April 10--The College of DuPage is among 13 suburbs and government agencies that lost more than $1 million each in taxpayer funds as a result of alleged fraud in a municipal investment fund, according to a Tribune analysis.
The Illinois Metropolitan Investment Fund, which invests public money on behalf of municipalities, pension funds and local government boards, has refused to disclose a list of its clients since revealing in October it had lost more than $50 million after investing in allegedly fraudulent loans now at the center of a federal criminal investigation.
The Tribune's analysis identifies for the first time 238 public entities throughout the Chicago area that participate in municipal fund, called IMET for short. Of those, 207 lost money, ranging from less than $1 to $2.2 million. The list of investors burned by the alleged fraud include more than 100 municipalities, 27 police and fire pension funds, 18 school districts, 15 libraries, 15 park districts, three community colleges and one airport.
Although IMET has begun efforts to recoup the loss, the financial damage comes at a time when local government budgets are already under pressure. Gov. Bruce Rauner has proposed cutting the local governments' share of state income tax revenue to save $600 million.
The individual investment losses may hit suburban taxpayers in the form of reduced services or higher taxes. The Palos Heights Public Library, for example, lost about $68,000 from reserves. The loss has had no immediate impact on operations, according to its administrator. But if the library has an expensive maintenance project, it would have to fill the hole in its savings.
"I have a board that does not want to raise taxes and that would be the only way to replace the money," said Elaine Savage, administrative librarian who retired last month.
When the Tribune first asked in November for a list of participants, IMET said it could not disclose the information because of privacy concerns. IMET later denied a Tribune request under the Freedom of Information Act seeking the names of its participants and their account balances. The fund said it is not a public body subject to the state's FOIA regulations. IMET also said its customer list and other financial records are confidential and proprietary documents exempt from disclosure.
The newspaper obtained the fund's customer list from three separate public officials; each list was identical. Since the paper could not verify how current the lists were, the Tribune contacted every institution on the list, nearly 300 in all. The IMET account information was obtained from the participants through interviews, emailed questions and public-records requests.
Some municipal treasurers told the Tribune their IMET accounts were dormant or they had never invested with the fund even though their village boards had given them the OK to do so. More than 30 customers of the 238 the Tribune identified only had money in a second portfolio IMET manages that was not affected by the alleged fraud.
Ultimately, the Tribune's analysis traced individual losses for the various government entities, accounting for $50.1 million, or 99 percent, of the total $50.4 million lost. IMET's lawyer did not respond to requests for comment.
The College of DuPage in Glen Ellyn suffered the biggest hit, with a loss of $2.2 million, according to the Tribune analysis. The school is already under scrutiny of its financial oversight for giving its president a $763,000 severance package to end his contract three years early and for lavish spending on food and wine by the administration.
Others with losses of more than $1 million include the Proviso Township school treasurer's office, which manages the finances for 14 Cook County school districts, ($2.01 million), the Kane County Forest Preserve ($1.58 million), Glenview ($1.38 million), Arlington Heights ($1.3 million), Pace bus agency ($1.25 million) and Hinsdale High School District 86 ($1.19 million).
"This has completely shaken our trust," said Todd Hileman, Glenview's village manager. "I've seen other governments taken advantage of by some of these schemes, but I never thought I would be part of a scheme."
IMET's loss represented less than 3 percent of its total assets, but the revelation rocked municipal managers because they are not used to dealing with distressed investments.
"This was the first time we've ever lost money from an investment," Savage said. "It was like a punch in the gut."
Municipalities and public agencies have to be conservative with tax dollars as a matter of law. Stocks, commodities and real estate are among a long list of off-limit investments. Many agencies don't have the time or staff for professional money management. IMET was a popular option to park cash.
Like a mutual fund, IMET is a pooled investment vehicle. According to its investment policy, IMET invests in the same basket of eligible securities as its municipal customers.
