News

Schools hit by Lehman losses file claim

 

Twelve area school districts and the county superintendent of schools have taken the first official step toward filing a lawsuit against San Mateo County and its soon-to-retire treasurer Lee Buffington over the loss of about $20 million Buffington's office had invested in Lehman Brothers Holdings Inc. before that financial giant bankrupted in September 2008.

The consortium of school districts filed a claim in September, putting the county on notice that a lawsuit may be imminent. The dozen school districts involved in the legal action include Menlo Park City, Las Lomitas, Portola Valley, and Woodside.

Anne Campbell, former superintendent of the Portola Valley district and now the county's superintendent of schools, said the consortium of school districts, represented by San Francisco-based Jenkins Goodman Neuman & Hamilton, has not decided whether to go forward with the lawsuit, and has until March to decide.

Locally, the Menlo Park City School District was by far the biggest loser: Its budget took a nearly $4 million hit. The Las Lomitas district lost almost $400,000; the Portola Valley district, nearly $150,000; and the Woodside district, nearly $100,000.

The county's investment pool lost a total of about $155 million due to the Lehman Brothers failure, leaving holes in the budgets of participating public agencies including some municipalities and the county itself. But unlike some investment pool participants, the school districts were required to put their bond revenue and other working funds into the pool.

The claim asserts that the treasurer's office placed an "imprudent portion" of the pool's funds in Lehman, and kept them there despite its awareness months before Lehman's collapse that the company was on increasingly shaky ground. By not reinvesting funds in more stable institutions, the county "engaged in a high-stakes gamble that the government or some other entity would rescue Lehman," the claim says.

The treasurer's office violated county and state investment policies in investing so much of its funds in a single institution, and in the types of securities and notes it invested in.

Campbell said her office, school district representatives and the county had been working together for nearly two years to find ways to recover the money, but it had become apparent over the last few months that legal action might be required.

She said the districts not only want their money back, but want "to be sure that the policies of the county investment pool have been changed to make sure this doesn't happen again. ... We haven't been able to ascertain whether that's happened."

County Manager David Boesch said the county had crafted new policies based in part on recommendations by Alan Biller and Associates, a Menlo Park firm brought in to do a forensic analysis of investment practices that led up to the 2008 loss of investments. The policy changes will be voted on by the Board of Supervisors at the beginning of next year, when new two new supervisors takes their seats and a new treasurer replaces Buffington.

Boesch said, however, that "the county feels it's in a very strong position" if it has to defend itself against a lawsuit by the school districts. "We can demonstrate that the office has used best practices" in investing funds, he said.

Some of the Biller firm's recommended changes to the county's investment policies were measures the treasurer's office had already put into practice, Boesch said.

When Lehman Brothers declared bankruptcy in 2008, Boesch said, "the board (of supervisors) acted immediately ... to pursue any and all remedies to restore the losses." Actions included filing a claim in bankruptcy court against the principals of the failed company, and mounting an aggressive effort to receive federal funds through urgency financial measures passed by Congress.

Comments

Like this comment
Posted by chris
a resident of University South
on Nov 10, 2010 at 12:06 pm

The only people will come out ahead in this pursuit will be the attorneys.

What is the point of one part of the county suing another part of the county? No matter how you slice it, the people of the county will be the losers.

Can we have some more reasonable people call a halt to this ridiculousness?


Like this comment
Posted by Ban-"Derivatives"
a resident of Another Palo Alto neighborhood
on Nov 10, 2010 at 2:00 pm

The following Bloomberg News article adds another layer of confusion to our (ie .. we the taxpayers) understanding of municipal finance--

Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire:
Web Link

What's really annoying is that few, if any, of our elected officials have demonstrated any understanding of what the financial officials that they have been elected to oversee seem to know anything about what these finance people are doing. To make matters worse, no one--elected officials, or financial officers--seem to be in line for any disciplinary action.

Here in California, the State Auditor is about the only agency with the power to look into these sorts of things, but can only do so if a "Referral" is sent their way by an elected official. Maybe the State Attorney General has some power, but this office doesn't seem to have been active in looking into these sorts of situations on a routine basis. So .. the taxpayers end up being the big losers.

So far, no on in the State Legislature seems to have taken the initiative to ban County/City governments from gambling with "derivatives", which is probably the only way that these sorts of irresponsible activities by governmental entities can be halted.


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