Published by Bloomberg Government on December 14, 2012

(Bloomberg) — A Federal Deposit Insurance Corp. program that expanded safeguards for some business and government bank accounts will probably expire on Dec. 31 after the U.S. Senate failed to advance a proposal for an extension.

A 50-42 vote yesterday on a procedural motion fell 10 short of the 60 needed to move forward on a two-year extension of the Transaction Account Guarantee Program, effectively killing it. The TAG program, introduced in the wake of the 2008 credit crisis, guarantees $1.5 trillion in non-interest bearing accounts above the FDIC’s general limit of $250,000. An extension in 2010 is set to expire at the end of the year.

“Absent unforeseen developments, the TAG program will expire at the end of the year,” James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association, said in an e-mail.

TAG, which provided unlimited backing for accounts used for payrolls and other business or government expenses, was opposed by Republicans as a bailout program that shouldn’t be continued. Groups such as the ABA and the Independent Community Bankers of America sought the extension as a way to keep accounts from being moved to bigger banks or money-market mutual funds.

“We’re disappointed that the Senate failed to vote on a temporary extension,” American Bankers Association President and Chief Executive Officer Frank Keating said in a statement. “The TAG program has been fully funded by the banking industry at no taxpayer expense and millions of small businesses and municipal depositors would have valued its continuation during this period of economic recovery.”

Delaware’s Precaution

With the Senate’s rejection of TAG, Delaware Treasurer Chip Flowers is directing banks holding his state’s deposits to quickly set aside “sufficient collateral to ensure the safety and security” of the accounts, he said in a statement yesterday. This has to be done by the end of the month, according to a directive from Flowers’ office.

In October, the National Association of State Treasurers reaffirmed a resolution calling for TAG to be extended “to provide added stability and predictability at this still-fragile time for the economy and the financial system on which it depends.”

FDIC Chairman Martin Gruenberg said last week that community banks have sufficient liquidity to manage TAG’s expiration even if the deposits it attracts do migrate to bigger institutions. “TAG was extended by statute through the Dodd-Frank Act, and the FDIC has traditionally deferred to Congress in deciding appropriate deposit insurance limits,” Andrew Gray, an FDIC spokesman, said in an e-mail.

CBO Report

The Congressional Budget Office, in a Dec. 10 report, estimated that the FDIC would be unable to cover potential losses from the program and projected that costs to the agency would extend beyond 2015. Republicans used the CBO findings to object to the TAG extension. “It creates a new amount of spending above and beyond what was contemplated there,” Senator Patrick Toomey, a Pennsylvania Republican, said in a statement. “That is a huge problem in and of itself. So I would oppose this legislation on the substance of it, but in particular, I’m objecting to the fact that it does exceed this budgetary authority.”

The Senate vote was celebrated by the Credit Union National Association, which had lobbied against an extension. “This is the first time that credit unions have vigorously opposed bank-backed legislation; it won’t be the last time,” CUNA President and CEO Bill Cheney said in a statement. “We will be alert for any attempt by banks to attempt to attach this bill to some other year-end legislative package.”

Brian Gardner, senior vice president and Washington policy analyst for Keefe Bruyette & Woods Inc., said yesterday’s vote probably signals the end for the program. “It might not be fatal, but TAG is in intensive care and its vital signs are pretty weak,” Gardner said in an e-mail.

State Treasury Issues Advisory on FDIC TAG Program

For Immediate Release: December 13, 2012
Contact: Deputy State Treasurer Erika J. Benner at (302) 672-6700 or erika.benner@state.de.us.

DOVER, DE — The Delaware State Treasury (Treasury) issued an advisory notifying Delaware residents, businesses, nonprofits and government agencies on the impending expiration of the Federal Deposit Insurance Corporation’s (FDIC) Transaction Account Guarantee (TAG) Program on December 31.

The TAG program was created in 2008 to strengthen confidence in the U.S. banking system and to ensure liquidity. Essentially, it provides an uncapped federal guarantee on funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts. Many of these accounts are checking accounts used by individuals, businesses, nonprofit institutions and government agencies to carry out their day-to-day financial operations. Failure to renew the TAG Program will result in such transaction accounts being subject to the FDIC insurance cap of $250,000.

