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Tuesday, February 09, 2010
Treasurer Switched Court Deposits
By Colleen Heild
Copyright © 2010 Albuquerque Journal Journal Investigative Reporter
Court officials in Albuquerque and Santa Fe say they were never notified that beginning in 2006 the state treasurer began investing their deposits into a money market fund that wasn't federally insured — and proved risky.
A 2001 letter from the Treasurer's Office declared there was no risk and that the deposits were "102 percent" backed by government securities. The letter urged local court officials to use the Treasurer's Office account to deposit money the courts held in trust for people involved in lawsuits.
"We were relying on them telling us that," said Ted Baca, chief judge of the state district court in Albuquerque.
Four district courts in New Mexico have more than $6 million in litigant funds in the pool. The money is put up by parties in pending civil litigation, such as condemnation or foreclosure cases.
State court rules require such deposits to be held in financial institutions that are federally insured.
Baca and 1st Judicial District clerk Stephen Pacheco told the Journal the first they learned of the risk was last month. That's when more than $1 million deposited by the Santa Fe District Court in two condemnation cases came up $22,000 short when the case settled and property owners had to be paid.
The money had been invested in the 22-year-old Local Government Investment Pool, which is managed by the state Treasurer's Office. Hundreds of state and local government entities have used the fund to park money for the short term and reap interest.
District Court rule 1-102 states that litigant funds shall be deposited in an interest-bearing account "only in a financial institution insured by the Federal Deposit Insurance Corporation or the Federal Savings & Loan Insurance Corporation."
Court officials said they relied on letters received in 1993 and 2001 from then-state Treasurers David King and Michael Montoya stating that the short-term investments to the pool were not "at risk."
"The purpose of the pool is to maximize interest earnings while retaining liquidity and safety," wrote then-Deputy Treasurer Robert E. Vigil in a 2001 letter to district courts.
Court officials said they didn't know the mix of pool investments had changed to include the Reserve Primary Fund, an AAA-rated money market fund that abruptly closed in September 2008 when Lehman Bros. filed for bankruptcy. The Reserve Fund held $785 million in Lehman-issued securities.
The fund had been paying high yields but froze its deposits, including $38 million owed to the state local pool. Over the past year, all but about two cents on every dollar invested has been gradually returned to the office of state Treasurer James Lewis.
The Santa Fe condemnation case was resolved last week when additional funds from the Reserve Fund arrived to pay off the principal and provide for about $18,000 in interest.
When the court asked recently about the lack of notification concerning the change, Baca said treasurer's officials pointed to a statement on the treasurer's Web site about the risk.
In an e-mail to the Journal, Deputy Treasurer Mark Valdes said a "disclaimer on investment risk" also has appeared on depositors' monthly statements beginning in January 2007. It states the deposits are neither insured by the state nor the federal government.
But court officials said they were accustomed to receiving letters from the treasurer when changes in the account occurred and that didn't happen.
Valdes said while some investments in the pool have been collateralized at 102 percent, they "were never federally insured."
Since 2008, the state Treasurer's Office has switched to investments such as U.S. Treasury bills and FDIC-backed commercial paper.
Now, court and state treasurer's officials are searching for a new way to hold the money and comply with the law.
"We've been told for the time being these (existing deposits in the LGIP) are safe," Pacheco said. But he said the Administrative Office of the Courts and Lewis' office are "trying to work out a vehicle for us to use" permanently.
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