Iowa Towns Still Reeling From California Twister : Finances: Hawkeye State has suffered greatest losses in investments with Steven Wymer’s Irvine-based ITM.

Residents in the small farming community of Marshalltown are stunned these days. Their city has been devastated almost overnight, and all they’re told is that it’s because of some shady financial scheme in California.

Since last month, the city of 25,000 people just northeast of here has had to shelve a year’s worth of road repairs and sewer improvements, as well as take much of its outdated equipment--such as a 32-year-old firetruck--off the replacement list.

Now residents have heard that the town may have to lay off 35 employees--nearly 20% of its work force--including some from the police and fire departments.

“There is a lot confusion and misunderstanding in town,” said Jay Gsell, Marshalltown’s city administrator. “People want to know, ‘How did it get this bad so fast and who do we blame?’

“I think if Steve Wymer were in Iowa, he would have 88 city and county officials lining up to take whacks at him with a machete.”

Today, Steven D. Wymer, 43, is facing criminal charges alleging that his Irvine-based company, Institutional Treasury Management Inc. (ITM), defrauded clients in Iowa and elsewhere of $113 million they had given him to invest. The manager has pleaded not guilty.

While officials in other states--particularly California and Colorado--are also scrambling to find lost money, no place has suffered more than Iowa, where 88 government agencies invested more than $70 million with a Wymer client called Iowa Trust.

The Des Moines Register has dubbed “the Iowa Trust Scandal” the biggest financial disaster in the state’s history. At the highest levels of Iowa’s government, the issue has dominated lawmakers’ attention.

On the first day of the legislative session earlier this month, the president of the state Senate resigned his leadership post while an ethics committee investigates his role as a salesman for Iowa Trust.

And Iowa Gov. Terry E. Branstad has moved quickly to restore public confidence by appointing a panel to investigate the incident and propose legislative reforms to prevent repetition.

“I tell people Dec. 12 was like Pearl Harbor Day in Iowa,” one county official said about the day the news broke. “This is so shocking because we really are careful with our money. We are conservative and boring, and we’re not out to make a million bucks.”

Like the cities and agencies elsewhere, Iowa’s investors still hope that some or all of their money might be recovered. Federal officials have frozen the assets of Wymer’s ITM and are sorting out the dozens of claims filed against the company.

But some local governments face a cash crunch because the lost money was earmarked for salaries, construction projects or equipment. Iowa officials are considering creating a low-interest loan program for cities or agencies that cannot meet their immediate obligations.

Iowa government officials said their scandal underscores a vulnerable reality for small-town America, where most investments are too small for major brokerage firms to handle economically and local public officials are often not schooled in high finance.

It is just such an environment that contributed to the scandal in Iowa. The Iowa Trust was formed in January, 1989, to pool dozens of small to medium investment accounts, with the hope of creating better investment opportunities.

But--unknown to many members of the trust, who thought Iowa Trust was a local operation--Wymer was hired as an adviser to invest the money. He was actually recommended to the trust by Marshalltown, which had success in dealing with him on previous investments of the town’s money. Once a few cities started to join, the trust gained credibility, and others followed.

Several local officials said a reason they were comfortable with the trust is that Iowa has fairly conservative finance laws, including a requirement that cities and local agencies invest only in government securities, as did Iowa Trust.

“If the money is in U.S. Treasury notes, what better way to invest?” said Lynde Lundquist, treasurer of Cherokee County. “We thought we were doing the right thing.”

But authorities allege that Wymer also deceived his clients to make them believe that their money was safe.

A criminal indictment handed down by a federal grand jury in Los Angeles on Jan. 2 alleges that Wymer sent clients false monthly statements that overstated the amount of money in their accounts and had employees forge bogus brokerage confirmation documents to support the fake monthly performance statements.

Iowa cities and agencies also had the option of investing in a state-based fund established in 1987 by the League of Iowa Municipalities, the Iowa State Assn. of Counties and the Iowa Assn. of Municipal Utilities.

But many of the local officials thought that they were already dealing with a state-based operation. And, said counties association director Paul Coates, “we were getting beat on the yield offered by Iowa Trust.”

One of the cities most severely affected by the Iowa Trust Scandal is Dubuque, which invested more than $23 million, much of it from police and fire pension accounts. City officials there have said that they will meet all their obligations in the near future but that if the problems are not resolved soon, the city could face a budget crunch.

In almost every corner of the Hawkeye State, local officials are telling horror stories about the financial disaster that swept through Iowa like a cyclone across the prairie.

Marion had invested more than $4 million in Iowa Trust. City leaders now wonder how they will pay for new garbage trucks they hope to buy.

In West Liberty, which had $646,000 in the trust, the city has cut back on cemetery maintenance.

And in Boone, city officials invested almost $3 million with Iowa Trust that was supposed to pay for library construction already under way. Since the city is under contract to pay for the construction, it could not halt the project. Instead, it ordered the builder to slow down the schedule.

Boone officials say they have enough money to pay the builder for another four months, by which time they hope that some of the money will be recovered. If not, City Administrator Jeff Kooistra said, Boone may have to seek relief from the state.

“We are very upset to say the least,” Kooistra said.

Marshalltown, which has a city budget of just $18 million, invested nearly $12 million with Iowa Trust. City Administrator Gsell said officials are scrambling to pay for basic operating expenses.

In addition to laying off 35 full-time employees, he said, another 65 part-time staff could be cut from the city budget unless the invested money is recovered in the next few weeks.

And because the city cannot buy the new firetruck it had planned, Gsell said, Marshalltown will probably have an increase in its fire insurance premium.

“That was literally our cash flow,” he said. “There’s not a part of our operation that won’t be affected.”

At public meeting halls across the state, residents have angrily questioned elected officials about how they got into such a mess. Some predict that the scandal will eventually take a political toll.

“We are hearing from a lot of people. The average guy on the street is wondering what happened,” said Randy Enright, executive director of the state Republican Party.

“There are people who are concerned for their hides in this thing.”

Already, new laws have been proposed in the Legislature and placed at the top of the calendar for the new session.

On the first day that the Legislature reconvened, state Senate President Joe Welsh, a Democrat from Dubuque, stepped down from his leadership job while he is being investigated by a state ethics committee about the scandal. Welsh was a salesman for the trust for two years; questions have been raised about whether he tried to influence legislation to benefit Wymer’s ITM.

In a statement when he stepped down, Welsh said that he will be cleared by investigators and that he will return to his post when the inquiry is complete.

Meanwhile, though, a political columnist for the Des Moines Register predicted recently that Welsh’s problems and the public’s shaken confidence could lead to a clean-house movement in the Legislature that might spread to several other lawmakers and unrelated controversies.