AUGUSTA – Legislation putting tighter restrictions on state investments died when lawmakers adjourned last month, but the controversy continues and likely will be before lawmakers next year.

“I probably will resubmit my bill,” said Sen. Richard Rosen, R-Bucksport. “This is the taxpayers’ money and we should only be investing in the safest sort of investments.”

Rosen acknowledged his measure was sparked by the ongoing controversy surrounding State Treasurer David Lemoine’s investment of $20 million from the state cash pool in a fund operated by a United Kingdom-based fund. The Mainsail II commercial paper went from a high rating to subprime within two weeks last summer.

“The intent of the bill was to allow the Legislature to weigh in and make it crystal clear that the state’s investment policies should avoid any structured investment vehicles like Mainsail II,” Rosen said.

On any given day, the state has hundreds of millions of dollars in short-term investments. All of the various state funds are pooled and cash that will not be needed to pay state bills is invested for periods ranging from a few weeks to six months.

Earnings can be substantial. In the last full budget year, which ended June 30, 2007, the earnings were nearly $64 million. That is greater than the budget that year for the entire judicial branch of state government.

Lemoine said that even with the problems created by Mainsail II, Maine is meeting its investment projections for the current fiscal year.

The concern over state investment polices is not partisan. Rep. Jeremy Fischer, D-Presque Isle, House chairman of the Legislature’s Appropriations Committee, peppered Lemoine with questions about state policies at last month’s public hearing on the Rosen bill.

“We all want a policy that assures the security of our investments,” he said.

Fischer wanted to make sure that state policies would allow investment in Maine financial institutions. He said taxpayer funds should be used to help provide needed capital to help the state’s economy grow.

“We do have a lot of CDs [certificates of deposit] spread around Maine banks,” Lemoine said. “We have them at the $100,000 level so they are protected by the FDIC [Federal Deposit Insurance Corp.] in keeping with our conservative policies.”

Lemoine said that the current law governing investments is conservative by any measure. He said there is a very limited range of options for investments and he relies on national rating agencies to assess risk.

He said the Mainsail II investment was based on the recommendation of a financial adviser from Merrill Lynch that the investment met the state’s strict criteria.

“It became clear that we were very reliant upon rating agencies and the professional advisers we had for the cash pool,” he said.

Lemoine said he no longer uses Merrill Lynch as an adviser. But he noted that Mainsail’s commercial paper had the top ratings of both Moody’s Investors Service and Standard & Poor’s when it was purchased. The Mainsail II investment was about 3 percent of the state cash pool and what the state will receive will be determined by a receiver named last month to sort out the mess.

Lemoine believes the state is in a good position among those owed money from the Mainsail II fund but said he “dare not” predict when the matter will be resolved.

Rosen said the Mainsail II controversy underscores the tension put on the treasurer to earn more money from investments to help the state’s “bottom line.” Rosen, the assistant GOP floor leader, has served on the Appropriations Committee.

“I have seen the treasurer in the past asked to find more money for the budget by increasing the projections from investments,” he said.

Rosen said lawmakers need to share the blame for that. He said his measure, which would have limited investments to government securities, would not generate as much income but also would have less risk.

“That always is the tension between putting the money under the mattress, where you know where it is but it doesn’t grow, or putting it out to work, where you run the risk you will not get it all back,” Lemoine said.

Rosen agreed that the tension exists, but said he wants “plain vanilla” investments that may have a lower return but have no risk.

“This is the taxpayers’ money we are talking about,” he said. “We need to be conservative and not risk their money.”

Lemoine said Wednesday there is “nothing new” on the Mainsail II investment.