Two longtime practices of the Arkansas treasurer’s office changed significantly during the tenure of Martha Shoffner, who resigned Tuesday after six years as state treasurer.
For years, the state treasurer’s office held bonds until maturity, and the office’s investment policy prevented speculation on future rates of return, according to a special Legislative Joint Auditing Committee report released in September. That changed in 2009, two years after Shoffner’s first term began, the treasurer’s office said in its response to the special report.
“In 2009, because of declining economic conditions, treasury felt it obligatory to try a different approach to generate more money,” the office said in its response to the audit.
One approach was selling bonds before they mature, a change the Legislative Audit Division said cost the state several hundred thousand dollars in unrealized gains.
The treasurer’s office invests excess state funds that aren’t needed to pay the state’s bills, Chief Deputy Treasurer Debbie Rogers said Thursday. That can be funds from sales taxes and income taxes but also things like agency fees, she said. The state’s bond-investment portfolio totals $1.9 billion, with almost all of it invested in U.S. government bonds, Rogers said. A small amount is invested in certificates of deposit for state agencies that have trust funds, with the longest invested for six months, she said. The state can invest in corporate bonds, but only for 90 days, Rogers said.
The average maturity of the government bonds is 4.5 years, she said. The state Board of Finance’s policy restricts the treasurer from holding bonds that exceed five years, she said.
Another treasurer’s office practice that changed during Shoffner’s tenure concerned which firms got the state’s business.
Traditionally, the treasurer’s office split the bond business among all the bond firms in the state, said Gus Wingfield, who was the state treasurer from 2003 to 2007. Wingfield acknowledged, however, that most of the state’s investments during his tenure were in certificates of deposit because of the higher rates of interest paid at the time.
St. Bernard Financial Services Inc. of Russellville began to receive more business in 2010, but the treasurer’s office made a significant shift to St. Bernard in mid-2011, Autumn Sanson, chief investment officer at the treasurer’s office, said Thursday. When asked why the change was made, Sanson declined to answer.
According to a criminal complaint filed by the FBI in federal court Monday, Shoffner began using one broker over the others “about the same time Shoffner was looking for a new place to live in Little Rock.” The complaint alleges that Shoffner received six payments of $6,000 each from one broker, an FBI confidential source who has been given immunity for cooperating in the case. Under pressure, Shoffner resigned Tuesday saying, “I can no longer perform the duties and responsibilities owed to the public.”
Bonds are simply promissory notes, or loans where the issuer - a government, municipality, corporation, federal agency or other entity - promises to pay the buyer a certain premium above the face value of the bond. For example, a $1,000 bond with a 5 percent annual yield would pay $1,050 at the end of one year, when the bond is said to mature. Interest rates typically are higher for longer-term bonds and lower for short terms.
There are reasons, however, that the owner of a bond may choose to sell before the bond matures. Bond prices generally move higher as interest rates fall and decline when interest rates rise. Bonds with longer maturities generally have wider price swings than those with shorter terms. If the owner of a bond believes interest rates will rise, he may choose to sell the bonds before they mature and perhaps replace them with shorter maturities.
For the year that ended June 30, 2011, the Legislative Audit Division analyzed one transaction that resulted in a net economic loss to the state of $835,931.55, the division told a legislative committee last September. St. Bernard Financial Services made the trade, auditors said. The Arkansas Securities Department issued a firm a letter of caution Aug. 28 for activities associated with the transaction.
In the year beginning July 1, 2011, the treasurer’s office sold bonds from its investment portfolio to selected bond brokers before the bonds reached maturity and then bought similar bonds from the same brokers, resulting in a net economic loss of $58,172, the audit division said.
But a bond broker who asked not to be identified because he has done business with the state in the past said it’s easy to second-guess a trade after a bond matures.
“It’s easy to be critical after the fact,” the broker said. “Everyone thought bond prices were peaking in 2009. I kept expecting [interest] rates to go higher.” There could have been a rationale for changing the treasurer’s policy and allowing bonds to be sold before they matured, the broker said.
“It’s a dual-edged sword,” he said. “Brokers wanted to make commissions on the trade, of course, but they may have legitimately believed that bond prices were going to go down and you could sell your longer-term bonds and buy some shorter-term ones.”
St. Bernard was paid $2.3 million in commissions on bond transactions over the past few years, a state auditor has estimated.
Front Section, Pages 6 on 05/24/2013