DALLAS — Trustees of the Florida State Board of Administration yesterday halted all withdrawals of funds from its local government investment pool after more than $10 billion was pulled from the fund in the past two weeks. The trustees, who include Gov. Charlie Crist, Chief Financial Officer Alex Sink, and Attorney General Bill McCollum unanimously decided to suspend withdrawals from the fund until the board can meet on Tuesday to consider possible solutions to the situation. The run on the pool, which holds and invests local governmental tax revenues and bond proceeds, began Nov. 14 when executive director Coleman Stipanovich reported at a cabinet meeting that the $24.5 billion investment pool included some $2 billion of securities that had been downgraded below the state’s investment policy guidelines due to exposure to subprime mortgage problems. The pool is now down to $15 billion, Stipanovich said, with withdrawals of $3.5 billion by Florida local governments yesterday. He said between 950 and 1,000 local governments participate in the pool. “If we don’t do something quickly, we’re not going to have an investment pool,” he said. “Our participants are scared to death.” Stipanovich said the fund has no direct exposure to subprime mortgages, but the bad debts affect $1.5 billion of commercial paper held by the pool that was issued by Axon Financial, KKR Atlantic Funding Trust, KKR Pacific Funding Trust, Ottimo Funding, and Countrywide Bank FSB. Earlier this month, the board said maturities had been extended from November to February 2008 for $725 million of highly rated short-term investments collateralized by subprime residential mortgages. Trustees will meet Tuesday on a plan to provide credit protection for the commercial paper issued by the five firms. “Even if that paper defaults, we would still hold the collateral behind it, which is the single-family residential mortgages,” Stipanovich said. He said that even though certain pool investments have been downgraded below purchase credit rating guidelines, they continue to pay principal and interest. Stipanovich said the pool has collected approximately $64 million in principal and interest payments since August on these downgraded investments. “For the past month we’ve been in a once-in-a-lifetime event,” he said. “Everyone I talk to on Wall Street and in the financial community tells me they’ve never seen a liquidity crisis like we’re seeing today. “There is no liquidity out there. It is as simple as that.” Sink asked if some provision could be made to allow governments needing funds from the pool to meet payrolls or debt service to make withdrawals before Tuesday, but Stipanovich said that would be impossible. “We can stop all withdrawals, but we can’t be in a position of deciding who gets money and who does not,” he said. Crist said local governments will have to draw on other sources of liquidity for necessary funds until next week. Stipanovich said local governments have lost confidence due to misperceptions and misinformation about the safety of the pool. “We need to set the record straight, and build the credibility back into the program that the Legislature had in mind when it created this board 25 years ago,” he said. “That confidence needs to be restored,” he said. “Participants need to know that if they put a dollar in, they’ll get a dollar out.” Stipanovich said the board is committed to obtaining an AAAm rating from Standard & Poor’s for the pool. The board hasn’t made any purchases of asset-backed commercial paper since October, Stipanovich said. He said the pool’s asset-backed exposure would be less than 15% by January 2008. The board directed the SBA staff to consider options for using the state’s retirement system to guarantee the investment pool. The board will also bring in an outside financial consulting firm to review its investment policy and recommend more conservative investment guidelines. Jim Moye, chief deputy controller of Orange County, said none of those actions would bring the county back into the investment pool. Orange County removed its $370 million from the pool two days after the subprime mortgage problem was revealed. “They need to change their investment policy, and communicate it with greater transparency, before we come back,” Moye said. “The board knew it had this problem for some time but it was not communicated to the participants.” The county withdrew from the investment fund to protect the money it had invested, Moye said. “These are operational funds, not retirement funds or other long-term situation,” he said. “We need that money for payroll and other expenses. There is no legal obligation for the state to guarantee the safety of the funds in that pool. “The state has its own budget problems,” Moye said. “If something happened, there’s no way I can see the Legislature taking money from the general fund to reimburse the investment pool.”
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