Treasurers Try to Catch Up to Changing Times

The Charles County treasurer’s job did not look all that difficult in 1974 when Thelma Bowie first considered running for the office, so she took a shot at it. To no one’s surprise, she won.

With a high school diploma--and 24 years of experience as a staffer for retiring Treasurer Franklin Winkler--Bowie was reasonably familiar with the basic routine: Collect the taxes that people send in and then put the money in the bank--into “safe” certificates of deposit.

“It was a political office--you went to all the weddings and funerals,” recalls retired state Sen. Jim Simpson, who was a county official at the time.

In August, after five consecutive terms, Bowie retired amid a scandal over $1.3 million in losses racked up when her deputy invested county funds in “derivatives”--the same high-risk financial instruments that have wrought havoc in Orange County.

Bowie’s travail--she is undergoing medical treatment for heart problems--reflects some of the stunning changes that have overtaken the once-staid world of municipal and county fiscal officers over the past few decades.

From onetime financial backwaters that could be run by almost anyone, local government finance departments have been quietly evolving into complex operations that often require special investment acumen as well as knowledge of the latest innovations in financial markets.

Not every jurisdiction has kept pace with these demands, and some--possibly including Charles County and others where the job is still a part of the county’s courthouse political legacy--are struggling with the consequences now.

One major factor behind the painful transition is a drastic increase in the pressures on treasurers to earn more with their constituents’ money. Slumping local economies exacerbated by taxpayer revolts have seriously squeezed many cities and counties, prodding fiscal officers to seek every ounce of “investment profit” they can get to replace forbidden tax hikes.

Interest rates on the more traditional “safe” investments, such as Treasury bills and bank CDs, have steadily declined almost to a pittance, creating temptations to move toward higher-paying--and decidedly riskier--bonds.

Meanwhile, Wall Street’s new high-visibility investment houses have been coming up with creative financial mutants that salesmen have hawked aggressively to often unsophisticated fiscal officers.

“The pressure is on these people to have maximum performance, and the people who supervise them don’t care how they get there,” said Robert Sobel, a Hofstra University financial expert. “Six months ago (Orange County Treasurer Robert L.) Citron was a hero. Now, look.”

To be sure, the latest debacles in places such as Orange County and Maryland’s Charles County are hardly the first time that a city, county or state government has found itself in financial trouble.

John Peterson, president of the Government Finance Group, a Virginia-based investment firm, points out that in the nation’s earliest days states routinely defaulted on big construction bonds for canal-building and the like, often soaking foreign investors.

The Advisory Commission on Intergovernmental Relations reports that in the late 1870s, about one-fourth of the total debt incurred by cities and counties across America was in default--primarily because of carpetbagging governments and bad railroad bonds.

But the big economic recovery after World War II--and a spate of financial crackdowns by states--stabilized the situation. Through the early 1970s, there were only a handful of big defaults--New York, Cleveland and the Washington Public Power Supply System among them.

And financial crises stemming from bad investments by local officials--rather than just defaults--have been even rarer.

One reason is that for the most part, counties and cities were restricted by state law from investing in anything much riskier than a Treasury bill or bank CD.

Johnnie Mae Griffin, treasurer of Pittsburg County, Okla., says her county’s investment portfolio--which ranges between $5 million and $7 million at its peak--goes entirely into local bank accounts. “You have to live in your own world,” she said. “Here, we are much slower-paced.”

But quite a few jurisdictions now have no real limitations, and the lure of greater investment returns is tempting.

In Auburn, Maine, population 24,000, where losses from investments in derivatives cost the city about $6.5 million last summer, acting City Manager Patricia A. Finnigan says the government did not even have an investment policy.

There was no way to prosecute anyone after the debacle because there were no rules to violate, Finnigan said. “It was just that (the city’s treasurer then) felt that that would be appropriate,” she said. “We’re developing a policy now, and should have it out soon.”

