The West Virginia Legislature established the BTI in July 2005 as a public corporation of the State of West Virginia, to make short-term operating funds of the state more accessible to state government and to allow the West Virginia Investment Management Board (the “IMB”) to focus on the state’s long-term trust investments. The Consolidated Fund is the statutory title of the fund that collectively refers to the investment pools and accounts the BTI manages.  The following is a history of the events that led to the creation of the BTI in 2005.

In 1967, the West Virginia Legislature created the Board of Investments (the “BOI”) to oversee the investment of state funds.  The board was composed of the Governor (chairman), the State Treasurer and the State Auditor.  By statute, staffing for the BOI was provided by the State Treasurer’s Office (the “STO”).  The primary function of the BOI was to invest the funds of various state agencies in accordance with the direction of those agencies.  Although some of the excess cash of the state was invested, much of it was left in bank accounts across the state.  In 1976, Treasurer Ron Pearson implemented a program for investing idle state funds in certificates of deposit.  The program enjoyed limited success, primarily due to the restrictions in state code that limited the State’s investment options.  State Treasurer Larrie Bailey, who succeeded Treasurer Pearson in 1977, worked with the Legislature to introduce House Bill 1321, known as the “Modern Investment Act”, during the 1978 Regular Session.  HB 1321 sought to address the shortcomings in the existing State code and modernize the procedures for the investment of funds of the state.  The provisions of HB 1321 created the Consolidated Fund and Consolidated Pension Fund and also permitted political subdivisions of the State to invest funds with the BOI.

The BOI was responsible for developing investment policies over funds it invested, selecting money managers to manage the state’s money, and overseeing the STO in the performance of functions for the BOI.  In February 1985, at its first meeting after the election of Treasurer A. James Manchin, the BOI passed a motion that authorized the STO to enter the bidding process and actively seek the role of money manager for the Consolidated Fund.  As a result, the STO became the sole money manager for all the State’s money invested in the Consolidated Fund.  At the February 1985 meeting, the BOI also approved extending the maximum maturity of investments from 90 days to 10 years.  With these new authorizations in place, the STO implemented a speculative investment strategy to take advantage of declining interest rates.  This strategy was in direct opposition to the primary objectives of the Consolidated Fund which were: preservation of principal, minimization of risk and volatility, and maintaining sufficient liquidity for anticipated withdrawals.

The STO’s investment strategy, which involved excessive trading of U.S. Treasuries in the 7- to 10-year maturity range in the cash and “when issued” markets, resulted in significant losses in 1987 when Treasury yields reversed from steadily falling to suddenly rising.  Market yields on long-dated Treasuries began slowly rising over March 1987, ticking up by 30 to 40 basis points before abruptly rising by 90 to 100 basis points during April 1987.  The sudden increase in yields in April 1987 was the result of the Japanese response to sanctions imposed by the U.S. on March 27, 1987.  On April 1, 1987, Japan began liquidating their sizable holdings of 7-year Treasuries in response to the U.S. sanctions.  The STO was forced to sell their long-dated holdings at significantly reduced prices to meet cash flow needs.  Investment staff concealed the losses, accumulating them in a reserve account in the investment accounting system.  This resulted in an imbalance between the investment accounting system and the participant accounting system.  By the time the losses were discovered by Touche Ross during the statewide Single Audit in October 1988, the state had lost a total of $291.6 million.  The subsequent audits and investigations resulted in the impeachment and resignation of Treasurer Manchin and the imprisonment of the Investment Director for lying about the investment losses and attempting to cover them up.

Governor Gaston Caperton appointed a committee to study the investment losses and develop recommendations for dealing with the losses.  As a part of the plan, the STO created a process to amortize the losses over time to avoid passing the losses through to the participants.  Settlements received from lawsuits against broker-dealers were used to fund the purchase of securities that would help to amortize the losses over a period of nearly 25 years.  Other recommendations of the committee were incorporated into Senate Bill 621, which was passed during the 1989 Regular Session.  This bill also increased the BOI’s board from three members to seven members, with four of those members being appointments of the Governor.  SB 621 only represented the initial steps that needed to be undertaken to resolve the issues that led to the investment losses.

