard’s calculations on these trades in her binder at Monday’s legislative committee meeting.
She said she’s not sure whether the records explain why the trades were made because “honestly I have not studied them.”
Front Section, Pages 1 on 09/21/2012