CHICAGO -- Eighteen local governments in Ohio face potential losses of $8 million from "illegal, high-risk investments," the state auditor's office said yesterday.
State Auditor Thomas E. Ferguson yesterday released a list of 10 counties, four cities, two villages, and two school districts that face monetary losses uncovered in ongoing audits conducted by his office.
In October, Ferguson's office warned that scores of local governments invested in high-risk instruments that may violate state law. State officials said that the investments were mainly interest-only, stripped mortgage-backed securities. Ferguson's office declined to release a list of affected governments until yesterday.
In a press release, Ferguson said total losses for the governments could exceed $13 million, "depending on when the entities still holding the illegal investments redeem them."
He also revealed that audits, which began earlier this year, have uncovered investments other than the stripped mortgage-backed securities.
"The audits are still in progress and we cannot give specifics about the investments in the individual entitles," Ferguson said. "However, we can say there have been a variety of investments found."
So far, the largest potential losses uncovered are in Portage County, which may have lost $1.5 million to $5 million; Sandusky County, which may be out $850,000 to $2.5 million; and the city of Painesville, which may have lost $1.3 million, according to the auditor's office.
The state auditor said that audits scheduled to begin next year will likely uncover additional governments that have put money into what he called illegal, high-risk investments. He said the total number of effected governments and their losses may not be known for a year.
According to the state auditor's office. current state law allows for investments that mature or are redeemable within two years from the date or purchase or are obligations of or guaranteed by the United States or carry the pledge of the United States.
The Ohio Attorney General's Office issued an opinion last month interpreting the investment law specifically for school districts and noncharter local governments. The opinion states that those governments are not authorized to invest in instruments issued by the Federal National Mortgage Association.
Ferguson pointed out that investment laws governing counties are different, and that charter municipalities in the state can adopt their own investment procedures.
In the case of illegal investments, Ferguson warned that the fiscal officers of the governments as well as the companies that sold them the investments "are subject to findings for recovery for the amount of the entire investment."
A spokesman for Ferguson said that while most fiscal officers in Ohio are bonded, the bond may not be enough to cover the losses. He said the governments could seek the money from the securities firms that sold them the investments.
One government, Sandusky County, last month filed suit in federal court in Toledo against Government Securities Corp. of Texas, charging the firm with state and federal securities fraud in connection with investments the firm sold to the county, including interest-only securities. The firm on Sept. 29 filed suit in federal court in Houston against the county, asking for a declaratory judgment clearing the firm of any wrongdoing.
Meanwhile, the state's House Finance and Appropriations Committee is continuing to hold hearings on potential changes to Ohio's investment laws. State Rep. Patrick Sweeney, D-Cleveland, the committee's chairman, said yesterday that he does not want to see lawmakers enact "knee-jerk" legislation to address the investment problem.
Sweeney said he believes what is needed is a process to let people know what are legal and illegal investments for governments. He said such a process could take the form of a panel that would review investments offered by securities firms to governments in the state.
Sweeney said that work on a legislative resolution to the problem may not be completed until early next year.
The committee hearings were originally to be held on a bill that would set up a fiscal monitoring process and a fiscal emergency loan fund for counties. That bill was tailored for Columbiana County, which is being investigated for possible illegal stock-related investments that is not related to the auditor's findings.
Sweeney said the committee was sent another bill that would prohibit specific investments. However, he said such a bill could be impractical given constant innovations in investments and could result in lost flexibility for governments.