Much has been made in recent days of the state’s “loss” of $20 million in risky investments. Further examination shows that the state treasurer followed the state’s investment protocol, which allows participation in only top-rated investments and requires purchases to undergo several layers of review. If they are serious about ensuring such problems don’t happen again, lawmakers should review the state’s requirements to ensure they are stringent enough. An upcoming review, scheduled for this spring, of the contract requirements for the state’s independent investment adviser offers an opportunity for further scrutiny.

Republican lawmakers have blamed state Treasurer David Lemoine for losing $20 million from the state’s cash pool in a risky subprime investment.

The state’s cash pool, currently totaling about $760 million, holds revenues that are not immediately needed to pay the state’s bills. The money can go only toward investments with high marks from the rating agencies Standard & Poor’s and Moody’s Investor Services. Second, the state retains a professional investment adviser that approves brokers who can work with the state. Last, these brokers are expected to use their companies’ research to determine which investments make sense for the state.

In early August, on the recommendation of an approved broker from Merrill Lynch, the state invested $20 million in MainSail, a European-based fund run by money-management firms. When it made the investment on Aug. 8, MainSail had top ratings from both Standard & Poor’s and Moody’s. Within days, the ratings dropped to junk status and the fund’s overseer, the Bank of New York, froze MainSail’s assets. Those assets are likely to ultimately be sold, perhaps not for their full value, so Maine is likely to recoup at least part of the $20 million.

BusinessWeek wrote of MainSail’s precipitous drop: “The odds are only about 1 in 100,000 that a bond would go from the highest grade, AAA, to the low-quality CCC level during a calendar year.” The magazine, however, said the rating agencies should have been aware that the structure of investment vehicles like MainSail meant they faced heightened risk.

This raises the question of whether Maine and its advisers are putting too much stock in ratings rather than the portfolios of the funds invested in.

State Treasurer Lemoine also raised concerns about the quality of the advice received from the broker who suggested buying into MainSail. This is another area to scrutinize before the state solicits proposals for a financial adviser.

For now, new cash pool money is going into bank accounts, where it is safe but will earn far less than with investments (cash pool investments earned $36 million last year).

Maine, like other states, will continue to invest in a variety of funds. Ensuring these investments are as safe as possible, while still earning a good return, will pay dividends in the future.