Earlier today, the U.S. Senate, through a close procedural vote, ended debate without action on a bill that would have extended the TAG Program for two years. In response to recent Senate action on the measure, Delaware State Treasurer Chip Flowers issued a Treasury Directive that requires financial institutions holding state deposits to set aside sufficient collateral to ensure the safety and security of state funds held on behalf of the Treasury in transaction accounts at their institutions. Under the Directive, such funds will have to be collateralized by December 31 – the date the White House and Congress need to reach resolution on issues relating to the “fiscal cliff.”

“Until the issue as to whether the TAG Program will exist after December 31st is resolved at the federal level, it is critical that Delawareans using checking or other transaction accounts in FDIC-insured financial institutions for business or personal uses ensure their money is safe and properly secured. This is the rationale underlying the issuance of this advisory by the Delaware State Treasury,” Flowers said.

“Furthermore, the Directive issued today protects our state funds. The safety and security of state funds will always be the top priority of the current administration of the Treasury. While the Treasury will continue working with our colleagues to find a compromise solution to extend the TAG Program that would be voluntary and not increase the size of the federal deficit, in the interest of Delawareans, I am hopeful that the White House and Congress will find common ground on this important program prior to the end of the year,” Flowers said.

Citing significant benefits to state and local governments and the U.S. banking system, Flowers and other members of the National Association of State Treasurers (NAST) have been meeting with White House and Congressional leaders to urge passage of a two-year extension of the TAG Program.

State and local governments, many of the nation’s largest corporations, medium and small businesses, universities, charities and hospitals rely upon the security of these federally insured accounts to ensure that their funds are not subjected to market instability and that these funds will be available, even in the extreme case of a bank failure. A two-year extension of the TAG Program would not only allow states and localities without effective collateralization requirements sufficient time to develop such policies in light of the health of the U.S. banking system, but would immunize taxpayer funds from any market shocks resulting from the “fiscal cliff” resolution (or lack thereof) and the upcoming debt ceiling debate.

Treasurers Meet Senior Administration Officials to Discuss Details of TAG Program Extension

Published by Yahoo! Finance on December 11, 2012

LEXINGTON, KY — (Marketwire) The National Association of State Treasurers (NAST) today commended the U.S. Senate for supporting a full debate on the extension of the Transaction Account Guarantee (TAG) Program.

The U.S. Senate voted earlier today to invoke cloture on S. 3637, which would temporarily extend the federal deposit insurance coverage for noninterest-bearing transaction accounts. Passage of today’s vote will allow the bill to proceed to the Senate floor for full debate. Also, earlier today, the White House expressed its official support for continuation of the TAG Program. Members of NAST continue to urge Congress to pass a two-year extension, citing significant benefits to state and local governments and the U.S. banking system. As it currently stands, the TAG Program will expire on Dec. 31.

“NAST appreciates the support of U.S. Senator Harry Reid for filing the motion of cloture and sponsoring the legislation to extend the TAG Program,” said NAST President and Nevada State Treasurer Kate Marshall. “NAST is asking that the TAG Program be temporarily extended to allow for a proper transition period.”

Representatives of NAST met earlier today with senior U.S. Treasury officials to discuss the importance of, and need for, this program. The Federal Deposit Insurance Corporation (FDIC) launched the TAG Program in 2008 in the midst of the global financial crisis. Its purpose is to strengthen confidence in the banking system and to ensure liquidity.

“We are grateful for the support expressed by the President with regards to extending the TAG Program,” said Delaware State Treasurer Chip Flowers. “Today’s vote reflects large bipartisan support for advancing the debate on this extremely important program. We cannot end the TAG Program without giving governments, businesses and consumers ample time to transition. We look forward to working with the White House and Congress in moving towards passage of this important, yet temporary, federal insurance program.”

