CFO Sink Unveils Proposals to Increase SBA Investment Safeguards

Florida Chief Financial Officer (“CFO”) Alex Sink today unveiled 10 proposals to strengthen financial safeguards over investments at the State Board of Administration (“SBA”).

In strengthening the oversight of Florida’s investments, CFO Sink’s three goals are to:

• protect local investors and Florida’s retirees
• increase transparency and communication
• improve governance over public investments

CFO Sink’s proposal included the following 10 recommendations:

1. Determine if there is a Basis for a Lawsuit Regarding Investments Sold to the State by Investment Firms
2. Continue Recent Stabilization of Local Government Investment Pool
3. Expand and Formalize Role of Local Government Investment Pool Members
4. Increase Transparency and Communication About Investments
5. Enact New Ethics and Disclosure Legislation for Investment Advisors to State Agencies
6. Strengthen Statutory and Performance Requirements for Executive Director of the State Board of Administration
7. Expand State Board of Administration to Include Two Appointed Financial Professionals
8. Strengthen and Restructure the State Board of Administration’s Audit Committee
9. Enhance State Board of Administration’s Investment Advisory Committee
10. Segregate Risk Management Functions from Investment Decisions

A copy of CFO Sink’s press release is reprinted below for your review.

 

Should you have any questions or comments, please do not hesitate to contact this office.

 

 

CFO Sink Unveils Proposals to Increase Safeguards Over Investments at the State Board of Administration

TALLAHASSEE— On the third day of the 2008 Legislative Session, Florida Chief Financial Officer Alex Sink unveiled ten proposals to strengthen financial safeguards over investments at the State Board of Administration (SBA). Bringing her nearly three decades of business experience to Florida government, CFO Sink’s proposals were offered to provide a framework of ideas early in the Legislative Session.

“Today’s investments are different than the investments of thirty years ago, and that means we’ve got to adapt and strengthen our safeguards at the State Board of Administration,” said CFO Sink. “I’m pleased to offer a number of strong proposals today that will increase oversight over public funds and further protect our investors. I’m also pleased that a number of Legislators are working to strengthen our state’s financial oversight of public funds this session.”

CFO Sink was joined today by Jeannie Garner, the Chair of the Local Government Investment Pool (LGIP) Advisory Committee, and Wayne Blanton, Executive Director of the Florida School Board Association, who applauded her proposals on behalf of the local investors and government retirees they represent.

“CFO Sink’s recommendations directly address a number of concerns that local investors have had with the SBA,” said Garner. “We’re glad the CFO is working with our local investors to highlight the importance of enacting stronger reforms this year.”

“I commend CFO Sink for her efforts to restore confidence in the fund and most importantly– transparency– in how the board conducts their business in the future,” said Blanton. “Her proposal of increased ethics, communication and transparency will go a long way in getting the SBA back on track.”

In strengthening the oversight of Florida’s investments, CFO Sink’s three goals are to: protect local investors and Florida’s retirees, increase transparency and communication, and improve governance over public investments. CFO Sink’s proposal, detailed below, included the following ten recommendations:

1. Determine if there is a Basis for a Lawsuit Regarding Investments Sold to the State by Investment Firms
2. Continue Recent Stabilization of Local Government Investment Pool
3. Expand and Formalize Role of Local Government Investment Pool Members
4. Increase Transparency and Communication About Investments
5. Enact New Ethics and Disclosure Legislation for Investment Advisors to State Agencies
6. Strengthen Statutory and Performance Requirements for Executive Director of the State Board of Administration
7. Expand State Board of Administration to Include Two Appointed Financial Professionals
8. Strengthen and Restructure the State Board of Administration’s Audit Committee
9. Enhance State Board of Administration’s Investment Advisory Committee
10. Segregate Risk Management Functions from Investment Decisions

Chief among CFO Sink’s recommendations Thursday was to perform a litigation analysis for the SBA Trustees. Last year, Florida’s LGIP was sold several financial investments that within a short period of time defaulted or had to be restructured. Several news reports have suggested that some financial firms may have been selling or offering advice inconsistent with their own investment strategies. A litigation analysis prepared by the independent law firm already working for the SBA would reveal whether the LGIP has legal remedies with regard to the purchase of these investments. CFO Sink also recommended today that companies should be required to publicly disclose when they are selling assets or offering financial advice in conflict with their own investment strategies.

“The people of Florida deserve to know if there was wrongdoing with the sale of these investments to the LGIP,” said CFO Sink. “If so, we must hold those companies that sold the investments accountable.”

From Florida’s cities and counties to our retired state and local employees, millions of Floridians expect sound professional financial management at the SBA. The SBA is a constitutional entity of Florida state government that manages 30 investment funds, comprising over $184 billion in assets. Standard and Poor’s has consistently ranked Florida’s pension fund at or among the top states, and a recent Pew Charitable Trust analysis praised Florida as a “national leader” and a “top performer” as one of only five states with a fully-funded pension. CFO Sink is one of three Trustees of the SBA, along with Florida Governor Charlie Crist and Attorney General Bill McCollum.

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As a statewide elected officer of the Florida Cabinet, Chief Financial Officer Alex Sink oversees the Department of Financial Services, a multi-division state agency responsible for management of state funds and unclaimed property, assisting consumers who request information and help related to financial services, and investigating financial fraud. CFO Sink also serves as the State Fire Marshal.

