(Sean Whaley/Nevada News Bureau) – The loss of millions of dollars in an investment made by the state Treasurer’s Office in 2008 when the Lehman Brothers financial firm failed in the midst of an historic national economic crisis has become a campaign issue for Treasurer Kate Marshall as she seeks a second term in office.
Republican opponent Steve Martin says Marshall did not heed warning signs about the collapse of one of the nation’s largest financial investment firms and has not fully disclosed the effect of the company’s filing for bankruptcy on the state’s finances.
Martin said Marshall’s lack of experience in financial matters has been displayed in her first term, and she has not been as transparent as she should have been about the activities of her office and the programs she oversees.
“My biggest issue, and it even includes the Lehman Brothers loss, is the overall lack of transparency and financial accountability in that office right now,” he said.
Marshall says Martin has his facts wrong in suggesting that her office ignored warning signs of the Lehman collapse or that she failed to disclose the effect of the collapse on Nevada after it happened.
Nevada’s $50 million investment in Lehman, made through Wachovia on behalf of the state, was said by the advisers to be “100 percent good” immediately before Lehman filed for bankruptcy on Sept. 15, 2008, she said.
“Lehman was rated A the day it went down,” Marshall said. “I wish I had a crystal ball; I did not. I don’t know of anybody who knew before it went down, that’s kind of why it was such a big crisis.”
States overall lost $3 billion in the company’s failure. Nevada is now in line with other creditors seeking compensation for their losses.
But even with the Lehman Brothers loss, Marshall said she made money for the state that year.
“That year we actually showed a net gain,” she said. “So at the end of the year, even with that loss, I added $55 million to the state’s coffers.
“Was it horrible, yes,” Marshall said. “The entire country reached a precipice, and the entire country just about financially collapsed. Did Nevada feel part of it, absolutely. Is Nevada still feeling part of this financial collapse in our economy, absolutely. Do I think I showed stewardship and leadership and was able to manage us through that crisis? You betcha, you betcha.”
Marshall, a Reno attorney in private practice who had not run for public office prior to seeking the treasurer position in 2006, said she has helped guide the state through the worst national fiscal crisis in decades, including keeping one of the best credit ratings for any state in the nation. Marshall said she would like to continue to do so for another four years.
Martin, who served for a time as Nevada State Controller as a Gov. Kenny Guinn appointee, is a Las Vegas certified public accountant who also serves on the Board of Finance, a panel that oversees the investment policies of the Treasurer’s office.
The most recent poll on the race, conducted just this week on behalf of the Las Vegas Review-Journal, shows Martin ahead of Marshall with 37 percent of the vote, Marshall with 32 percent and 19 percent undecided.
Martin said he will ensure the treasurer’s office is completely transparent if he wins in November. The Lehman Brothers failure is just one example of Marshall’s failure to be completely transparent and forthcoming about the operations of her office, he said.
Martin cites as evidence of his criticism a legislative budget hearing for her office about five months after the Lehman bankruptcy filing.
“She was quizzed during the budget hearings in February 09 at the Ways and Means and it was like a shock to everybody, not only to Republicans but Democrats just across the board,” he said.
He cites a 47-page treasurer’s office financial report released in October 2009 that made no mention of the Lehman loss. The report says in its introduction it will provide a detailed explanation of what happened in the office, Martin said.
“That is a material item and has to be referenced in there and should be totally explained as to what went on; it wasn’t,” he said. “That is not transparency.”
Marshall said Martin has his facts wrong on the transparency claim as well.
“I was on TV and in a newspaper article within 24 hours identifying the loss,” she said.
Her office produced copies of two television news reports dated Sept. 16 and 17, 2008, citing Marshall announcing how the collapse of Lehman Brothers could cost the state as much as $12 million of its $50 million investment.
She also did a lengthy interview on Jon Ralston’s television interview program Face To Face on Dec. 18, 2008.
Marshall said the Lehman loss is also included in the Comprehensive Annual Financial Report (CAFR) prepared by the state Controller’s office.
The amount the state expects to recoup from the Lehman loss has been a moving target. Marshall told the Legislature in February 2009 the return might be half of the original investment. The state has recovered none of the $50 million yet.
