by Max Brantley
Auditors say, however, that the bond would have produced the $1.7 million plus $835,000 more if the bond not been sold, but instead held for the full five years until maturity next year. IF the security doesn't get called before its maturity date in June 2013, the auditors might have added. UPDATE: The $25 million bond in queston CAN'T be called. It's noncallable until maturity, with an interest rate of 4.25 percent, pretty good in this market.
One other question: I can't tell just yet if that $800,000 lost earning potential — it really isn't an actual loss of state money — was calculated after taking into account the earnings on the sale proceeds in alternate investments.
Surely they were reinvested somehow? Surely? Anybody know how? I'll ask Audit later this morning. I wonder too about how much attention Audit gave to analyzing how liquidity needs might guide decisions, or even the necessity, to sell investments.
UPDATE: I talked with deputy auditor Jon Moore who gave me the explanation I needed. (And I should add I overlooked in the Democrat-Gazette some of these same details in my reading this morning.)
The estimate of $835,931 in lost potential earnings DOES include interest earned on other investments made with the proceeds of the Jan. 22, 2010 sale of the $25 million bond purchased July 30, 2008.
Moore said the state made $1.677 million by selling the bond for more than the purchase price. It initially put the proceeds in a low yield money market fund. That money was reinvested three more times in different bonds, in each case with potentially higher interest rates, from 3 to 6.25 percent. But, these were callable bonds and all were redeemed before the higher interest rates took effect or provided much income, Moore said. (Each transaction produces a commission for a security dealer, of course).
The state figured it this way: Between the profit and subsequent interest earned, the state made $2,662,978. The original bond, held to maturity, would have paid $3,498,909, or an $835,931 difference. The brokers naturally have argued that every market wager can't be guaranteed and they had expectations for higher earnings. But expecting a callable bond with a 6 percent coupon not to be called is viewed by some is an unrealistic expectation.
The plan is to review more transactions dating back four years. Sounds prudent.
Again: No ringing defense of Shoffner intended. But I still think some aspects of this don't readily reduce to simple equations. Best example of that is Audit's questionable decision to highlight on a big TV screen what, by its own admission, was a poor comparison — Shoffner's investment yields versus yields of state pension systems, which don't face the same liquidity and statutory investment restrictions.
This much is clear: The treasurer's inability — still — to respond to questions about the transactions in question is, in itself, a telling comment on the competency of her investment knowhow. Or, after hearing the explanation on the one big transaction, it's perhaps evidence there isn't a good answer.