CHICAGO -- A county investment fund in Ohio is being scrutinized by the state auditor to make sure some of its investments are legal.

John Conley, spokesman for Ohio auditor Thomas Ferguson, said a soon-to-be-released audit of Cuyahoga County will include a review of its Secured Assets Fund Earnings Fund, which has sustained $97 million in losses since the beginning of the year. Conley said that while there is concern about the fund's losses, the auditor is particularly concerned about how the fund is investing money for other local governments.

The fund currently invests $1.1 billion of public funds for Cuyahoga County and for about 75 cities, villages, school districts, and other counties in Ohio.

Since last year, the auditor's office has uncovered millions of dollars of losses incurred by local governments in Ohio, mainly due to investments in interest-only stripped mortgage-backed securities. In five cases, those and other investments have been found to be illegal for school districts and non-charter local governments.

Conley said in the case of Cuyahoga County, the auditor's office is particularly interested in how school district money is being invested.

School district money "can only be invested in a certain way and if that money is not being handled and accounted for separately with the SAFE Fund, there's a potential problem there," Conley said.

Conley said the audit of Cuyahoga County should be released later this month.

Francis Gaul, who oversees the fund as Cuyahoga County's treasurer, said the school district money is segregated and is invested in U.S. Government instruments that do not exceed a two-year maturity limitation required under Ohio law.

"We don't invest in [interest-only securities] or any crazy stuff," Gaul said. "That's why we were healthy while others were in serious trouble."

Gaul said the paper losses representing about 8% of the SAFE Fund were due to the bear market in fixed-income securities. Still, the fund is offering governments a return of about 6.6% on their investments, according to Tim Simmerly, the fund's chief investment officer. He said the fund has been able to make money through investment techniques such as repurchase agreements with dealers and through the arbitrage of proceeds from a taxable note issue sold last year by the county.

Critics of the fund have expressed concern that the county, whose funds make up 35% to 40% of the money invested in the SAFE Fund, could be exposed to large losses if the market continues its slide and other local governments decide to pull out of the fund.

But Gaul and Simmerly said that safeguards are built into the fund's agreements with other local governments that would prevent a mass pullout of money. The income fund has an average maturity of three years and has 35% of its portfolio invested in cash or cash equivalents, according to Simmerly.

Gaul, a Democrat who is running for Congress in Ohio in November, said that criticism of the SAFE Fund may be politically motivated.

So far the Ohio auditor has issued findings against three school districts, one village, and one city for having made investments that matured beyond a two-year statutory limit. The $1.5 million of losses sustained by the governments has been assessed against fiscal officers of the governments and the securities firm and broker that sold them the investments.

Some of the governments involved in the investment troubles have sued or settled with the securities firms that sold the investments, while others have filed for arbitration with the National Association of Securities Dealers against the securities firms.

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