Algonquin, Cary, Crystal Lake, Huntley, Lake in the Hills, Woodstock and McHenry FPD Lose $2.4 Million

Saturday, I extracted the loses of McHenry County tax districts from the front page article in Sunday’s Chicago Tribune.

As I was reminded by Pete Gonigam of The First Electric Newspaper, I missed Algonquin. His article from December 10, 2014, estimated that Algonquin would lose $596,000, which turns out to be low.

In any event, I have added Algonquin’s estimated loss to the others, which you can see below:

Investment losses at local governments.

Investment losses of local governments.

I picked a home at random in Lake in the Hills and found about $200 in village property taxes.

That means about 1,000 homes property taxes for one year were lost through the inopportune investment.


Algonquin, Cary, Crystal Lake, Huntley, Lake in the Hills, Woodstock and McHenry FPD Lose $2.4 Million — 6 Comments

  1. This should be considered a criminal act.

    Really, unless we can have tax payer accountability these egregious acts will continue.

  2. So if I lose money in my 401k I can just tell my employer that I need more money or will work less?

  3. There are some County taxing bodies which hold a prudent amount of cash in reserve, so that they may keep operating in times of financial crisis.

    Then there are other taxing bodies who have collected so much cash in reserve that it is an embarrassment (because they continue to ‘tax to the max’).

    These taxing bodies (Valley Hi is example of this) then look for ways to spend the extra money.

    In the case of Valley Hi, there have been discussions about “public private partnerships” on ventures unrelated to the original language of the referendum authorizing the tax which enabled collection of this surplus.

    When any taxing body holds cash in reserve. there are some restrictions on how and where they may invest those surplus cash reserves.

    It is up to taxpayer watchdogs to ferret out instances in which the taxing body is taxing to the max, while holding inordinate surplus cash in investments which are returning negative real returns.

    Many times the taxpayer watchdog will find debt on the books paying far higher interest rates than the rates being earned on the surplus funds.

  4. I thought this was fraud?

    Not just the loss of an investment losing money.

  5. The losses were due to loan fraud in the USDA Business & Industry Loan Program.

    In that program, the USDA guarantees private loans.

    The party initiating the loans, Nikesh A Patel of First Farmers in Orlando, FL (no relation to the First Farmers in Indiana), was certified by the USDA program.

    Nonetheless First Farmers created fake loan documents for fictional customers using phony USDA signatures.

    First Farmers proceeded to sell the loans to Pennant Management, which is based in Milwaukee.

    In one is known as a repurchase agreement, First Farmers agreed to buy back the loans at a future date, and Pennant had the loans in the interim as collateral.

    Pennant placed the loans in a fund(s).

    Units of government including local government investment pools (LGIP), banks, etc. invested in the funds.

    A local government investment pool is when several units of government combine their investments to obtain larger returns and / or more investment expertise.

    The two LGIP’s available to Illinois municipalities are the Illinois Metropolitan Investment Fund (IMET) and Illinois Funds.

    IMET is it’s own entity explicitly authorized by Pat Quinn’s Local Government Debt Reform Act and before that implicitly by the Illinois Municipal Code, whereas Illinois Funds is part the Illinois Treasurers office.

    It seems IMET offered better returns and Illinois Funds a more cautious investing approach.

    IMET in turn offered a few different investment choices, one being the Convenience Fund.

    IMET Convenience Fund (amongst others) invested in a Pennant Fund which contained the fraudulent repurchase agreement loans from First Farmers.

    Repurchase agreements using private loans backed by a US government agency (aka First Farmers backed by the USDA) are more risky than repurchase agreements backed by US government securities (such as US Treasury Bonds).

    Furthermore, First Farmers, the originator of the “loans” was unrated by credit agencies, as opposed to a highly rated firm.

    So the problem was private loans (backed by a US government agency) from an unrated firm.

    The USDA declined to back the loans because in fact there never was a loan.

    Now the government has charged First Farmers with fraud, Pennant is suing First Farmers, IMET is suing Pennant, and the owner of First Farmers has agreed to liquidate various holdings including hotels, a luxury residence, and luxury automobiles financed through the scheme.

    It’s unknown at this time how much of the loss will be recovered by the local taxing districts.

    Whether or not IMET or Pennant should have done more due diligence work has been questioned by at least one credit rating agency; and along those lines should IMET or Pennant have provided more disclosure on the risks of the repurchase agreements.

    First Farmers in Orland has ceased to exist.

  6. Mark, great analysis….but the fact is is was fraud…plain and simple…and a corresponding lack of due diligence on Pennant’s part….and also a lack of due diligence on IMET’s part….as they did not fully vet Pennant’s investments on an on going basis..

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