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Letter to the editor

How to thaw frozen assets?

Financial consultants recommend the state investment pool be divided by risk.

By HELEN HUNTLEY, Personal Finance Editor
Published December 4, 2007

Local governments aren't likely to get full access to their money in a troubled state-run investment pool any time soon. The State Board of Administration froze the fund last Thursday to stem an avalanche of withdrawals and will consider today how to implement a partial thaw while protecting assets.

Investment consultants hired by the board said Monday they will recommend that the $14-billion Local Government Investment Pool be split into two parts: an "A Fund" containing top-quality investments and a "B Fund" holding troubled securities originally purchased for about $2-billion. They represent 14 percent of the pool's assets.

Although the A Fund would allow withdrawals, restrictions still would be needed to protect the fund from having to sell assets at a loss, saidt Simon Mendelson, chief operating officer of the cash management group at BlackRock Inc. "One thing that can't happen that would hurt us all ... is a massive drawdown on the fund."

One proposal to discourage withdrawals would be to impose a redemption fee on A Fund withdrawals above a set percentage or dollar amount.

No withdrawals would be permitted from the B Fund, which would include $867-million of mortgage-backed securities that are in default.

BlackRock officials said it will be several months before they have a better idea of how much money that fund will be able to return to investors.

The state board paid New York-based BlackRock $125,000 to come up with an action plan over the weekend. One thing BlackRock said it is not recommending is that Florida's public pension fund bail out the government pool by buying its troubled securities. BlackRock officials said the pension fund couldn't legally pay any more for the securities than the depressed price they'd go for on the open market.

BlackRock's report got mixed reviews from local government officials. They said they'd support the two-fund concept and some restrictions on withdrawals. However, they are adamant that they want all their money back and aren't willing to accept redemption fees.

"To pay anything less than 'par value' to our school superintendents and our school systems is not acceptable," said Bill Montford, chief executive officer of the Florida Association of District School Superintendents. "We're much more interested in looking at more creative ways to address this issue."

Investors serving on an advisory committee to the board made return of their money their No. 1 recommendation. "The state should guarantee participants will receive 100 percent of their money back," said Jeannie Garner, director of financial services for the Florida League of Cities.

Another advisory board member, Hillsborough County Management and Budget Director Eric Johnson, endorsed the idea of limiting withdrawals for emergency reasons to stave off a run where "you almost guarantee we will lose money," Johnson said. "None of use want to lose any of our money."

Other recommendations include continued use of an independent advisory firm to review investments and better disclosure of investments.

Many of the investors who got caught in the freeze are expected to review their own investment policies.

Hillsborough County Commissioner Brian Blair said he will ask fellow board members Wednesday to further restrict how the county invests its tax revenues. The county had $872-million sunk into the pool as of last week when withdrawals were frozen by the state.

"We need to put more emphasis on security of taxpayer dollars rather than yield," Blair said.

The recommendations from BlackRock and investors will be considered today by the State Board of Administration, which consists of Gov. Charlie Crist, Chief Financial Officer Alex Sink and Atty. Gen. Bill McCollum.

"What I want is continuity, stability and for the fund to be protected in a responsible way," Crist said.

Staff writers Jennifer Liberto and Bill Varian contributed to this report. Helen Huntley can be reached at hhuntley@sptimes.com or 727 893-8230.

Breaking downthe proposal

Investment consultant BlackRock Inc. is recommending the $14-billion Local Government Investment Pool be split into two parts:

86 percentKnown as A Fund and worth about $12.04-billion, this group will contain top-quality investments.

14 percent Known as B Fund and worth about $1.96-billion, this group will hold troubled securities.

[Last modified December 3, 2007, 23:47:43]