Its largest portfolio, known as the Convenience Fund, is modeled after a money-market fund and is supposed to invest in safe, liquid, short-term debt such as government bonds and certificates of deposit. (IMET has a second investment option known as the 1-3 year fund that buys U.S. Treasuries and other assets with maturities longer than a year.)
Starting in 2012, IMET decided to try something different with the Convenience Fund. On the advice of a newly hired investment manager, Milwaukee-based Pennant Management, IMET began buying repurchase agreements, which are short-term loans usually secured by government bonds or cash. Repurchase agreements are a common investment for public investment pools.
But at the end of September, Pennant notified IMET of problems with the collateral in a repurchase agreement with Orlando, Fla.-based First Farmers Financial.
On Sept. 30, federal authorities arrested Nikesh Patel, 31, chief executive of First Farmers, for allegedly selling to Pennant about $175 million in sham private loans said to be guaranteed by the U.S. Department of Agriculture. The loans were the collateral in repurchase agreements bought by IMET and several other Pennant clients, including banks and retirement plans. The federal guarantees also were allegedly forged, according to a criminal complaint against Patel.
Patel was charged with wire fraud in connection with the loans, according to a criminal complaint in Chicago federal court. Court documents show he was released on $100,000 bond.
Investors in fraudulent schemes usually are left with nothing. But Patel has agreed to turn over five hotels, homes and other assets to help Pennant's clients recover some money, according to documents in a civil lawsuit brought against Patel and his companies by Pennant.
Despite the possibility of recovering some of their investment dollars, municipalities and government agencies have bailed out of IMET. As the Tribune has previously reported, IMET's total assets under management have declined $1.3 billion since the fraud disclosure, to $723 million on Feb. 28 from $2.05 billion at the end of September.
The Tribune's analysis found more than 80 customers have removed their remaining funds from IMET.
Some of IMET's largest customers withdrew their money, including College of DuPage ($81.9 million), Proviso Township ($70.5 million), Glenview ($54.3 million), Carol Stream ($44.8 million) and Pace ($43.8 million).
"When the fraud was announced to participants, without knowing the extent of the fraud and what IMET intended to do in response, we felt it prudent to withdraw all of our remaining funds from the Convenience Fund," Joseph Moore, spokesman at the College of DuPage, said in a written response to emailed questions.
The community college was a newcomer to IMET. The school initially invested $10 million a year ago, attracted by the fund's rate of return, Moore said
Even with interest rates near zero percent in recent years, the Convenience Fund has managed to produce higher rates of return than banks and the state-run investment pool. In fiscal 2013, the Convenience Fund's one-year return was 0.34 percent, compared to 0.05 percent for Illinois Funds, the state-run pool, according to IMET.
The College of DuPage began depositing tax receipts into IMET instead of Illinois Funds, Moore said. By the end of September, the school had $80 million on deposit with IMET, which represented 27.3 percent of the institution's total cash, cash equivalents and investments, he said.
The school deposited another $2.4 million into the Convenience Fund during the first two days of October, according to its IMET account statement obtained through a Freedom of Information request.
On Oct. 8, IMET disclosed the alleged fraud to its participants. The next day, the fund removed about 2.8 percent of the funds each customer had in the Convenience Fund and put the money in a restricted account. In December, IMET transferred the $50.4 million into another account it called a "liquidation trust."
The loss hit some public bodies especially hard because they had deposited in IMET property tax receipts received in September. Hinsdale High School District 86, for example, had $17 million in the Convenience Fund in August, said Bill Eagan, chief financial officer. That account ballooned to $43.2 million the next month.
About half of IMET's customers are suburban municipalities. The Tribune also identified towns outside the Chicago area that are clients, too, including Effingham, Flora, Moline, Mount Vernon, Normal and Urbana.
Several municipalities were exposed to the alleged fraud in more than just their own account. Glen Ellyn, for example, belongs to the Intergovernmental Personnel Benefit Cooperative, a health-insurance cooperative, and co-owns the Glenbard Wastewater Authority, a public utility. Both are IMET members.
