BRADENTON, Fla. — Florida officials have adopted what they say are stringent policies for the state’s local government investment pool requiring managers to operate under the same standards as a money market fund registered with the Securities and Exchange Commission.
The LGIP has operated under progressively more conservative policies since a run severely depleted it in late 2007. The State Board of Administration board of trustees Tuesday voted formally to adopt policies that implement additional protections for the local governments across the state that invest in the pool.
The new guidelines also are consistent with the priorities of the LGIP, which are safety, liquidity, and yield, SBA director Ash Williams told SBA board members Gov. Charlie Crist, Chief Financial Officer Alex Sink, and Attorney General Bill McCollum.
“We have continued building, I think, confidence in the local investor community and we’ve added several significant new mandates recently,” Williams said. “We look forward to continue building the pool.”
The LGIP provides local governments with a way to invest tax revenues and other short-term funds. While it operates under the auspices of the SBA, it is managed by Federated Investors Inc.
Since problems developed more than 18 months ago because of the subprime mortgage debacle, the SBA has implemented stronger management policies backed by legislative changes in operations to “better protect public funds and to safeguard funds in markets with extreme and prolonged redemption pressures, such as those that occurred during the credit crisis of late 2007 and 2008,” the SBA said in a release.
Key enhancements added to the LGIP investment policy guidelines Tuesday include improved minimum liquidity requirements, tightened maturity limits, stress testing, enhanced reporting, elevated credit quality review, and industry standard investment performance reporting of daily yields calculated using audited balances, as well as a seven-day yield conforming to SEC methodology.
The new policies may help stabilize the LGIP, which was once the largest in the nation, with more than $27 billion in assets.
In late 2007, fears over subprime mortgage investments caused a run on the LGIP. Sudden withdrawals caused assets to plummet to $17 billion, which then required the SBA to freeze withdrawals to protect remaining assets.
Today the LGIP has dwindled to $6 billion in assets.
While the LGIP did not have any direct investments in subprime mortgages, there were investments in asset-backed commercial paper, some with subprime exposure. That led the state to divide the LGIP into Fund A and Fund B. Distressed and defaulted securities were placed into Fund B, which enabled Fund A to qualify for a stable, AAAm rating from Standard & Poor’s.
The state is still pursuing JPMorgan and Lehman Brothers for selling the LGIP unregistered secured notes that it says were not exempt from registration under the Securities Act of 1933. As of June 30, those notes amounted to $187.6 million sold by JPMorgan and $517.7 million sold by Lehman.
The SBA has tolling agreements in place, which enable attorneys to continue negotiations without fear of missing the legal deadline to file suit. However, since Lehman is in bankruptcy, the SBA has filed a claim with the court overseeing the case.