Withdrawals From State Fund Are Called Unfair

TALLAHASSEE - Local Hillsborough County governments that rode out last month's run on a state-run investment pool say the state has unduly placed them at risk, by allowing investors who cut and ran to withdraw more than their fair share.

Now, those remaining investors say, the state must get their money back.

Mortgage-backed assets in the Local Government Investment Pool's portfolio lost value this fall because of the subprime mortgage collapse that peaked in August. As reports surfaced about risky holdings in the investment fund, panicked investors withdrew $10 billion from the $27 billion-plus fund during two weeks in November.

The State Board of Administration, which oversees the investment pool, froze trading temporarily to stop the bleeding. SBA trustees re-opened the fund a week later, to limited withdrawals only. The local governments that remain invested in the pool share proportionately in the riskiest securities, which the SBA has isolated from the rest of the fund and kept frozen. As of Thursday, the fund stood at about $12.2 billion.

Proportionate By Law

By law, the investment fund is owned proportionately by all local government participants, Pat Frank, Hillsborough County's Clerk of the Circuit Court wrote to SBA director Bob Milligan this week. But "those local governments that withdrew all or substantially all of their proportionate account balances after Oct. 31, 2007, received liquid funds in lieu of their proportionate share of the illiquid holdings" in the pool.

To accomplish that, she wrote in her letter dated Thursday, the SBA had to give the departing investors a portion of the liquid funds in the accounts of remaining investors. That would have left the remaining investors with a greater share of risky, illiquid holdings left behind by those who abandoned the pool.

Frank also sent her concerns to the SBA's trustees - Gov. Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum - writing not only on her own behalf, but on that of Hillsborough County's school board, sheriff, administrator, aviation authority, transit authority and the Tampa Sports Authority.

So far, no investor in the fund actually has lost money, Frank noted in an interview. The problem now is risk exposure. No one knows when, whether or to what extent the downgraded assets in the fund's portfolio will gain or lose value in the future.

A Dollar Versus 86 Cents

Bay area governments still vested in the fund want the SBA to determine how much each investor who fled in November had in the risky holdings and demand that those investors pay back that amount.

"We don't want to be in a position where we expose ourselves to more downgraded securities than is necessary," Frank said.

Tara Klimek, spokeswoman for Sink, said the CFO has shared Frank's concerns with Milligan, whom the SBA's trustees appointed interim director after Coleman Stipanovich's resignation from the post last week. Sink said she is waiting for Milligan's analysis and recommendations.

"Frankly, there are so many differently affected parties in these scenarios," Klimek said. "You've got investors who got out, those that are still in, lawmakers, local governments, the state government. Everyone's raising issues from different perspectives. They're all intertwined and really need to be considered in their entirety."

SBA spokesman Michael McCauley did not respond to requests for comment.

The propriety of the November withdrawals will be one of the questions that lawmakers probe in January during the Joint Legislative Auditing Committee's hearing on the investment pool, said Rep. Carl Domino, alternating chair of the committee and an investment manager by trade.

"The second the subprime mortgage collapse occurred in August, they knew some of these things were less valued; at that point, the question of withdrawals should have been addressed," said Domino, R-Jupiter.

"It's not like you put $1 in, and I put $1 in, and the $2 stayed separate," he said. "It's a pool. Once it's valued at only $1.86, why should you get $1 back, and I get only 86 cents?