State and local governments, as well as many of the nation’s universities, charities and hospit als rely upon the security of these federally insured accounts to protect their funds from excessive market instability, and to ensure that these funds will be available even in the extreme case of a bank failure. A two-year extension of the TAG Program would protect these taxpayers’ funds from market volatility and the instability related to the “fiscal cliff” resolution (or lack thereof) and the upcoming debt ceiling debate.

During its recent annual conference, NAST voted to extend its resolution supporting the TAG Program. To see the full resolution, visit www.nast.org.

Published by BankCreditNews.com

Members of the National Association of State Treasuries are urging the Obama administration and Congress to push through a two-year extension of the Transaction Account Guarantee program. Launched by the FDIC in 2008 in the wake of the financial crisis, the TAG program guarantees funds held in non-interest bearing accounts and was crafted to increase confidence in the banking system.

“The TAG Program helps ensure the safety of public funds,” Kate Marshall, the president of NAST and treasurer of Nevada, said. “While NAST understands that some of the nation’s largest banks may oppose its continuation, we believe it would be imprudent to abruptly terminate this program without providing a proper time period for transition.”

State and local municipalities, as well as universities, charities, hospitals and many of America’s largest companies, rely on the program to protect their funds from market volatility and economic downturn. Extending the TAG program would allow municipalities without effective collateralization requirements ample time to implement policies while protecting public funds from economic instability and the looming fiscal cliff.

“States and local governments are already experiencing some impact of the termination of the TAG Program,” Nancy Kopp, Maryland’s treasurer, said. “A reduction in the availability of U.S. Treasury and Agency securities due to increased demand for these products is impacting short-term rates…Without question, the TAG Program should not be abruptly eliminated from the U.S. banking system. A phase-out of the program will reduce the current volatility of the financial markets and provide ample time for state and local governments to consider safe alternative placement for taxpayer funds.”

Delaware Treasurer Chip Flowers said that while the health of the U.S. financial system has improved since the TAG program was implemented, many challenges remain. “The TAG program provides federal protection to public funds, increases stability and helps diffuse money throughout the banking system to avoid concentration of deposits in a small number of large banks—potentially creating deposit allocations in large banks equal to or higher than pre-2008 levels,” Flowers said. “We hope that the White House and Congress will not prematurely terminate this critical program until these challenging issues are addressed and state and local governments have sufficient time to find viable alternatives to protect taxpayer funds.”

Published by Bloomberg News Agency on December 8, 2012

Reid Sets Senate Cloture Vote on Bill To Extend TAG Program Through 2014

The Senate is scheduled to hold a cloture vote Dec. 10 on legislation that would extend the transaction account guarantee (TAG) program for another two years. Sen. Harry Reid’s (D-Nev.) bill (S. 3637) would keep the Federal Deposit Insurance Corporation TAG program in place until the end of 2014. Under the motion to be considered, 60 votes are needed to proceed to the bill. Adopted as a temporary measure in 2008 and later extended by Congress, the program has allowed banks to pay an additional premium to insure transaction accounts in excess of the FDIC’s current $250,000 deposit insurance limit. It is currently set to expire at the end of 2012 (233 DER EE-9, 12/5/12).

Concern to Avoid ‘Destabilizing Blow.’

“If Congress fails to extend this critical program before its Dec. 31 deadline, nearly $1.5 trillion in TAG deposits would become abruptly uninsured overnight,” Independent Community Bankers of America (ICBA) President Camden Fine said Dec. 7. “This will be a destabilizing blow to Main Street financial institutions and the communities they serve.” Members of the National Association of State Treasurers have joined the last-minute push for an extension. State and local governments and a range of private entities from small businesses to large corporations rely on the security of federally-insured TAG accounts, the group said Dec. 6, and would need more time to transition into safe alternatives for their funds. The program provides full insurance of noninterest bearing transaction accounts, which are essentially checking accounts used by businesses, governments, and other organizations for payroll and other recurring expenses. It was created at the height of the financial crisis four years ago to prevent a sudden withdrawal of deposits.

