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Local governments bail out of state fund

Communities sacrifice returns for safety amid mortgage fears.

By HELEN HUNTLEY, Personal Finance Editor
Published November 21, 2007


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Concerned about the safety of their money, local governments are pulling their cash out of a $20-billion state-run investment pool. Pinellas County joined the exodus Tuesday, yanking out its entire investment, $290-million. Some $6-billion has left the pool in recent weeks, costing it nearly a fourth of its assets.

However, the flight to safety comes at a cost. Super-safe investment alternatives will produce less interest to fund local government operations.

The state pool, similar to a money market fund, is another casualty of the meltdown in the housing and mortgage markets. Even though it holds no subprime mortgages, the state pool owns securities backed by other types of mortgages. Prices of those securities have dropped as investors shied away from investments related in any way to mortgages. In addition, a small part of the state portfolio - about 4 percent of its value - has been hit with credit downgrades and defaults.

So far none of the 995 local government participants has lost a dime. However, the increased risk is making them nervous. And the sharp uptick in withdrawals from the pool is not unlike a brief run on a bank by nervous depositors.

"You can't take a chance," said Ron Miller, finance administrator for Pinellas Park. He withdrew $14-million from the state pool Friday and is considering what to do with the remaining $8-million in city funds held by the state. "The primary thing we're doing is securing the money. The return is a secondary goal. ... We may pull more in the next day or two."

Pinellas County officials decided to withdraw all the county's money after conferring with officials in other counties and learning that they were taking out funds, said Ken Burke, clerk of the circuit court and custodian of county funds.

"It probably is secure, but we can't take that chance with public funds," he said.

Hillsborough County has close to $900-million in the pool, including proceeds from a recent bond issue, but plans to reduce its exposure, said Dan Klein, deputy clerk of circuit court. Pasco County did not respond to a request for information.

St. Petersburg pulled $50-million out of the state pool earlier this month and has about $58-million remaining. Tampa does not invest in the pool.

Local government officials face a dilemma because the state pool has been a great deal for them. The state Board of Administration, which manages Florida's $137-billion pension plan, has been managing the local government investment pool since 1982. It charges a miniscule fee for the service, less than two-hundredths of 1 percent. The result has been superior returns, consistently better than the average money market fund offered by big institutions. On Tuesday the pool was yielding 5.16 percent, although the yield is expected to decline along with market interest rates.

"It's been a higher yield than any of our other investments," said Klein, at Hillsborough County.

The $290-million Pinellas County has withdrawn is going into a Wachovia Bank money market account paying two-tenths of a percent less than the federal funds rate, which is expected to drop to 4.25 percent next month. The bank guarantees the money with a pledge of securities as collateral. Longer term, the county plans to spread the money among a mixture of government securities and bank investments.

"Our yield will go down and that's a concern," Burke said. "When this calms down and we get better information, I see us probably reinvesting in the SBA. But we want to feel that sense of security before we do that."

This is an especially challenging time for local government officials to go out and find their own investments because they're about to be flooded with cash as annual property tax payments roll in.

The problems facing the state fund are similar to those encountered by many money managers as mortgage-related investments have been downgraded. All the securities were highly rated when the state pool purchased them and even those that have been downgraded are backed by high-quality mortgages, state officials say.

"We're confident that we're going to work through that exposure," the state board's executive director Coleman Stipanovich said last week. "It's not like we bought a stock at $100 and it's trading at $20. It's securities being marked to market at 95 to 98 cents on the dollar. ... And we think the securities are worth more than that. We're not willing to panic and give away good collateral."

Several money market mutual fund sponsors have pledged to protect their investors from loss, although they are not legally obligated to do so. The state pool offers no guarantees, so if there were any losses, they would be have to be absorbed by participants.

The state pool has been paring back its exposure to commercial paper secured by mortgages and other assets. That paper amounted to about 30 percent of the portfolio at the end of September and is expected to be 10 to 15 percent by year's end.

Although most investments in the state pool can be easily sold to raise the cash needed to honor rising withdrawals - an issue known as liquidity - the problem assets are another matter. In some cases, the board renegotiated the terms of securities, agreeing to extend maturities in exchange for higher interest rates and an injection of capital by the sponsoring financial company. Ultimately, the state pool could take ownership of the mortgages that serve as collateral.

Coleman said managers relied too heavily on credit rating agencies.

"We need to do a better job there in terms of looking underneath the sheets," he said.

Even as they are taking out their money, some local government officials are looking forward to coming back to the pool.

"These people have been a fantastic benefit to the state of Florida and government units," said Jeff Spies, St. Petersburg's finance director. "I would in a heartbeat go back into the pool once this liquidity issue is gone and they're back to assets that don't seem to be affected by this."

Helen Huntley can be reached at hhuntley@sptimes.com or 727 893-8230.



What's happening with the state investment pool?

Worried local governments are withdrawing money at a rapid clip.



$6-billion

How much was pulled out in recent weeks.



The investment pool

Had a great track record of producing high returns.



Mortgage crisis

Hurt the value of some pool investments, raising safety concerns.



So what does this mean for cities?

Leaner budgets as they opt for safer, lower yields.

[Last modified November 20, 2007, 23:22:02]


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