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For their own good
Fifty years ago, they were screwed-up kids sent to the Florida School for Boys to be straightened out. But now they are screwed-up men, scarred by the whippings they endured. Read the story and see a video and portrait gallery.
Do you want your money now at a discount or are you willing to wait for a chance to get more - and maybe all - of it back? That was the tough question the State Board of Administration posed Friday to local government officials whose money is now frozen in a troubled state-run investment pool.
The answer: Local officials aren't willing to forfeit a dime. But they are willing to work on a rescue plan.
"You need to come up with how to make the taxpayers of Florida whole," said Hillsborough County school superintendent Mary Ellen Elia. The School Board has $573-million in the state's local government investment pool, which was shut down Thursday because of mass withdrawals by panicky local government investors. A continued run would have forced the fund to raise new cash by selling securities at fire sale prices, ensuring losses for the last investors to leave.
The State Board of Administration, which manages the pool, meets Tuesday to consider its future and find a way to make withdrawals available on a limited basis to local governments that really need the money. While some government bodies were scrambling to make payrolls Friday, Florida Chief Financial Officer Alex Sink said most of the pressing problems were resolved, with banks stepping into the gap with loans.
"It's never a good time to take this type of action, but we are at a time of year when the tax collections are rolling in," she said.
A newly appointed committee of 16 public officials whose money is at stake conferred by conference call late Friday afternoon to let off steam and suggest proposals for action.
"I will wait a while and I'll give you guys a chance, but you've got to get this thing fixed," Hillsborough superintendent Elia said. "It isn't going to be fixed by having us agree to take less than what we put in there."
Committee members expect to work over the weekend on their recommendations to the board.
"We need a strategy that maintains the pool," said Leon County Clerk of Circuit Court Bob Inzer, another committee member. "It can only be maintained by restoring confidence and trust."
Some committee members indicated they would be willing to put more money into the pool if they could be sure it would be invested safely.
The pool, similar to a money-market fund, currently has 820 investors , about half of whom have accounts of more than $1-million. By far the largest is Citizens Property Insurance Corp. with $2-billion. The temporary freeze on withdrawals - coming at the end of the hurricane season - will not create any difficulty for Citizens, spokesman Rocky Scott said.
The government pool's most serious problem is that it holds about $1.5-billion of investments that have defaulted or been downgraded by credit agencies. They include mortgage-backed securities created by Kolberg Kravis Roberts & Co., Ottimo Funding and Axon Financial Funding, as well as certificates of deposit in troubled Countrywide Bank. Some of the asset-backed investments have had maturities extended because issuers couldn't pay them off when they originally came due.
When the pool held $28-billion two months ago, these troubled investments amounted to a relatively small 5 percent of assets. Now that the pool has shrunk by half to $14-billion, they represent an uncomfortably large 11 percent.
Furthermore, even some of the pool's higher-quality investments aren't worth what the pool paid for them. If forced to liquidate, the pool simply wouldn't have enough money to pay off all investors.
One alternative: State Board of Administration executive director Coleman Stipanovich has proposed that another fund - the larger state pension fund - be used to insure the local government pool against losses from the questionable investments. In this scenario, the pool would pay what amounts to an insurance premium to the pension fund. If the investments defaulted, the pension fund would cover the losses and assume ownership of mortgages backing the investments.
An independent analyst is being asked to review the possibilities for the pension fund's involvement and bring a recommendation to the board Tuesday. Any plan that could transfer losses from the government pool to the pension fund is likely to face serious opposition from pension fund participants. Pinellas County Judge Walt Fullerton said he was "aghast" to read Stipanovich's proposal.
Hillsborough Commissioner Brian Blair sent an e-mail to county Administrator Pat Bean late Friday posing questions about why taxpayer money has been placed in the investment pool in the first place.
Among other things, he asked how one government could deny another access to its taxpayers' money, and whether interest returns are worth the risk. The county had $872-million deposited in the pool as of Thursday, when officials suspended withdrawals.
"Public dollars should be for public services and they should be liquid and insured," Blair said when reached by phone Friday.
The problems are similar to those facing many private money market funds that bought what was supposed to be high-quality short-term debt only to have it downgraded and devalued in the wake of this summer's debacle in the mortgage market.
The state pool's survival is uncertain. Created in 1982, it offered local governments a low-cost, high-yielding fund to hold their cash until they needed it. It was popular because it paid more than most other money-market investments and many participants say it is still needed.
"We want to see this continue," Charlotte school superintendent Dave Gayler said. "We would have to spend an awful lot of time and money in Charlotte County managing our own assets." However, large investors, just like small ones, have many more options for their cash today than they did in 1982.