Ten Proposals to Strengthen Safeguards over Florida Investments

From Florida’s cities and counties to our retired state and local government employees, millions of Floridians expect sound professional financial management at the State Board of Administration (SBA). The SBA, a constitutional entity of Florida state government, manages 30 investment funds, comprising over $184 billion in assets. Standard and Poor’s has consistently ranked Florida’s pension fund at or among the top states, and a recent Pew Charitable Trust analysis praised Florida as a “national leader” and a “top performer” as one of only five states with a fully-funded pension.

As one of three trustees, CFO Sink is presenting ten proposals to strengthen financial safeguards at the SBA and provide greater protection to the people’s investments. CFO Sink’s ten proposals provide a framework of ideas designed to:

• Protect investors;
• Increase transparency; and
• Improve governance.

Protecting Florida’s Local Government Investments

1. Determine if there is a Basis for a Lawsuit Regarding Investments Sold to the State by Investment Firms

• Perform Litigation Analysis for SBA Trustees to determine if legal remedies with regard to the purchase of downgraded or defaulted investments are available.

Reforming the Local Government Investment Pool (LGIP)

2. Continue Recent Stabilization of Local Government Investment Pool

• Provide Investors with Convenient SBA-administered Local Government Investment Pool.
• Utilize Independent Financial Firm (currently Federated) to Manage Assets at Competitively Negotiated Fee.
• Maintain AAAm Rating of Fund A by Standard and Poor’s.

3. Expand and Formalize Role of Local Government Investment Pool Members

• Allow Investors to Serve as Trustees of the LGIP.

• New Board will Approve Investment Strategies & Guidelines.

• Formalize Local Government Investment Pool Advisory Committee.
• Majority of Advisory Committee Members must be Investors.
• Other Members to Include Accounting and/or Investment Experts.
• Advisory Committee to Meet Quarterly (at a minimum); Will Recommend Approved Investment Classes, Review/Approve Competitively-Bid Contracts.

4. Increase Transparency and Communication About Investments

• Provide Investors and the Public with Weekly Valuation Reports.
• Communicate with Investors All Decisions Made by LGIP Trustees or Local Government Investment Pool Advisory Committee.

Reforming the State Board of Administration

5. Enact New Ethics and Disclosure Legislation for Investment Advisors to State Agencies.

• Require Financial Firms to Disclose to the State Board of Administration if they are Selling or Offering Advice Inconsistent with their own Investment Strategies.

• Consider Texas Model: Requires full disclosure of “all direct or indirect pecuniary interests” that a financial advisor has in a transaction when it is connected with any financial advice the advisor provides to the state.

6. Strengthen Statutory and Performance Requirements for Executive Director of the State Board of Administration

• Expand Florida Statutes Section 215.441 to include minimum qualifications for State Board of Administration Executive Director.
• Consider Virginia Model, which requires “extensive experience in any two or more of the following areas: domestic equity or fixed-income securities, international equity or fixed-income securities, cash management, alternative investments, managed futures or large real estate investments.”
• Establish Full and Timely Reporting Requirements, Including Any and All Information Necessary to Make Informed Decisions about SBA Investments.
• Increase Current Quarterly Reporting Requirement to Monthly Reporting on All Investment Matters.
• Continue Performance Contract with Executive Director.

7. Expand State Board of Administration to Include Two Appointed Financial Professionals

• Amend Florida’s Constitution to Add Two Appointed Financial Professionals to the Board of the SBA.
• Require One Appointment to have Extensive Accounting and/or Auditing Experience; This Board Member will Chair the SBA’s Audit Committee.
• Require One Appointment to have Extensive Investment Experience; This Appointment will Chair the SBA’s Investment Advisory Committee.
• Confirm Appointments with a 2-1 Vote of Elected Trustees; Governor must be on prevailing side.
• Appointed Board Members will Deliver Quarterly Reports to SBA Trustees and the Public about the Audit and Investment Committees.

8. Strengthen and Restructure the State Board of Administration’s Audit Committee

• Require Audit Committee to Appoint and Approve the Budget of the Internal Auditor.
• Require Timely Management Responses to Audit Reports– within 90 Days.
• Designate one SBA Trustee as Chair of Audit Committee and Expand Audit Committee to Five Members (at least three members from the private sector).
• Implement Sarbanes Oxley Requirements where Applicable—New Accounting and Investing Standards Required of All Public Company Boards.
• Federal Government Instituted these Accounting Reform and Investor Protections After Major Corporate Scandals such as Enron and WorldCom.
• Establish a Confidential Hotline for the Anonymous Submission of Questionable Practices.
• Provide Written Reports and Public Presentations to SBA Trustees on Quarterly Basis.
• Allow, with SBA Board Approval, for the Hiring of Consultants and Financial Professionals as Needed to Fulfill Responsibilities.

9. Enhance State Board of Administration’s Investment Advisory Committee

• Designate one SBA Trustee as Chair of Investment Advisory Committee.
• Require At Least One Member of the Committee to be an FRS-Participant.
• Charge Committee with Closely Scrutinizing New Products and Approving Types of Investments Used
• Give Annual Recommendation on Asset Allocations to SBA Trustees.
• Require Investment Decisions About Downgraded Assets to be Communicated to SBA Trustees within Two Weeks.
• Provide Written Reports and Public Presentations to SBA Trustees on Quarterly Basis.

10. Segregate Risk Management Functions from Investment Decisions

• Provide Strategic Overview of Broad Range of Risk Management Issues.
• Establish Separate Team within State Board of Administration to Solely Review Investment Mandates, New Products and Downgrades.
• Require Disclosure of Findings to State Board of Administration’s Investment Advisory Committee and Trustees on a Timely Basis.

 

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