Wall Street –> Main Street –> School Street
With all of the debate over the last week about the recently passed $700 billion “bailout” by the Federal Government — and I certainly don’t wait to debate the pros and cons of that — a lot has been focused on the affect on “Main Street” — how it affects homeowners, small businesses, etc. However, what may have been missed was that the current financial crisis has had a very direct negative affect on local schools as well.
Steve Mitrovich recently outlined the situation in his Superintendent’s Newsletter on September 30. School Districts are required to invest most, if not all, of their working capital — which includes their reserves as well as the cash they’ve received from the State — with the County Treasurer, who then invests the pooled money from dozens of public agencies in the County. The entire pool is about $2.7 billion, but unfortunately almost 6% of it was invested in bonds in the now bankrupt Lehman Brothers. Due to a writedown of this entire holding, EVERY public agency (including every school district) in the county lost a lot of money. For the San Carlos School District, we lost over $600,000.
What is even more disturbing about this situtation is that despite the claims of “surprise” coming from County officials, it was clear to a lot of people a long time ago that Lehman was in trouble. Even a very cursory look online led me to an article on April 1st that talked about Lehman having its days numbered. It doesn’t require an advanced degree in finance to know that investing 6% of any portfolio in any single company is a bad idea. Then not seeing the warning signs with Lehman Brothers specifically is frankly unbelievable. And, to top it all off, the stated goals of the fund are capital preservation first, liquidity second, and yield third. These are supposedly professional investment managers here.
Unfortunately the problem may not be all behind us. Over 80% of the County’s fund is invested in Financial Services — again a shocking lack of diversification.
As the Superintendent’s note stated, the San Carlos School Board did meet on October 2nd to discuss our options. Although I can’t predict yet what will happen, we are clearly not the only people upset by this. Many school districts are consulting attorneys to understand our options here. We also need to find a long-term solution to either take money away from the control of the County Treasurer and/or influence their investing decisions to be more diversified and truly focused on capital preservation.
I will keep you informed as events develop here.