The IPBC was one of IMET's largest customers with nearly $70 million invested, including $56 million in the Convenience Fund.
The insurance pool, which covers 83 municipalities, lost $1.59 million. Every member had sufficient funds in reserves to cover their portion of the loss, said IPBC executive director Dave Cook.
The Glenbard Wastewater Authority sustained a loss of about $95,000 on its $3.4 million balance in IMET.
While the Convenience Fund offered daily liquidity, some communities stored funds used for long-term capital projects. Mount Vernon, a town of 15,000 in southern Illinois, is one of the smaller municipalities in IMET but one of the larger victims. The town had nearly $30 million in the Convenience Fund at the end of September. About $25 million were bond proceeds raised in 2012, according to its account statement. Mount Vernon suffered a loss of about $817,000.
City Manager Ron Neibert said the loss hasn't had any immediate effect on any of the town's capital projects being funded by the bond proceeds.
"Obviously we're concerned about losing the funds, but we're confident we're going to see the return of those funds at some point in the future," Neibert said.
The police and fire pension funds in IMET have less exposure to the alleged fraud than local governments and other public agencies. While pension funds have to keep a portion of their investments liquid to pay benefits, IMET was generally being used to temporarily park tax receipts before investing them, said James McNamee, president of the Illinois Public Pension Fund Association, which represents police and fire pension funds.
The loss at IMET was the first in its 19-year history. Five suburban councils of governments created the fund in 1996 as an alternative to the state-run investment pool. The councils encouraged their municipal members to open accounts. Two councils, the DuPage Mayors and Managers Conference and the Northwest Municipal Conference, pulled their money out of IMET in November.
Losses at public investment pools are an anomaly because they generally make low-risk investments in highly rated institutions, said Peter Rizzo, a managing director at Standard Poor's Ratings Services, which reviews the credit quality of 82 public investment pools. S does not rate IMET.
"For public investors, yield is not the first priority," Rizzo said. "It's safety and liquidity."
But there have been a few high-profile blowups. In 1994, Orange County, Calif., declared bankruptcy after the value of its investment pool fell because of risky, leveraged positions in bonds. More recently, the state-run pool in Florida ran into trouble when some of its risky debt investments defaulted, sparking massive withdrawals.
IMET has said that it is a victim of financial fraud and that the repurchase agreement was in "full compliance" with state laws governing the investment of public funds. The majority of IMET's participants have kept their funds in the pool.
"Lake in the Hills remains confident in the ability of IMET to invest our funds appropriately," said Rich Hentschel, finance director. "We believe this recent case of fraud was an isolated incident and not indicative of the ability of IMET to select investments of the highest quality."
But Glenview's Hileman and other municipal managers are evaluating whether the First Farmers repurchase agreement was a legal investment of public funds. Illinois Funds, which also is governed by state public investment guidelines, said that "in no case are loans of any kind, guaranteed or not, acceptable as collateral or as direct investment" for the state-run pool.
About a dozen communities, led by Glenview, considered filing a class-action suit against IMET but have held off pending the outcome of the sale of Patel's assets, as previously reported by the Tribune.
If IMET is unable to recoup $50.4 million from Patel, villages are questioning whether IMET and Pennant have enough insurance to cover any shortfall. Hoffman Estates even inquired into whether IMET's board members are covered by insurance.
"We wanted to know what type of polices they have that might cover the actions of those employees in their official capacities," said Jim Norris, Hoffman Estates' village manager. "We are going through a due-diligence process we felt it was important to go through."
In the meantime, IMET participants are taking a closer look at their investments.
"We are all rethinking the appropriateness of pooling," said Glenview's Hileman.
The Palos Heights library withdrew $2.4 million from IMET after its board decided it wasn't comfortable with the possibility of sustaining more losses with taxpayer money, Savage said.
"I can say my board wants to be good stewards for the taxpayers of the community," Savage said. "They don't want to seen as frivolous in how we run the library or how we invest our public funds."
asachdev@tribpub.com
