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Fund Panic Won't Hit Average Joe

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By JEROME R. STOCKFISCH, The Tampa Tribune

Published: December 6, 2007

The headlines have been downright scary: "Investor Fund Panic." "State Pool Frozen." "Fear Rocks State Fund."

But those of us keeping a watchful eye on our 401(k)s and other savings and investments might want to take a deep breath. What does the recent run on a state investment fund mean to the average Floridian?

"Ultimately, very little," said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. "To you and I, the guy on the street, there's not going to be any immediate impact."

The state was, indeed, jolted by an unusual and frenzied withdrawal of holdings in Florida's Local Government Investment Fund, administered by the state Board of Administration in Tallahassee.

Despite the attention, the fund and its investors operate in a fairly insulated world.

"I don't know that there's any consequence for the person on the street in any of this," said Eric Johnson, Hillsborough County's budget director. "It's a serious issue, but it's not a crisis unless local governments continue to treat it like a crisis."

The fund is open only to Florida's local governments and institutions such as community colleges. They park their cash typically for the short term, much like a bank customer would use a money market account. Money markets provide a better interest rate than checking or savings accounts, and that also holds true with the state fund; investors received a sweet 5.63 percent annual return as of October.

Local budget administrators were spooked by reports in the financial media that Florida's fund held mortgage-backed securities, a current Wall Street bogeyman. Not only that, but some were also in default. That led to the mass withdrawal, as much as $10 billion from the $27 billion fund in 10 days.

In reality, that money being shifted around is tax dollars, which, of course, means it came out of your pocket. And there are scenarios that might touch the lives of those outside of Tallahassee or city hall accounting offices.

Already, some local governments have warned that the freeze of the fund - to be lifted in a limited way today - would leave them unable to meet payrolls or make some payments to vendors. Administrators of the fund were working this week to arrange credit lines with private banks to bridge any emergency.

The state Board of Administration did not provide details of those governments in a pinch, but they would most likely be smaller or more rural jurisdictions. Johnson said Hillsborough and local governments wouldn't have a problem meeting payrolls.

Those governments that withdrew their holdings from the fund must now invest it elsewhere. It is unlikely that they will receive a comparable interest rate to the state fund; that means interest income likely will drop.

Hillsborough County - which did not withdraw its money from the fund - expects to earn $17 million toward its $4 billion budget solely on its investments this year. A decline of as little as 1 percent in interest rates could suck several million dollars out of county coffers, Johnson said. It isn't likely in the current anti-tax atmosphere that taxes would be raised to make up for that loss of income. But Johnson said that "if interest earnings decline, that would be apparent in day-to-day services."

Meaning residents in jurisdictions seeing interest income decline could endure more of what was seen during this fall's round of budget cutting: layoffs and fewer services.

In a worst-case scenario - one called "very unlikely" by University of Florida finance Professor Mark Flannery - the fund would be liquidated at a loss, and the local governments that didn't pull out early would face even more severe budgetary constraints.

Meanwhile, some in Tallahassee advocated backing up the local government fund with the state's massive Florida Retirement System pension fund, which sits on $138 billion. That strategy has been dismissed.

While the retirement fund also contains downgraded and defaulted investments, the long-term nature of its investment strategy makes it more resilient to incidents such as the mortgage-backed securities hiccup, financial experts said.

Reporter Jerome R. Stockfisch can be reached at (813) 259-8402 or jstockfisch@tampatrib.com.

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