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State Tries To Quell Investor Fund Panic

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By CATHERINE DOLINSKI and ANTHONY McCARTNEY, The Tampa Tribune

Published: December 5, 2007

TALLAHASSEE - The same depressed real estate market that has rocked the private sector now threatens local governments, which sought assurances from state leaders on Tuesday that they will not lose the money they have invested in a fund containing mortgage-backed assets.

While Gov. Charlie Crist and other state officials approved a plan Tuesday to remedy the beleaguered investment fund, some analysts continued to watch for any signs of fallout from similar investments in other public funds, including the $138 billion Florida Retirement System.

The State Board of Administration, which oversees the local government investment pool, froze it Thursday after spooked investors sapped $10 billion from it within two weeks. That created financial bedlam for some investors, particularly small municipalities and school districts that rely on the fund to make payroll, bond payments and other obligations.

On Tuesday, SBA trustees agreed to reopen the now-$14 billion fund for limited withdrawals as early as Thursday morning, but walled off the riskiest assets from additional trading.

Hillsborough County governments remain some of the largest shareholders in the investment pool, with the county and school board accounting for more than $1.4 billion. That makes both entities subject to the most risk, experts say.

No county money has been lost, said Dan Klein, chief deputy clerk of court. And the school district has enough money to cover upcoming payrolls. The size of both entities shields them from some of the problems that smaller governments face, including not being able to pay workers.

But Mark Flannery, a professor at the University of Florida's Warrington College of Business Administration warned, "The fewer that stay behind in the pool, the bigger the late withdrawers' losses will be."

SBA trustees - Crist, state Chief Financial Officer Alex Sink and Attorney General Bill McCollum - also accepted the resignation of SBA director Coleman Stipanovich, who critics say failed to communicate with investors and poorly handled the fund.

Stipanovich said he offered his resignation voluntarily.

"I think I've provided very good leadership; it's just one of these things," Stipanovich said afterward. "It's a once-in-a-lifetime event that we hope would never occur again."

Sink said the resignation was necessary to restore faith of investors and move forward.

"In my opinion, the SBA was stonewalling the investors," she said, recounting a tale that one investor had to hire a lawyer to learn what assets the fund held. "That doesn't build confidence."

Hillsborough County is among the governments expressing distrust of the SBA's practices.

The SBA's reports to local governments did not represent "transparent and complete disclosure," Klein said.

Fund Will Be Split Into 2 Parts

The plan that Crist, Sink and McCollum approved Tuesday will split the fund into two parts, the largest containing its securest assets. As early as Thursday morning, investors will be able to withdraw $2 million or 15 percent of their holdings. They will have to pay a fee to withdraw more than the cap, which will expand gradually and eventually be lifted.

This "clean" portion of the fund makes up 86 percent of it. Shares of the fund's other 14 percent containing defaulted and at-risk securities will not be tradable. The SBA will divide each investor's holdings proportionately between the two funds. The plan also calls for establishing a public-private partnership with financial institutions to allow pool investors to borrow against their shares in the fund.

The plan comes from BlackRock Inc., a New York money management firm hired as a consultant by the SBA. On Tuesday, SBA trustees named BlackRock as interim fund manager while they recruit a permanent one.

Don't Be Hasty, Experts Say

Eric Johnson, Hillsborough's budget director, said Tuesday's plan seems prudent, but too many local governments simply "acted in their own interest." Had Hillsborough pulled its share, it could have driven the pool toward insolvency.

David Denslowe, a University of Florida economics professor, agreed. "If everybody could have stayed together, they would have been better off."

The investment pool has been weakened by recent events, Denslowe said; local governments will be skittish about sending the fund any more money.

As to why Hillsborough and some other governments were slow to pull out their money, Johnson said the fund had been a good deal for a long time. "We have earned a lot of money in the past because of the fact we had a lot of money."

In general, the problems with the investment fund come at a time when local governments are flush with millions of dollars that would not be available later in the fiscal year.

The school district, like many Tampa Bay area governments, is still assessing the fallout from the freeze and the effect on its investments. Hillsborough schools have enough money on hand pay their bills, schools spokesman Steve Hegarty said.

Hillsborough County commissioners will debate what to do with the county's investments during a board meeting this morning, including whether to steer investments toward safer funds.

Pasco County, which is the second largest county investor in the state with nearly $487 million in the fund, plans to withdraw a portion of its money Thursday but will make further decisions about what to do later.

Hillsborough Clerk of Court Pat Frank's office, which relies on collecting court costs and fees, is in more dire straits. Klein said the office plans to make a withdrawal Thursday to meet its financial obligations. "This is the slowest time of the year with regard to revenues."

Hillsborough County Tax Collector Doug Belden said his agency was able to retrieve more than $70 million it had invested in the pool last week and will make no further deposits until questions about the fund's stability are resolved. His office has more than $500 million in the bank to help pay local governments their shares of tax collections.

Sink Says Pension Fund Is Safe

The spotlight on risky investments has caused concern among some analysts about the safety of other public funds, including Florida's $138 billion retirement fund that the SBA also oversees. That fund owns more than $1 billion of the same downgraded and defaulted debt that sparked the run on the investment pool, according to Bloomberg News.

"Retirees' money is safe," Sink said Tuesday.

Sink stressed the differences between the two funds, from their asset allocations to their risk models. Whereas the pension fund is a much larger and longer-term investment fund, the local government investment pool has always been highly liquid, drawing comparisons to a checking account with deposits and withdrawals constantly flowing.

Virtually every fund in the country has some exposure to subprime assets, Sink said. "But we have to understand ... this whole problem came about because we had a run on this local government fund," she said. "We're not going to have a run on the pension fund."

Not everyone was so optimistic, however.

"These were highly inappropriate investments for taxpayers' money," Joseph Mason, a finance professor at Drexel University in Philadelphia, told Bloomberg News. "This is the tip of the iceberg for pension funds. We know the paper is sitting there. There are substantial subprime-related losses that haven't shown up yet."

Harvey Pitt, former chairman of the Securities and Exchange Commission put a finer point on it. "Garbage is garbage," he said. "Once they recognize it's not fit for human consumption, they have to exercise their fiduciary obligation and get rid of it."

Reporter Julia Ferrante contributed to this report. Reporter Catherine Dolinski can be reached at cdolinski@tampatrib.com or (850) 222-8382. Reporter Anthony McCartney can be reached at amccartney@tampatrib.com or (813) 259-7616.

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