Tough times for investing

By Times Staff Writer
Published November 30, 2007

What is the local government investment pool?

For 25 years, local governments and schools have invested in a state-administered pool that has provided a superior rate of return at low cost and minimal risk of loss. Many of these government entities - roughly 900 remain invested in the pool - use the interest to help pay employees, retire bonds or meet other operating expenses.

If the fund is so good, why is everybody pulling out their money?

The people managing the fund for the state purchased a relatively small amount of short-term bonds that were tied to the reeling mortgage industry, and that made Wall Street credit monitors nervous. They downgraded those bonds to "below investment quality," which set off a chain reaction not unlike a run on a bank. Articles in the financial media came to the attention of local governments in Florida, some of which began withdrawing money. What began modestly, accelerated into a stampede over the past two weeks. That led to Thursday's temporary freeze on withdrawals.

Is the investment pool at risk?

Not necessarily. The downgraded bonds made up only 4 percent of the pool's investments. But the hemorrhage of withdrawals that reduced the the pool's size by more than half in November will likely reduce the interest rate local governments receive.

Are government employees going to get their paychecks?

Some smaller entities that have most or all of their money tied up in the pool may have trouble meeting their obligations in the short term. Large entities like Hillsborough and Pasco counties have other revenue sources and will be able to weather this, even though they have hundreds of millions of dollars invested in the pool.

[Last modified November 30, 2007, 01:57:26]