Martin said the most recent estimate for recovery from the Lehman loss that he is aware of is only nine cents on the dollar, or less than $5 million.
Martin also cites Marshall’s plan for writing off the loss from the Lehman investment as an example of not being transparent.
Marshall is spreading the loss of income to several dozen different agencies and programs over 4.5 years. She said the plan, which was reviewed by the Board of Finance in July 2009 – before Martin was appointed – was approved both by state Budget Director Andrew Clinger and the Legislature.
But Martin says the financial loss to many programs, including the Millennium Scholarship, has not been fully explained to everyone involved. He cites an email sent to the treasurer’s office on June 10 this year from a budget analyst asking why interest payments were not being received for one of the programs, the remediation trust fund account.
The treasurer’s office responded and explained the situation was the result of the Lehman loss but Martin says it is evidence that the plan has not been well publicized.
“Now if a budget analyst doesn’t understand what is going on, and they work directly in that area, how can we say that the information is public knowledge and has gotten out,” Martin asked.
Martin asked for a special Board of Finance meeting to discuss the issue but the treasurer’s office received an attorney general’s opinion saying it was not appropriate for discussion.
Martin said such an action does not equate to a transparent treasurer’s office.
He said over 170 agencies and programs are being financially affected by the loss of income from the Lehman collapse, including more than $600,000 to the financially strapped Millennium Scholarship.
“All of these are just glossed over and not publicized,” he said.
But Marshall said Martin approved the plan to cover the Lehman loss as a member of the Board of Finance when he voted to approve the quarterly financial statements. Spreading the loss out over time has meant less of an impact on the different agencies and programs dependent on the funds.
“He has seen this for a year and only decided two months before the election that he was going to vote against it,” she said. “It has been in front of him for quite a while.”
Martin acknowledges the votes but said the information was in the “fine print” in the reports, and that his ongoing research efforts have led to his concerns in recent months.
Martin says the transparency issue is also found in Marshall’s questionable oversight of the Millennium Scholarship program. He has criticized Marshall for what he says is her failure to provide an accurate financial assessment of the health of the scholarship to lawmakers earlier this year.
The scholarship, named after the late Gov. Kenny Guinn, is available to qualified Nevada high school graduates. The Legislature’s Interim Finance Committee in August transferred funds from a separate college savings program into the scholarship to keep it solvent through the current school year but it faces a bleak future.
The shortfall was created in part when the Legislature decided to divert funding sources used for the scholarship to help fill a shortfall in the general fund and the College Savings Plans Board opted not to use other revenues to keep the scholarship solvent. The situation worsened when the annual tobacco settlement fund payment to Nevada, the main source of the scholarship, came in lower than expected in April, primarily because people are smoking less.
Martin noted that both Assemblywoman Heidi Gansert, R-Reno, and Senate Majority Leader Steven Horsford, D-Las Vegas, in April questioned the treasurer’s office about the shortfall and Marshall’s statements to the Legislature in February that the scholarship fund would remain solvent through 2014.
Marshall said lawmakers were given the best information available from her office about the financial status of the scholarship, and in a letter to the governor and Legislature she warned that taking nearly $28 million in funding from the program over three years to balance the state budget would put it at risk.
Martin said he first suggested the program would be short by $3.9 million in the current year, long before a new analysis by the treasurer’s office actually showed a $4.2 million shortfall.
Martin said he has the experience Marshall lacks to run the office. Marshall can rely on expert advice, “but if you don’t understand the background and everything else from a finical standpoint you don’t know if you are getting good advice or bad advice.”
Marshall said in her nearly four years as treasurer, she has worked to reduce costs by renegotiating contracts and taking other actions to spend less. This has resulted in savings that the Legislature has been able to use to help overcome ongoing budget deficits, she said.
“I have been able to identify funds for them to help them bridge the gap and get them through the latest hump,” Marshall said.
The office has also made great strides in helping Nevada parents save for college, including one program that will match savings up to $300 a year for parents with eligible incomes, she said.
“It doesn’t get any better than that,” Marshall said.
(Updated at 12:40 p.m. on Sept. 25, 2010, to reflect new poll results showing challenger Steve Martin ahead of incumbent Kate Marshall.)