“While we recognize that the health of the U.S. banking system has improved since the inception of the TAG Program in 2008, there remain many challenges facing the system over the course of the next few months—including issues relating to the ‘fiscal cliff,’ potential financial contagion from problems in the Eurozone, slow economic growth and the upcoming debate on the U.S. debt ceiling,” Delaware State Treasurer Chip Flowers said in a statement. “We hope that the White House and Congress will not prematurely terminate this critical program until these challenging issues are addressed and state and local governments have sufficient time to find viable alternatives to protect taxpayer funds,” he said.

Big Banks, Credit Unions Oppose Bill

House Republicans generally oppose any new extension of TAG and some in the financial services industry support that view. They say that continuing the program is unnecessary because banks are in far better shape than 2008. The Financial Services Roundtable, which represents many of the nation’s largest banks, has said that a move to keep TAG alive may create a “misperception of instability” in the banking system and also raises moral hazard concerns. The Credit Union National Association (CUNA) and its members are urging senators to block Reid’s bill. Banks’ capital is at its highest levels ever and liquidity has increased steadily since the crisis, the group said Dec. 7. “It looks like banks are doing quite well. Why do they continue to insist that they need a taxpayer backstop in the form of TAG?” CUNA said in a statement. The National Association of Federal Credit Unions (NAFCU) has said that it would support a TAG extension—if senators added a provision that would allow credit unions to lend more money to the business sector.

NAFCU has been lobbying Reid to include a version of S. 2231, the Small Business Lending Enhancement Act, which would increase limits on commercial lending from 12.25 percent of a credit union’s assets to 27.5 percent of assets. The majority leader has not said whether the Senate will consider amendments to his bill. NAFCU has also said that the TAG extension bill must include insurance coverage of lawyers’ trust accounts (IOLTAs) in credit unions. Such accounts in banks are already federally insured. “Given the limited time frame Congress is working with, considering a TAG extension without IOLTA coverage and a member business lending increase for credit unions and their 95 million members would be unconscionable,” Brad Thaler, NAFCU vice president of legislative affairs, said in a Dec. 7 statement.

Treasurer signs directive strengthening open and competitive rules in selection process

Published by the Cape Gazette on December 3, 2012

The Delaware State Treasury recently announced the issuance of a request for proposals seeking qualified investment banks to assist the treasury in managing the state’s $2 billion investment portfolio. This action is part of the treasury’s multiphase plan to increase returns on the portfolio without increasing the current level of risk and to ensure the fees paid by the state are in line with the portfolio’s returns.

In October, State Treasurer Chip Flowers announced that the treasury had brokered a strategic deal with two of the state’s current investment banks, JPMorgan Chase and Schroder Investment Management North America Inc., that reduced the fees charged by those investment banks to the state in light of the current economic climate. Both investment banks are incorporated in Delaware.

Fee reductions allow the treasury to return additional monies to the General Assembly from the portfolio, thereby helping taxpayers through cost savings. Prior to October, the state of Delaware had paid approximately $2.1 million annually under five investment manager agreements authorized by the Cash Management Policy Board in 2008.

The RFP, which will remain open until Monday, Dec. 17, is open to all financial institutions meeting the qualifications set forth in the document. The portfolio, which is invested by the treasury pursuant to Delaware law and certain guidelines adopted by the board, was the subject of an extensive 60-page report ordered by Flowers and conducted by Credit Suisse Securities (USA) LLC earlier this year. The report provided the board and treasury with a number of substantive recommendations for improving returns of the portfolio while maintaining or reducing the current level of risk and addressing potential shortcomings in the portfolio.

The purpose of this RFP is to adopt a number of the report’s recommendations by hiring qualified investment managers capable of managing the state’s realigned portfolio. Additional recommendations, including changing fixed-income securities that are rated no less than “A” from one of the three major credit rating services, remain subject to the procedures of the state’s Administrative Procedure Act, which requires public input prior to adoption.

Simultaneously with issuing the RFP, Flowers signed Directive 121126-01, strengthening the treasury’s rules relating to the selection process. Under the terms of the directive, the RFP selection committee would be prohibited from disqualifying small and medium-sized investment banks by requiring such banks to have the ability to hold large allocations of state funds. Typically, such requirements also have a disproportionate effect on women- and minority-owned financial institutions.