During the 1991 Regular Session, Senate Bill 8 was passed.  This bill separated the BOI completely from the STO, creating it as a stand-alone agency.  The bill also moved all cash management and participant accounting functions from the STO and placed them under the BOI.  Over the period from 1989 to 1991, the investment processes and controls of the BOI had been significantly overhauled based on recommendations from the various audits and investigations.  Instead of managing portfolios in-house, the BOI hired professional investment managers to oversee the investment of funds.  Although BOI staff were responsible for executing trades, all investment decisions were made by external advisors.  Additionally, the BOI was required to undergo an annual audit and have its performance evaluated by an external investment consultant.  New controls and procedures were implemented to ensure that investment activity complied with applicable statutes and Legislative Rules, that investments were properly valued in accordance with generally accepted accounting principles, and that investment accounting records were properly reconciled and balanced to participant accounting records.

In 1996, the Legislature passed House Bill 4132, known as the West Virginia Trust Fund Act, during the Regular Session to create the West Virginia Trust Fund.  The Trust Fund was created as non-stock, not-for-profit corporation that would be responsible for the investment of the Consolidated Pension Fund.  This was an attempt to get around Article X, Section 6, of the West Virginia Constitution, which prohibited the state from becoming a joint owner or stockholder of any company or association.  HB 4132 left the BOI responsible for cash management for the state and responsible for the management of the Consolidated Fund.  The West Virginia Supreme Court ruled in January 1997 that the West Virginia Trust Fund Act was unconstitutional and the ban on state ownership of stock could not be circumvented.  To address the findings of the court, the Legislature passed Senate Bill 563 during the 1997 Regular Session.

Senate Bill 563 dissolved the BOI and moved all investment responsibilities to the West Virginia Investment Management Board.  The cash management and participant accounting functions of the BOI were returned to the STO.  Senate Bill 563 also implemented a requirement that an annual audit be performed to ensure investment activity of the WVIMB was properly recorded in the participant accounting records of the STO and the investment activity and participant activity were properly reconciled and balanced.  Treasurer John D. Perdue sought to have the Consolidated Fund returned to the STO, arguing that the WVIMB should focus on long-term investments, while the STO should be responsible for the management of short-term investment of state and local government funds.  During the 2005 Regular Session, the Legislature passed Senate Bill 558, creating the West Virginia Board of Treasury Investments (the “BTI”).  The BTI came into existence on July 5, 2005.

The legislation that created the BTI was based upon state code provisions carried over from 1991 and 1997 that incorporated the lessons learned from the losses of the late 1980’s and the successful investment program created in the aftermath.  Key safeguards in the BTI’s authorizing code include:

• Independent board composed of five members:  State Treasurer (chairman), Governor, State Auditor, an appointed member that must be a CPA with experience in finance/investments, and an appointed member that must be a lawyer with experience in finance/investments
• Requirement that the board employee an internal auditor that reports to the board
• Requirement that the board have an annual financial and compliance audit by a qualified CPA firm
• Requirement that the board prepare monthly financial statements
• Requirement that the board have returns audited annually by a qualified investment consulting or CPA firm

In addition to the mandates of State code, the board and staff of the BTI have worked diligently over the BTI’s 16+ year history to continue enhancing and improving the investment program for the Consolidated Fund.  These efforts include:

• Maintaining a AAAm rating from Standard & Poor’s rating for the WV Money Market and WV Government Money Market Pools since 2006,
• Obtaining the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting for over fifteen consecutive years
• Working with the BTI’s investment consultant to develop peer group rankings for the WV Money Market, WV Government Money Market and WV Short Term Bond Pools
• Setting up regular training for the board and staff on current investment topics
• Creating a culture of transparency with respect to the investment of state and local government funds
• Performing outreach and education for participants in the Consolidated Fund
• Working diligently to control costs to provide better returns to participants in the Consolidated Fund

BTI staff and Board look forward to accomplishing many great tasks in the future and making a positive impact on the State of West Virginia’s footprint.