Delaware Treasurer Wants to Keep State Funds Out of Derivatives

WASHINGTON - - Delaware Treasurer Janet C. Rzewnicki is opposing a proposal before the state's nine-member Cash Management Policy Board to permit state investments in derivatives.

Rzewnicki a Republican who is considering a gubernatorial bid, has rejected as too risky a proposal to allow investment in collateralized mortgage obligations, private mortgage-backed securities, and asset-backed securities. She also questioned a plan to put state funds into five-year investments.

Delaware Finance Secretary Sarah Jackson said the proposals, made last week by the manager of the state's intermediate-term portfolio, were simply meant to add new securities to Delaware's portfolio.

Rzewnicki said the recommendations were the latest in a string of attempts by Gov. Thomas Carper's administration to allow derivative investments in the short-term cash funds.

"This has been a long-term ongoing campaign by the Carper administration to put derivatives into the short-term portfolio and I am not in favor of doing that," Rzewnicki said. "We are on a solid financial footing and I want to keep it that way."

Jackson said the proposal was confined to "very limited, specific federal agency CMOs of a five-year total maturity or less, and they must not be trenched, must be whole instruments, not separated; and LOC-backed corporates."

"The proposal was that we look at some additional instruments which met the cash management board's very conservative perspective," Jackson said. "The board has said everything must be double-A or better."

Dan Scholl, deputy principal assistant to Jackson, said Rzewnicki "turned the proposal into a political item."

The proposals came before the board last week. The board will not make any changes to the state's investment policy before its next scheduled meeting in November.

Both sides agree that the change would apply to about $100 million in state funds. However, Jackson said that amount is about one-ninth of available funds, while Rzewnicki said the amount equals about half the state's general fund.

Rzewnicki said state lawmakers are proposing legislation to prohibit the cash management board from investing in derivatives or long-term investments. Del. Wayne Smith, R-7th District, who is expected to introduce the legislation, could not be reached for comment.

"The legislature understands if the cash management board has five-year money in the short-term arena, it could tie their hands on using the money - like for a tax cut or to deal with an economic downturn," Rzewnicki said.

Anticipating a legislative battle, Rzewnicki wrote to California Treasurer Matt Fong and other state treasurers for information on derivative investments.

Fong, in a news release, advised against allowing the investments.

"This would represent a significant change in investment strategy in Delaware, both in the length of maturity and the level of risk," Fong said. "A person would have to be well-schooled and know exactly what they are doing."

Fong has opposed derivatives since Orange County was forced to declare bankruptcy after losing billions on leveraged investments in derivatives.o

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