Both Honolulu dailies reported today on the latest report by State Auditor Marion Higa on the administration of the Department of Budget and Finance. The Advertiser story focuses on the audit as part of a “feud” between the auditor and the governor. The Star-Bulletin story this morning by Gene Park links to the full text of the auditor’s report, the Advertiser does not.
[Note: An earlier version of this entry said the S-B only carried an AP brief. S-B City Editor Ed Lynch replied by email to to say that a mix-up last night resulted in initially posting yesterday’s breaking news story on the audit. Today’s story by Gene Park was also online, just not easily found, and that was quickly corrected.]
The audit is definitely worth reading. It’s detailed description of the flow of money and paperwork though the state bureaucracy will be useful for future reference. And behind the idea of a political duel is the auditor’s detailed assessment of the breakdown of administration, the widespread lack needed up-to-date financial analysis, and the failure to heed both policies and statutory requirements designed to avoid just the kind of investment mess the state now faces with these auction rate securities.
The auditor’s report makes some stark points by referencing key documents.
According to the FAD administrator, FAD personnel were not fully aware of the risks of investing in auction-rate securities, including the potential effects of failed auctions. He also stated that no one could have predicted such risks.
But the report then reprints the cover page of the prospectus for one series of bonds the state purchased, which contains a prominent warning:
“You should carefully consider the risk factors beginning on page 12 of this offering memorandum.”
The first risk noted is that it these securities might be difficult to sell, a prediction that proved all too accurate but that no-one in B&F paid any attention to.
Similarly, although the state budget director and her staff continue to describe these as “short term” investments, as required by state law, the same cover page clearly lists the maturity date as June 1, 2041. The cover page alone makes a startling graphic statement.
In any case, this is an audit that deserves a careful reading and a spot in your archive.
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Hi Ian. Star-Bulletin does have a full story on the audit, by Gene Park. Look in biz section. I’ve pointed out the problem with the “top stories” link, as have others, I bet. Hope it’s fixed soon.
Hi again Ian. Gene Park’s story at starbulletin.com does link to the full audit. Link’s in the fact box with the story.
There’s one tidbit from the KHON2 site that doesn’t appear to be mentioned anywhere else (yet):
“At issue is $1 billion in state money invested by a single Honolulu broker in student loan securities for which the auction market has been frozen for 2 years.”
http://www.khon2.com/news/local/story/War-of-Words-Over-State-Finance-Department-Audit/q0UmfcTitUWrne3L917ZLw.cspx
Glad to see that you’re following this, Ian! I want to know more about the who and the why.
Hi Reader,
Thanks for your interest in the story! Actually my piece in the Star-Bulletin does mention that aspect of the story, and I name the broker as well.
I wrote, “State law says student loan securities can be bought as long as the investments are due to mature no more than five years from the date of investment. Income then goes into the general fund. Hawaii’s securities were sold by Citigroup Inc., much of it from local broker Pete Thompson, eight months before the market collapsed.”
It’s certainly no secret. Mr. Thompson’s background was detailed in a Bloomberg story here: http://www.starbulletin.com/business/20100304_citigroups_auction_rate_bonds_for_hawaii_lose_250m_in_value.html
Anyone else notice a parallel to the Governor and Kawamura making the “this investment is legal because the AG said so” argument?
John Yoo torture memoranda, much?
A lifetime ago in the early ’70s Pete Thompson was a political radical who wrote a series of articles about, I think, Windward development in the early issues of The Hawaii Observer. Apparently, his life has been quite a journey.