Rather, the RFP selection committee can recommend that the treasury qualify small and medium-sized investment banks to hold a smaller allocation as long as the state does not incur an additional cost. Further, the directive requires that any individual having a majority ownership interest in an investment bank or having a potential business conflict of interest who has input in the selection process either recuse from the process or meet certain ethical requirements promulgated by the state.

Upon announcing the RFP and issuing the directive, Flowers said, “Our treasury, backed by the full faith and credit of the people of Delaware, will continue working to provide additional funds to the General Assembly by effectively and safely managing our portfolio. The ability to manage and invest our portfolio has a direct impact on the lives of Delawareans, and I am confident that this process will result in the state hiring the best group of diverse investment managers at a cost-effective rate.”

Flowers added, “Since the RFP selection process has commenced, we are hopeful that the governor, the applicable members of his cabinet and the new controller general will work with the appointed members of the board to begin the approval process for changing the credit requirements for permissible investments as recommended by our independent investment advisor through the state’s open government laws. While we understand open government may be challenging for those serving on appointed boards, we must never bypass the consent of the people, and the laws designed to protect their input, in determining the manner in which their funds are invested.”

State Treasury Seeks Investment Banks to Manage State Portfolio

DOVER, DE — The Delaware State Treasury today announced the issuance of a request for proposal (RFP) seeking qualified investment banks to assist the Treasury in managing the state’s $2 billion investment portfolio. This action is part of the Treasury’s multi-phase plan to increase returns on the portfolio without increasing the current level of risk and to ensure the fees paid by the State are in line with the portfolio’s returns.

In October, State Treasurer Chip Flowers announced that the Treasury had brokered a strategic deal with two of the state’s current investment banks, JPMorgan Chase and Schroder Investment Management North America Inc., that reduced the fees charged by those investment banks to the state in light of the current economic climate. (Both investment banks are incorporated in Delaware.) Fee reductions allow the Treasury to return additional monies to the General Assembly from the portfolio, thereby helping taxpayers through cost savings. Prior to October, the State of Delaware had paid approximately $2.1 million annually under five investment manager agreements authorized by the Cash Management Policy Board (the Board) in 2008.

The RFP, which will remain open until December 17, is open to all financial institutions meeting the qualifications set forth in the document. The portfolio, which is invested by the Treasury pursuant to Delaware law and certain guidelines adopted by the Board, was the subject of an extensive 60-page report ordered by Treasurer Flowers and conducted by Credit Suisse Securities (USA) LLC earlier this year. The report provided the Board and Treasury with a number of substantive recommendations for improving returns of the portfolio while maintaining or reducing the current level of risk and addressing potential shortcomings in the portfolio.

The purpose of this RFP is to adopt a number of the report’s recommendations by hiring qualified investment managers capable of managing the state’s realigned portfolio. Additional recommendations, including changing fixed-income securities that are rated no less than “A” from one of the three major credit rating services, remain subject to the procedures of the state’s Administrative Procedure Act, which requires public input prior to adoption.

Simultaneously with issuing the RFP, Treasurer Flowers signed Directive #121126-01, strengthening the Treasury’s rules relating to the selection process. Under the terms of the Directive, the RFP selection committee would be prohibited from disqualifying small and medium- sized investment banks by requiring such banks to have the ability to hold large allocations of state funds. (Typically, such requirements also have a disproportionate effect on women- and minority-owned financial institutions.) Rather, the RFP selection committee can recommend that the Treasury qualify small and medium-sized investment banks to hold a smaller allocation as long as the state does not incur an additional cost. Further, the Directive requires that any individual having a majority ownership interest in an investment bank or having a potential business conflict of interest who has input in the selection process either recuse from the process or meet certain ethical requirements promulgated by the state.

