WATERVILLE VALLEY, N.H. -- State treasurers began a national conference here by considering the grim side of their work: the possibility of losing the public's money and trust.

"The world's not risk-free, but the public expects that you will make it that way," said Girard Miller, a senior vice president at Fidelity Investments. He said the keepers of the some $2 trillion of public funds at the state and lower levels of government face increasing risks from complex investment vehicles and failures by banks and other financial institutions.

He said that a proliferation of derivative products could cost treasurers some money if they are not wary. "You now have tranches that are being carved up by rocket scientists who themselves don't understand their behavior," he warned.

Another peril was highlighted by H. Jay Sarles, executive vice president of the Fleet/Norstar Group. He said the public's trust could be eroded by the practice of setting up authorities to finance projects that might not survive a voter bond referendum. "There shouldn't be a concerted effort to find ways to get around things that the voters don't want," said Mr. Sarles. "If the voters don't want it you probably shouldn't build it."

He conceded that investment houses have not yet learned how to treat some of their best and most influential customers. "We have a long way to go in terms of how the Street is handling these so-called institutional investors."

Mr. Miller did not absolve the treasurers of responsibility for their investment decisions. "I think that you can be savvy and I think that you can be smart, but I don't think that it's your job to be using public funds for risk capital."

Mr. Miller said that particularly for state treasurers -- who might place bond proceeds in investment contracts with insurers -- the failure of insurance companies should sound an alarm. In New Jersey, where the state insurance commissioner has placed Executive Life Insurance under conservatorship, the municipal investment contracts were deemed to have the lowest priority of any of the insurer's obligations.

Some of those risks could continue to increase, Mr. Miller said. "The economy is not out of the woods," he said. Among the growing potential risks to keepers of public funds, Mr. Miller said, are the Repo defaults in a bear bond market, and the sale of overpriced securities.

Because of the growing risks faced by state state treasurers, Mr. Miller predicted "a trend toward external money management." He cited Vermont and Florida as states that had already taken steps to turn over their public pensions to money management concerns.

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