NMFA board meeting, 7/18/12

The board of the New Mexico Finance Authority (NMFA) is trying to thread the needle. Whether ratings agencies looking from Wall Street think the board pulled it off enough to their satisfcation remains to be seen.

On Wednesday (July 18), the board — in a meeting that often got contentious — decided to cancel a contract with an independent, third-party organization to look into how a 2011 fraudulent audit managed to get by, leading to serious questions about the Finance Authority which issues low-interest bonds for government entitites and school districts across New Mexico.

But while the board voted to nix the agreement with the Washington legal firm of Steptoe and Johnson as well as a subcontract with the accounting firm of KPMG to try to get to the bottom of the financial mess, the board also passed a measure calling for the creation of a committee that will quickly move to work out a new contract having the third-party investigators report to the New Mexico State Auditors Office.

“We’re going to do the investigation,” board member and New Mexico Finance and Administration secretary Tom Clifford said during the meeting. “But appropriate deference should be made to the law enforcement agencies here.”

State Auditor Hector Balderas and Daniel Tanaka, director of the state’s Securities Division, said they were concerned about third-party investigators possibly hindering their respective investigations into the bogus audit that is being blamed on a former employee at NMFA.

“The role of Steptoe and Johnson and the subcontractor [KPMG] puts me in a difficult position,” Tanaka said.

But the chief executive officer of NMFA, Rick May, pointedly warned the board throughout the 5-hour meeting that the move could scare off ratings agencies. Just a few days ago, Moody’s announced it is placed $1.26 billion of New Mexico’s public debt on review for downgrade and on Wednesday morning Standard & Poor’s put the NMFA’s senior and subordinate-lien bonds on Creditwatch with negative implications on news of the fake audit.

“The action of the New Mexico Finance Authority has to worry about is far beyond the borders of New Mexico,” May said.

But other board members weren’t comfortable with the contract that NMFA leadership had drawn up. The deal originally would have paid Steptoe and Johnson, KPMG as well as a “crisis management firm” $1.275 million to look into the mess.

“There is merit to Steptoe and Johnson but it has to be truly independent,” new board chair Nann Winter said.

John Bemis, the secretary of Energy, Minerals and Natural Resources was blunt: “We’ve had a bad procedure. We’re just scrambling to do things.”

Under the motions that passed Wednesday, Steptoe and Johnson as well as KPMG can still be re-hired once the committee hammers out a new agreement with them.

No word on how long that may take but the board intends to draw up a new deal in a matter of days and Balderas told members that his office “can expedite as soon as possible, provided the scopes are approved.”

Update: Capitol Report New Mexico talked to Auditor Balderas Wednesday night who said he was pleased with the vote. “I was impressed with the leadership of the board, that they were very cautious and careful and they want to immediately comply with the Audit Act,” Balderas said, adding that his office expects to begin its investigation first thing Thursday morning. “The vote today by the NMFA board gives me every indication that we can go to NMFA to completely assess the situation without any further delays.”

Tanaka also told the board, “I can say with confidence that we have already determined that fraudulent activity was not limited to the audit report alone” but didn’t elaborate.

As for the so-called rogue employee, he’s been identified as Greg Campbell, who reportedly left NMFA back in June and cannot be located. New Mexico Watchdog reporter Jim Scarantino found his home in far west Albuquerque on Tuesday and Scarantino reports that Campbell was not licensed by the state as an accountant.

“We were misled by an employee, a rogue employee,” May said during Wednesday’s meeting, “who misled the board, who misled the staff.”