Upon announcing the RFP and issuing the Directive, Treasurer Flowers stated, “Our Treasury, backed by the full faith and credit of the people of Delaware, will continue working to provide additional funds to the General Assembly by effectively and safely managing our portfolio. The ability to manage and invest our portfolio has a direct impact on the lives of Delawareans and I am confident that this process will result in the State hiring the best group of diverse investment managers at a cost-effective rate. As we have stated on numerous occasions, the door of opportunity for those seeking to do business with the Treasury will be open, not closed. This Directive ensures that the process of selecting those investment banks managing state funds will be fair, open and competitive. When the people of our great state reflect upon the conduct and actions of this important office, we want them to say that, without question, their Treasury is ‘fair, effective and innovative’ – each a fundamental expectation of governing in these challenging times.”

Further, Treasurer Flowers stated, “Since the RFP selection process has commenced, we are hopeful that the Governor, the applicable members of his cabinet and the new Controller General will work with the appointed members of the Board to begin the approval process for changing the credit requirements for permissible investments (as recommended by our independent investment advisor) through the state’s open government laws. While we understand open government may be challenging for those serving on appointed boards, we must never bypass the consent of the people, and the laws designed to protect their input, in determining the manner in which their funds are invested.”

The RFP is available at treasury.delaware.gov or bids.delaware.gov.

Immediate Release

State Treasurer Chip Flowers and the Delaware State Treasury have released the November 2012 edition of the Delaware Economic Index, which rated the state’s economic climate over the past (60) days as ‘Fair’. For additional information or to obtain a copy of the Index, please click here.

Treasurer Flowers Announces Fee Reduction from State Investment Banks

DOVER, DE — Delaware State Treasurer Chip Flowers announced that the Delaware State Treasury and the Cash Management Policy Board (the “Board”) have reached an agreement on proposed changes to the State’s investment portfolio (the “Portfolio”). The Portfolio, which is invested by the Treasury pursuant to certain guidelines adopted by the Board, was the subject of an extensive 60-page report ordered by Treasurer Flowers and conducted by Credit Suisse Securities (USA) LLC (“Credit Suisse”) earlier this year. The report provided the Board and Treasury with a number of substantive recommendations for improving returns of the Portfolio while maintaining or reducing the current level of risk and addressing potential shortcomings in the Portfolio. The report is available in full on the Treasury’s website (treasury.delaware.gov).

Under the terms of the deal, the Treasury will be permitted to diversify the state’s assets by investing in fixed income securities that are rated no less than “A” from one of the three major credit rating agencies. Second, the Treasury will require the state’s investment managers to meet certain financial benchmarks to ensure that State funds are invested in an effective manner. Third, the Treasury will issue a Request for Proposal for new investment managers through an open and competitive process that is expected to commence in the next thirty (30) days. Finally, Credit Suisse will continue working with the Treasury (and Board) to monitor the performance of the Portfolio and propose changes as needed based upon market conditions. Though the Treasury and Board approved the deal during a special meeting earlier today, some of the proposed changes may be subject to the State’s Administrative Procedure Act, thus allowing an opportunity for public comment.

Upon announcing the terms of the deal, Delaware State Treasurer Chip Flowers said, “We believe that the action taken by the Board today was a positive step in the right direction. While some of the recommendations in the Report were not adopted by the Board, we believe the deal is beneficial to the People of the State of Delaware by addressing some of the challenges facing the Portfolio. The deal affirms the Treasury’s belief that taxpayer funds must be actively managed during these difficult economic times and allows the public to comment on the proposed changes through our open government laws. Also, the deal requires a new level of accountability for those institutions that invest State funds by evaluating their performance using key financial benchmarks.”

Treasurer Flowers also said, “Most importantly, we are very pleased that the deal requires the selection of the State’s investment managers to be undertaken through an ‘open and competitive process’. This is critical to ensuring that the State hires the best investment managers at a cost-effective rate through a fair process. The door of opportunity for those seeking to do business with the Treasury will be open, not closed.”

Separately, Treasurer Flowers announced that two of the State’s investment banks, J.P. Morgan Asset Management (”JPM”) and Schroeder Investment Management North America, Inc. (“Schroeder”), have agreed to reduce their fees charged to the State in light of the current economic climate (both investment banks are incorporated in Delaware). While the final terms of the fee reduction remain subject to contractual agreement between the Treasury and the investment banks, the State will receive the benefit of the fee reduction beginning this month. Fee reductions allow the Treasury to return additional monies to the General Assembly from the State Portfolio, thereby helping taxpayers through cost savings. Currently, the State of Delaware pays approximately $2.1 million under agreements authorized by the Board in 2008.

