The public spat between Gov. Linda Lingle and state auditor Marion Higa continued yesterday, with Lingle again bashing Higa over a report that was highly critical of the state's money-management practices.

"She continues to put out this kind of false information and there's no reason for her to do it other than for her to hurt the state's bond rating and how people view me and my administration," Lingle said in response to reporter questions yesterday.

"It's just not fair to the people of Hawai'i for her to continue to repeat these kind of false allegations."

The comments mark yet another round of sparring over Higa's report on the Budget and Finance Department and $945 million of auction-rate securities the state has largely been unable to sell.

The report took the department to task, saying it lacked proper leadership and accountability and broke its own policies in boosting the amount of auction-rate securities to more than 20 percent of its portfolio.

The state ramped up its purchases of the securities in the months leading up to the collapse of the auction-rate market in February 2008, more than doubling the amount it held to roughly $1.07 billion. At that level, it represented as much as 37 percent of the state's investment holdings.

The report questions why the purchases were made without doing a risk assessment or reviewing the offering documents of the securities that were bought. It said despite recent assertions by the department, key department personnel were not informed of the purchases that broke the 20 percent guideline.

"The department escalated those investments without exercising basic, prudent investment principles — it did not gain a full understanding of the securities, did not perform a risk assessment or cost-benefit analysis prior to the purchased, and invested almost 30 percent of the state's portfolio in that single investment type," the report said.

Auction-rate securities are a complex investment that let short-term investors get higher rates of return than bank accounts or certificates of deposit.

This was done by breaking long-term investments into securities that came up for auction every seven to 28 days. This allowed investors to move in and out of the securities, with the issuers promising to repurchase them should there be no takers at the auctions.

This worked well for years until the credit crisis hit in 2008 and auctions began failing. The state was left holding largely illiquid investments.

Georgina Kawamura, director of the Department of Budget and Finance, yesterday said the money invested in the securities included about $95 million of general fund money, with the remainder primarily coming from special transportation fund accounts.

Kawamura, along with state Attorney General Mark Bennett, commented publicly on the audit yesterday as part of the Lingle administration's response to the report. Among their criticisms was the audit's finding that the purchases violated state law requiring that short-term investments have maturity dates of five years or less.

Bennett noted the Legislature amended state law to allow the purchases of auction-rate securities in 1997 and that there were purchases made during the Cayetano and Lingle administrations.

"The statute was specifically amended to do this exact security," said Bennett, noting he provided Higa a letter explaining this history to her prior to the final report being issued.

Kawamura also disputed the report's finding that she was unaware of the purchases being increased during the second half of 2007. She said the state increased the investing in the securities because they had been safe in the past and were providing a good rate of return, she said.

Kawamura said she had given verbal approval to the purchases and increasing the single-class of investment to more than 20 percent of the state's portfolio.

"We complied with the law when we placed these investments," Kawamura said. "The guidance (20 percent limit) we created in house and we can deviate from it."

The auction-rate market has been largely frozen for the past two years, although there have been instances where the state has been able to sell some of its holdings. In the past several weeks, it's unloaded about $15 million of the investments.

The state said it intends to keep the investments — which have been written down by $254 million for accounting purposes — until they mature. Lingle yesterday said the state would lose money if it was forced to sell the investments now and bristled at what she said was Higa's suggestion that tax refunds wouldn't need to be delayed if the money was available.

"These are monies that are special funds, so it's not any money that would ever be available to pay back tax refunds," Lingle said.