By Bill Baker, J.D.
Editor and Publisher, The San Bruno Beacon
“I’m more interested in the return of my money than the return on my money".-----------Will Rogers
As reported in the October 2nd, 2008 edition of The Daily Journal, in a story titled, Schools come to terms with market loss, the San Bruno Park School District (SBPSD) lost an estimated $680,000 of San Bruno Park School District money after SBPSD Superintendent Hutt and the Board of Trustees invested this money in the speculative County Investment Fund that was obviously mismanaged to the point where there has been a total loss of approximately $150 million.
One of the fundamental and most important rules of investment is:
Only speculate with what you can afford to lose.
How did the San Bruno Park School District Superintendent and Board of Trustees get into this mess and how could they have avoided losing approximately $680,000 of SBPSD money that was gambled and lost on risky investments?
Let's look at the law:
California Education Code section 41002 provides:
"All moneys received by any school district or paid into the county or city and county treasury to the credit of the district from state apportionments, county, district or municipal taxes, other than moneys required to be placed in a separate fund of the school district, shall be deposited in the general fund of the district, which fund shall be in existence in each county and city and county treasury.
Nothing in this section shall be construed as discontinuing, nor as affecting the disposition of moneys in any of the separate funds of the school districts legally created or established in law."
California Education Code Section 41002.5 provides:
"Notwithstanding Sections 41001 and 41002, money received from the sources, or for the purposes listed in subdivisions (a) to (h), inclusive, may be deposited in a bank or other financial institution whose accounts are federally insured. Any money so deposited shall be in an account or accounts fully covered by that insurance:
(a) Funds received for the purpose of making loans, scholarships, or grants to students in, or graduates of, a school under the jurisdiction of the governing board of the district.
(b) Funds received for the sale of food or other services performed by one or more cafeterias established in the schools of the district.
(c) Funds received from the sale of produce, livestock, and other products of one or more school farms established in the district.
(d) Clearing accounts established pursuant to Section 41017.
(e) Funds of a student body organization.
(f) Funds in a revolving cash fund established pursuant to Section 42820.
(g) Funds for community recreation programs established pursuant to Chapter 10 (commencing with Section 10900) of Part 7.
(h) Funds that, pursuant to any other law or provision of the California School Accounting Manual, may be deposited in a bank or other federally insured financial institution in lieu of the county treasury."
------------> Based upon the information that was made available to all participants in the County Investment Pool, it was a fact that the County Investment Pool, managed by County of San Mateo Treasurer Lee Buffington, was not an insured pool of money, was investing in securities that had a significant potential for loss, and that any entity (like the San Bruno Park School District) investing their money in this pool could experience investment losses. When you invest money in something where you can lose some or all of the money you invest, you are gambling with the money you are investing. In this case, San Mateo County Treasurer Lee Buffington along with the SBPSD Superintendent and Board of Trustees gambled with San Bruno Park School District money and lost approximately $680,000.
Unless the SBPSD Board of Trustees and Superintendent Hutt could afford to lose approximately $680,000 of the SBPSD taxpayer money, that they had a fiduciary duty to protect against loss, Superintendent Hutt, and the SBPSD Board of Trustees, should have directed County Treasurer Lee Buffington to put all SBPSD taxpayer money under his control into FDIC insured certificates of deposit and not one of the County Investment Pools. As we have seen, putting the SBPSD money in the high risk County Investment Pool instead of FDIC insured certificates of deposit was a reckless, losing gamble of taxpayer money.
San Bruno Superintendent Hutt and the SBPSD Board of Trustees will argue that they had no choice but to allow County Treasurer Lee Buffington to invest the SBPSD's money into the risky County Investment Pool. This is incorrect. California Government Code Section 27136 provides:
"(a) Notwithstanding any other provision of law, any local agency, public agency, public entity, or public official that has funds on deposit in the county treasury pool and that seeks to withdraw funds for the purpose of investing or depositing those funds outside the county treasury pool, shall first submit the request for withdrawal to the county treasurer before withdrawing funds from the county treasury pool.
(b) The county treasurer shall evaluate each proposed withdrawal for its consistency with the criteria adopted pursuant to subdivision (h) of Section 27133. Prior to approving a withdrawal, the county treasurer shall find that the proposed withdrawal will not adversely affect the interests of the other depositors in the county treasury pool."
Superintendent Hutt and the SBPSD Board of Trustees probably never asked Lee Buffington to withdraw all of the SBPSD money from the risky County Investment Pool so that it could be placed in FDIC insured certificates of deposit outside of the risky County of San Mateo Investment Pool. The provisions for such a request are even provided for in the County of San Mateo Pooled Fund Investment Policy document published in January 2008.
There is little doubt in my mind that such a request to place SBPSD funds in would have been approved because FDIC insured certificates of deposit represent a safer investment than the County of San Mateo Investment Fund because these certificates of deposit are insured and the County Investment Fund is not insured. In addition, SBPSD money represent a very small percentage of the total amount of money invested in the County of San Mateo Investment Pool.
In the event that San Mateo County Treasurer Lee Buffington had refused to comply with the request to withdraw SBPSD money from the County Investment Pool and place it into FDIC insured certificates of deposit, legal action could have to be taken to secure his compliance with the demand. The legal fees would be a lot loss than the approximately $680,000 San Bruno taxpayers have lost as a result of this reckless gamble.
Going forward, Superintendent Hutt and the SBPSD Board of Trustees need to immediately draft a California Government Code Section 27136 letter to San Mateo County Treasurer Lee Buffington demanding that all remaining SBPSD money invested in the County of San Mateo Investment Pool be immediately withdrawn from the County of San Mateo Investment Pool and placed into FDIC insured certificates of deposit, at different banks, in such a way that all SBPSD money is insured.
SBPSD Superintendent Hutt and the Board of Trustees should not compound the problems they have already created for the SBPSD by failing to take the immediate action I have suggested in the previous paragraph. 