Florida Freezes Its Fund as Governments Pull Out
Seeking to stem a multibillion-dollar run on an investment pool for local governments, top Florida officials voted yesterday to suspend withdrawals from the fund, leaving some towns and school districts worrying about how they would pay their bills.
Local governments in recent weeks have been withdrawing billions of dollars from the fund, fearing losses on investments in debt related to subprime mortgages. The rush to get out of the fund began even though a relatively small percentage of the fund is invested in subprime-related debt, and it is unclear what losses the fund may sustain.
Florida’s troubles were the latest episode in the running crisis in subprime lending that has been troubling the credit markets this fall, hitting homeowners, mortgage providers, hedge funds and Wall Street firms. It was the first time since the problems started that a large state investment pool has been forced to freeze withdrawals.
“If we don’t do something quickly, we’re not going to have an investment pool,” warned Coleman Stipanovich, executive director of the Florida State Board of Administration, which operates the investment fund. He spoke at a special board meeting yesterday, called to decide what to do about the flood of withdrawals.
The state-run fund pools money from local communities so they can get better returns on investments. The Florida fund, known as the Local Government Investment Pool, had about $27 billion in assets until this fall. Its value had fallen to just $15 billion this month because of withdrawals, Mr. Stipanovich told the three-member board, which consists of Governor Charlie Christ; the state attorney general, Bill McCollum; and the state chief financial officer, Alex Sink.
The fund gave back worried investors $3 billion just yesterday, before the window closed, Mr. Stipanovich said.
At the special meeting, the board also considered ways to shore up the investment fund and find emergency money to help cash-short local governments through the crisis. One idea under consideration was tapping into the $137 billion state pension fund for public employees in Florida, which is also controlled by the State Board of Administration.
Mr. Stipanovich called that idea “a wonderful diversifier,” but Ms. Sink said she thought it would transfer too much risk into the pension fund.
“We would be, in effect, bailing out one fund, over which we have no legal obligation, with the star fund of Florida, which is our pension fund,” Ms. Sink said.
The union that represents thousands of public workers in Florida also expressed dismay at the idea of using the pension fund. “When something’s that big, if problems happen it can take a long time to restore the health,” said Doug Martin, legislative director for the American Federation of State, County and Municipal Employees in Tallahassee. The union represents about 120,000 participants in the state pension fund.
Some local officials in Florida who did not get their money out of the fund in time expressed indignation yesterday.
“What the cabinet did was stupid,” said Maryanne Morse, Seminole County’s clerk of the circuit court, as county investment officers are known in Florida.
Ms. Morse said she had withdrawn $240 million of Seminole County’s money after learning the fund had exposure to a type of debt, known as commercial paper, backed by subprime loans — but left another $96 million in place. She said she was bracing herself for what might happen next week, if the board votes to resume withdrawals at a meeting scheduled for Tuesday.
“When they open it again, there is just going to be a tremendous run on the bank,” she predicted.
Ms. Morse said that Seminole County could lose a small amount of its principal and that it would in any case be forfeiting up to $3 million just by moving the $240 million, because the money is sitting in an account that pays less interest. She said the county could delay some capital improvements if it lost money.
But other local officials waved off such concerns. Ed Fry, the clerk of the circuit court in St. Lucie County, said that he had left $140 million — about half of the county’s assets — in the state investment fund and that he did not expect big problems.
“They came through Long-Term Capital Management,” he said, referring to a hedge fund whose collapse jarred Wall Street in 1998. “They came through Enron. They’ll come through this, too.”
Until now, local governments in Florida had considered the fund a safe account that happened to pay a little more interest than a bank would. They praised its convenience, saying that in normal times they could request a withdrawal at 11:00 a.m. and see it arrive in their bank accounts by 3 p.m.
Anyone requesting money after 11:00 yesterday, however, was turned away.
The trouble at the investment fund started at the end of October, and then it began to accelerate.
Leanne Evans, treasurer of the Palm Beach County school district, said that late in October she received a memo from the board’s outside investment adviser, pointing out that the investment pool always seemed to beat its benchmark and suggesting that she look into how it was achieving above-par results month after month. Normally, higher returns can be achieved only by bearing higher risks, and Ms. Evans wanted the district’s short-term money in instruments that were virtually risk-free.
When she made inquiries, she said, she learned that the fund held some commercial paper backed by subprime loans.
“Truthfully, it was a relatively small percentage of the portfolio,” she said. “But it scared a lot of people, because local governments would never invest in that.”
She said the state fund’s formal investment guidelines were far more relaxed than her own local rules. She whisked out the school district’s money on Nov. 2, but said she would put it back again if the state ever tightened its guidelines enough to satisfy Palm Beach school district’s requirements.
