Florida Investment Pool Fails to Attract Investors After Freeze

More than a year after Florida municipalities started pulling cash from a $27 billion state-run money-market fund because it held defaulted securities, towns and agencies still want little to do with the investment pool.

"We haven't put any money back in and any chance we got we pulled it out," said Merrill Wimberley, chief financial officer for the Leon County School District in north Florida. He keeps about $3 million in the Florida Local Government Investment Pool, down from almost $40 million before a run on deposits in November 2007 forced fund officials to suspend withdrawals.

Assets in what was once the largest U.S. manager of municipal cash fell to $5.7 billion since the fund disclosed that it held $2.2 billion of below-investment-grade securities. More than $13 billion was pulled in the weeks after the pool said it was invested in the same types of securities that forced financial institutions around the world to take $1 trillion in losses and writedowns.

While the fund, which was used like a money market account by as many as 970 cities and districts, hasn't lost any money, it withheld a month's interest in a reserve account in case there were shortfalls. Finance officers are putting more cash in banks, Treasuries and private municipal funds such as the Florida Surplus Asset Fund Trust, which has grown 60 percent in a year to $255 million.

Their memories of emergency bank loans to meet payroll, weekend meetings with fund officials and daily accounts of declining deposits will probably keep the state's fund from regaining its former stature soon, said Joseph R. Mason, a finance professor at Drexel University in Philadelphia.

Investment Alternatives

"With alternatives in the market, it's not clear it makes sense to bring this idea back at the moment," Mason said.

Jim Moye, chief deputy comptroller of Orange County in central Florida, home to Walt Disney World, prefers quick access to his money rather than high yields.

"If we don't earn a dime on interest, it's OK," said Moye, whose county withdrew $758 million during the run.

Orange County invests $1.5 billion on its own now, mostly in U.S. Treasuries, where one-month bills yield 0.75 percentage point less than the Florida fund. Before its travails, the fund beat bills by as much as 1.7 percentage points.

Other state funds also got stuck with high-yield, high-risk debt as the subprime-mortgage market collapsed in 2007. Connecticut's fund held $100 million of defaulted asset-backed notes and Montana's had $90 million, according to Fitch Ratings. High-yield, high-risk, or junk, bonds are rated below BBB- by Standard & Poor's and less than Baa3 at Moody's Investors Service.

Eliminating Bad Debt

"People invested thinking you put a dollar in, you got a dollar out," said Peter Rizzo, an analyst in New York for S&P, which rates 90 investment pools with total assets exceeding $200 billion. "That wasn't the case."

Florida's LGIP has eliminated two-thirds of its bad debt, replaced managers, increased oversight and secured a AAAm rating from S&P, the highest for a money fund. Even so, half the 132 respondents to a questionnaire from Federated Investors Inc. last March, when it was hired as an investment adviser, said they lacked confidence in the fund.

"Once you violate public trust, it's very hard to recover," said Chris Blackwood, administrator of the Surplus Asset Fund Trust in Orlando, another pool for local governments.

The state fund still has about 800 accounts, with clients in all of Florida's 67 counties. It charged $3.6 million in fees last fiscal year through deductions from interest payments.

‘People Watching'

MaryEllen Elia, head of Hillsborough County Public Schools in Tampa, kept $573 million on deposit throughout the pool's difficulties.

"Tell me where you should put your money to be safe," she said. "There's a lot of people watching over the fund now."

The LGIP was reorganized under a plan from New York-based BlackRock Inc., the biggest publicly traded U.S. money manager, in which the best-quality securities were set aside as Fund A. Withdrawals were limited throughout 2008.

Some $2 billion of illiquid and defaulted debt was put into "Fund B" and closed to withdrawals. As Fund B securities paid interest and matured, proceeds were deposited into Fund A. About $1.4 billion was transferred in 2008 and, on Dec. 23, clients got full access to Fund A for the first time since the freeze.

"We did it in a year, which is pretty good given the market conditions," said Dennis MacKee, a spokesman for the State Board of Administration, which oversees the fund. "It won't be a perfect world until Fund B is eliminated."

Waiting for Interest

Investors are still waiting for their interest set aside in a reserve account, and are on the hook for a proportion of any losses on the securities in Fund B.

Left in Fund B is asset-backed debt and commercial paper: $356 million from KKR Pacific Funding Trust, $168 million of KKR Atlantic Funding Trust, $180 million from Ottimo Funding and $175 million from Axon Financial.

Their maturities were extended and they are paying interest, which is deposited into Fund A along with any underlying assets that mature or can be sold, said Robert Copeland, the SBA's senior accounting officer.

"We're collecting interest and principal of $10 million to $20 million a month," Copeland said. "We expect them to pay full face value."

Total face value of Fund B holdings is about $745 million, according to the LGIP's Web site. Pittsburgh-based Federated estimates their market value at $383 million.

Fund A now emphasizes safety over yield, said Deborah Cunningham, chief money market investment officer at Federated.

‘Lot of Stress'

"We are managing this pool for the liquidity needs of shareholders," she said. "It's gone through a lot of stress."

The fund's 30-day yield on Jan. 31 was 0.88 percent, according to its Web site, about 73 basis points more than four- week Treasury bills. A basis point is 0.01 percentage point. Before the disclosure of bad debt, the fund paid 5.5 percent, 170 basis points more than bills.

Since withdrawal limits were lifted, Fund A assets fell another $400 million. Leon County's Wimberley still keeps $18 million in Capital City Bank, a Tallahassee lender that loaned the school system $10 million to pay teachers in December 2007.

He said the LGIP's deposits might grow again with the election of new local officials who weren't burned by the run.

"But it's going to be like getting back with someone you broke up with," he said. "You wonder: ‘Will it work this time?'"

Bloomberg