Interestingly, Charles County’s big financial blowup last summer came despite tight restrictions on permissible investments. County officials decline to explain how their money wound up in high-risk instruments, but they have filed a series of lawsuits trying to void the transactions on grounds that they were made illegally.

Moreover, the qualifications of individual city and county treasurers seem to vary as widely as the laws that regulate them. That is particularly the case in the 34 states where the position is elected by voters rather than appointed based on credentials.

For many years, financial expertise would have been almost irrelevant for a treasurer. In the 1800s, they were not expected to invest money--just keep it. Taxes were paid in gold, and all the treasurer needed “was a great big vault,” said Bill Finck, who served briefly as a treasurer of Bexar County, Tex. “There was no intention of reinvesting.”

Until relatively recently, many jurisdictions deposited their collections in local banks. The banks provided some free services but nothing else. Interest earnings “simply weren’t expected,” Maryland’s Simpson recalls.

By the 1970s, the entire financial picture began to change. Taxpayer revolts were limiting the ability of local governments to raise taxes to cover their increasing costs. Federal programs were being cut back. And Congress was requiring localities to do more.

Although most counties were earning interest on their investments by then, the abrupt end to the inflation surge in the 1980s sent interest rates on Treasury securities and bank CDs plunging, depriving local governments of one of their few additional sources of income.

At the same time, deregulation tore away many of the restrictions that had limited the scope of the investments available on the financial markets, spawning a plethora of hybrids that offered far higher yields--at a far higher risk.

One major development was the expansion of the so-called government securities market to include investments offered by quasi-federal agencies such as the Federal National Mortgage Assn.

Although Fannie Mae, as the FNMA is popularly known, and other such entities are not backed by the “full faith and credit” of the federal government, they are considered so by the markets and thus fall within the limits of many local governments.

As a result, many local fiscal officers found them attractive places to put their money. And despite a few mishaps in the late-1980s savings and loan debacle, few thought them very risky.

When Wall Street came up with the idea of offering derivatives, some localities were poised to take the next step. And the salesmen were poised to make a kill.

Barbara Bauer, treasurer of Ada County, Ida., said she gets calls about once a week from salesmen trying to persuade her to invest in one fund or another, including some firms as far away as New York, Florida, Texas, Chicago “and a lot of California types.”

Mary Buckler, the treasurer of Marion County, Ind., which includes Indianapolis, says derivatives salesmen have been pulling out all the stops, holding out promises of high yields and even going to lengths to find out her nickname to help endear themselves to her.

“The people who present this mask it in mystery (and) try to brainwash away your common sense,” Buckler said. “But you get beyond all the packaging and marketing and . . . what you see is short-term money attached to a long-term yield. I don’t think so!”

Philip M. Dearborn, a government finance expert, says most localities did not succumb to such sales pitches, but the fact that even a minority did is disconcerting.

“Many of us have come to realize that there’s a lot going on out there that wasn’t apparent,” Dearborn said. Using derivatives judiciously to offset other developments in the market is one thing, he says. But “trying to get greedy is just crazy.”

Up to now, reform has come relatively slowly. One state that has moved to tighten its rules is Texas, which five years ago began requiring that county treasurers be formally “recertified” by passing courses on the latest bond market developments.

“You have to have a program of continuing education because so much changes every year,” said Bill Melton, the Dallas County treasurer. “We have all sorts of various and sundry instruments to be invested in.”

But most analysts believe that broader reforms will be slow in coming.

Joe Norris, a former LaPlata businessman who has replaced Thelma Bowie as Charles County treasurer, is determined to avoid a repeat of last summer’s debacle. “We hold no derivatives, and we’re not going to hold any,” he said.

But Hofstra’s Sobel is not so sanguine. “Sure, we can expect to see more conservative financing in the next few years,” he said, “but 15 years from now there’ll be problems all over again.”

Times staff writer Jonathan Peterson in Los Angeles contributed to this article.

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