Schools’ interest payments cut to recoup county investment error

A $15.8 million error in Maricopa County’s investment portfolio is reducing the money distributed to schools, local improvement districts and the county itself, and fueling a war of words between the current and past county treasurers. County Treasurer John Allen said his office is recouping the $15.8 million by reducing this month’s interest payments to 186 local governments who form the investment pool run by his office. The money reflects three years of miscalculated interest amounts, Allen said.

The reductions translate into $5.6 million less in interest payments for county government, $445,000 less for the Tolleson High School District and nearly $32,000 less for the Daisy Mountain Fire District at the north end of the Valley.

The move means what was expected to be $18.7 million in distributions is whittled down to $2.9 million for the third quarter of the state’s fiscal year.

Allen, who took office in January, blamed the miscalculation on former Treasurer Royce Flora and his deputy, Russell Pearce. Allen beat Flora by 14 points in the Republican primary last year and went on to win in the general election.

However, a 2018 audit by the state Auditor General faulted Maricopa County for not reconciling its internal accounting with its bank accounts.

While criticizing his predecessor, Allen emphasized the error is not a significant loss in the context of a $5 billion portfolio. Think of it like the interest on your checking account, Allen said: You’re happy to get it, but it’s not going to make a difference in your financial standing.

The error, which involves miscalculation of interest earned on local governments’ investments over the last three years, pencils out to 0.3% of the overall investment pool.

Because school districts and other local governments, by law, can’t budget anticipated interest, it should not disrupt their operations, Allen said.

Flora: This is bad blood, not errors

Schools say cuts will be a tiny hit

School budget officials impact is minimal.

“It’s not an amount that is going to have a significant impact,” said Jeremy Calles, chief financial officer of business services for the Tolleson district. It won’t trigger any cutbacks in the southwest Valley district’s operations, he said.

The office of the Maricopa County school superintendent echoed that sentiment.

“It’s not something that is going to be dramatic for them,” spokesman Tim Sifert said of the smaller school districts, which leave their budgeting duties to the county schools office.

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Three years of overstatements

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Allen said red flags started popping up early this year during an internal review of the office’s operation. The review confirmed the interest earned on local governments’ investments had been overstated for the last three years.

In a news release, he called it “unfortunate” that the previous administration didn’t realize the problem.

“It is clear that overstating income earned from interest reflected a narrative that suited their political purposes,” Allen said.

But even before the review was finished, Allen on his first day on the job dismissed chief investment officer Mark Thompson.

Allen blamed Flora and Pearce for hiring Thompson, a former Tempe lawmaker, despite a recommendation from the county’s human resources office that he was not qualified.

Flora said the dismissal was due to bad blood between Allen and Thompson from their days at the Legislature, and called Allen’s statements “a political attack.”

Allen beat Flora by 14 points in the Republican primary last year and went on to win in the general election.

Flora suggested Allen is confusing a payment the county made to reimburse Transwestern Pipeline in a tax dispute last year with the overestimated interest amounts. He added he doubted the assertion that accounts had been mismanaged.

However, a 2018 audit by the state Auditor General faulted Maricopa County for not reconciling its internal accounting with its bank accounts and, even after reportedly fixing the problem in fall 2018, left other accounts unaddressed.

Allen said, in addition to the Auditor General report, he also reviewed reports from the county’s finance office that noted investment accounts weren’t being properly reconciled.

It took three months, he said, to unwind three years of problems stemming from the Flora administration’s oversight.

Flora denied there were problems and said his office got four “clean” audits. However, he didn’t personally review them and said if any problems were flagged, they would have been brought to his attention.

He denied that Thompson was panned by the HR office but added he had rejected the suggestion that the county do a background check on the potential hire. He had known Thompson for years.

“Why waste the money?” Flora said.