Flowers calls for board members to resign
Source: The News Journal
The conflict between State Treasurer Chip Flowers and the state board tasked with overseeing $2 billion in state investments grew larger last week, as Flowers called for board members appointed by Gov. Jack Markell to resign and demanded that a Wilmington Trust executive no longer be involved with state business.
Some members of the Cash Management Policy Board have threatened to resign if the tensions with Flowers aren’t resolved. Last-minute legislation offered by Markell would have stripped the popularly-elected Flowers of some of his power and given more authority to the unelected board, but lawmakers didn’t act on the bill before adjourning the regular session last week.
The clash has not only pitted Flowers against the board, but reignited a rivalry between Flowers and Markell, who was treasurer for 10 years before being elected governor in 2008.
Flowers is targeting the board members’ communications with Wilmington Trust, one of the state’s money managers, after a vice president there complained that the bank was managing too small a portion of the state’s investment portfolio.
The complaint came from Nick Adams, a former deputy to Treasurer Velda Jones-Potter, who preceded Flowers in office and whom he defeated in the 2010 Democratic primary. Hours after lawmakers adjourned the session early Monday, Flowers said he called Wilmington Trust to demand that Adams be removed from the state account.
Adams serves as vice president for client development, working to recruit business for Wilmington Trust with institutional clients like municipalities and states.
Neither Adams nor Wilmington Trust would comment on the situation. Wilmington Trust is now owned by Buffalo, N.Y.-based M&T Bank.
Concerns from Wilmington Trust prompted board member Dave Marvin and board chair John Flynn to complain directly to the governor, members of his Cabinet and lawmakers that Flowers was ignoring the board’s votes by reducing Wilmington Trust’s share of state investments. Board members had voted to give banks oversight of roughly equal shares of state cash, and Wilmington Trust was being left behind, they argue.
They also worry that Flowers is investing too much cash in long-term accounts, against their guidance, and placing taxpayer investments at risk. Some short-term accounts in the portfolio are used to pay daily bills of the state. State pension investments are managed separately by Markell’s office.
“We obviously have a situation in which the Treasurer is unwilling to follow the directions of his civilian overseers,” Marvin wrote in a May 28 email to Flynn that was subsequently forwarded to state officials, including Markell, and obtained by The News Journal. Marvin’s email said Adams was “very upset about the new allocation that [Wilmington Trust] had been given” in the state investment portfolio.
Marvin, who has been among the largest donors to Markell’s Committee for a Better Future PAC, did not respond to requests for comment.
The state investments were lucrative for its five money managers last year, who shared about $2.3 million in fees for the work.
Board members, including Flynn and Secretary of State Jeff Bullock, say Flowers reduced Wilmington Trust’s share as he directed more state cash into long-term investments, ignoring board votes at an April 17 meeting. Flowers accused the board of doing the bidding of Wilmington Trust.
“I think it’s only fair and appropriate that the governor accepts the resignation of those who are involved in this,” Flowers said. “I think this sends a very bad signal that private individuals can seek to manipulate state funds.” Flowers said, “We have no shortage of great Delaware attorneys who understand fiduciary duty and some of the nation’s leading investment experts.”
Flynn and Marvin have served on the board since its inception in the early 1980s, a fact Flowers called “very troubling.”
In a statement, Markell backed the board, blaming the current climate on Flowers.
“The Treasurer’s decisions to ignore the determinations of the board are the source of the current controversy,” Markell said. “Time will tell if losses result from his actions. I am concerned by the precedent this sets, and not surprised that board members or a money manager would be upset that the Treasurer ignored the board’s decisions.”
Flowers shot back, responding that, “As the governor is well aware, I can spend most of my day criticizing some of the economic policies of the Markell administration but I have chosen not to do so. We’re trying to give the governor the benefit of the doubt even though Delaware has experienced anemic economic growth and we’ve lost millions on economic development projects,” Flowers said.
Board members originally threatened to resign after Marvin’s email regarding Wilmington Trust’s allocation in the portfolio generated a new round of controversy. In a separate May 28 email copied to Markell, as well as public board members Bullock and Finance Secretary Tom Cook, Flynn said he saw “no reason to meet for the sake of meeting. … If you would prefer that I resign, then I am willing to do so.”
Flynn delivered the same message to lawmakers on June 4.
“Currently we find our policies and guidelines with respect to the allocation of the state’s funds being countermanded and ignored, which the board believes is not in the best interests of the state,” Flynn wrote in a memo sent to lawmakers. “Given that our policies and guidelines are being overruled, the private members of the Board see no reason to continue to meet.”
With a single day left in the legislative session that ended June 30, Senate President Pro Tem Patricia Blevins, D-Elsmere, introduced legislation authored by Markell’s office to gut Flowers’ powers, giving the board total control over the state’s $2 billion portfolio.
The bill also would have exempted the board from the Administrative Procedures Act, which would require the board to publish and accept comments on policy decisions. Blevins did not bring the legislation up for debate last Sunday after a private meeting with Flowers, Bullock and Cook appeared to resolve some of the issues between the board and the treasurer. Not all Democrats were on board with the bill.
“I don’t believe we have a right to impose the governor’s will or even our own will on an independently elected office,” said Rep. John Kowalko, D-Newark. “The [Markell] administration has so far seemed to be too heavily weighted toward corporations and businesses and banks. I need independence. That’s what an elected office brings.”
Kowalko noted that Markell has not always been one to follow the direction of state boards, either. Markell was behind legislation this year that allowed Alabama-based HealthSouth Corp. to build a rehabilitation hospital in Middletown without a hearing before the Delaware Health Resources Board.
In 2011, Markell replaced dissenting members of the health resources board during its review of HealthSouth’s application and others resigned in protest, accusing Markell of improper political meddling. Markell signed the HealthSouth legislation on June 25.
Nevertheless, Blevins expressed concern this week that the fight over state investments had flared anew, confirming the bill will still be alive when lawmakers return to Dover in January.
“I do wish that he would at least try to work things out,” Blevins said of Flowers. “Sometimes I think it’s shooting from the hip. It’s just not productive, it’s not healthy.”
At the center of the controversy is the $2 billion in state cash managed by Flowers and the board. Flynn and other board members contend that, in April, they voted to allocate the funds equally between short-term and longer-term accounts to protect the state from losses created by spiking bond rates.
Board members also contend they wanted money allocated equally among managers – the source of the clash over Wilmington Trust’s portion of the portfolio. Draft minutes from the April 17 board meeting, where votes were taken, show the board did vote to equally disburse the funds, but with a 5 percent to10 percent cushion to account for fluctuations in short-term accounts.
Wilmington Trust, as of last week, held roughly $195 million in state cash, or about 21 percent of the state’s short-term portfolio, according to the treasurer’s office. Last March, when investment firm Credit Suisse evaluated the investment portfolio, Wilmington Trust held more than $285 million. Roughly 58 percent of the state’s cash was invested in longer-term accounts as of last week.
Flowers said the reduction in Wilmington Trust’s holdings came as a result of “compliance” issues, saying it was difficult to retrieve money from Wilmington Trust to pay state bills. He also argues that board members do not have the authority to micromanage the investment decisions typically made by his office.
Flynn and other board members say the treasurer is flagrantly ignoring their orders.
“The issue facing the state is, is the treasurer going to follow the guidelines that were established by the Cash Management Policy Board? Calling for resignation of two members, or all five members of the private sector, is not the issue,” Flynn said. “The issue is the board made some policy guidelines. They are not being followed.”