“I would like to commend J.P. Morgan and Schroeder’s for showing their commitment to the State of Delaware by working with the Treasury to reduce their fees to support the level of returns received under our State Portfolio. This fee reduction exemplifies the strength of the long-term relationship between the Treasury and these Delaware investment banks. The Treasury will continue to work with all of the State’s investment banks to ensure that the fees charged to the State are competitive and consistent with current market rates,” said Treasurer Flowers.

For a copy of the complete press release issued by the Delaware State Treasury, click here.

by State Treasurer Chip Flowers

Published by The News Journal on August 7, 2012

Recently, The News Journal’s editorial board weighed in on the Delaware State Treasury’s efforts to address the state’s poor performing investment portfolio. Despite significant evidence, including an independent report from a leading financial institution, the commentary failed to address why the portfolio managed by the Cash Management Policy Board is underperforming and implied its poor performance is the result of shrewd financial prudence. A clever argument, but I strongly disagree.

Upon entering office in January 2011, we inherited a falling portfolio that generated historic lows in interest. Our treasury maintains more than $1.6 billion daily, invested in safe securities for up to 10 years. Only on rare occasions is the state’s invested income used to pay our bills. Over the past five years, the independent report found, the portfolio not only failed to keep pace with inflation, it also performed below the average of similar states having a “AAA” credit rating or similar amounts invested. In fact, in 2011, the state’s $2 billion portfolio returned less than 1 percent (about $8 million) in interest. By taking some basic actions, your treasury was able to increase this return by an additional $4 million this fiscal year.

While some in government would have us believe that other fiscally sound states were wrong in taking action to protect their money and Delaware was right to “prudently” do nothing but watch its portfolio fall, this reasoning is flawed. It reminds me of when my sister received a less than stellar grade and attempted to convince my parents that the top-performing students were wrong for working hard. Her reasoning was flawed and so is the Policy Board in its attempt to bring down the hard work of others to justify their actions that resulted in below-average performance. In short, in difficult economic times, Delawareans deserve a portfolio that is actively managed to avoid poor performance.

We can do more. We can do better. We can start by acting on key recommendations provided to the governor, through the Policy Board, in the independent report.

Performance measures

First, we must hold those who manage our portfolio to performance measures. Under contracts signed by a prior treasurer, those who manage our state’s money receive more than $2.1 million in annual fees without having to meet performance standards. This is not only poor practice, but it fails to create safeguards to ensure that our managers are earning their money.

Establishing benchmarks will enable the treasury to monitor performance and hold managers accountable.

Second, we can achieve higher returns while lowering or maintaining current portfolio risk levels. With better management and proper diversification, our independent advisor concluded, we can increase the returns of a large part of our state portfolio to 3.20 percent without increasing risk. While this percentage may seem small, it could translate into millions in extra interest on the portfolio. Furthermore, better diversification would protect the portfolio from the negative impact of future increases in interest rates.

Finally, we must have open and competitive contracts in selecting those who manage our portfolio. Despite the portfolio’s below-average performance, at the request of the governor and his administration, language was inserted into the current state budget that allows the Policy Board to extend the current lucrative manager contracts without going through the state’s bid process.

This action actually rewards poor performance with taxpayer funds. The treasury will continue to promote an open and competitive process to select the best firms.

Future depends on risks

While I understand the governor, his administration and members of the Policy Board feared taking action during the midst of the financial crisis, such continuing failure to act, in contrast with other states, is preventing us from lowering risk and increasing returns. Disagreeing with the Goliaths of government may have serious retaliatory consequences (i.e., cuts in the treasury’s budget or threats to eliminate this independent office). However, every now and then Davids come along, standing firm and supported by the collective strength of the People, and change the course of our future for the better.

To read the online version of the editorial piece, please click here.