Local Governments Deposited $128 Million In State Fund

On Nov. 14, Bob Jamison became aware that the Local Government Investment Pool might be in jeopardy.

That meant big trouble for Highlands County, because the county commissioners and the clerk of courts had invested $67 million in the statewide fund, which has more than 1,000 Florida depositors.
"I was reading their quarterly newsletter. It said 3.4 percent of their portfolio had been 'downgraded below purchase guidelines.' If that's not a euphemism, I don't know what it is," said Jamison.
What that phrase screamed to Jamison was "junk bonds.

"I read between the lines and drew my own conclusion," said Jamison, the senior director of business services for Clerk of Courts Luke E. Brooker, who is charged with managing the county's money.
That same day, Brooker's finance officer and treasury manager, Pam Cross, was at a clerk of court's seminar in Orlando.

"This was not the topic of the seminar, but it was a hot discussion item over lunch," Jamison said Cross reported to him.

Jamison promptly recalled Cross and devised emergency plans to move the county's money into an interest-bearing account at Bank of America. Over a 10-day period, Jamison pulled back $51 million of the county's $67 million. By then, a run was on, and the State Board of Administration froze all accounts.

The county's $67 million included capital, operating and construction funds.

Of the $13 million that remained invested Friday in the SBA fund, the state has placed $11.2 million in Fund A. It's liquid, meaning it can be withdrawn; $1.8 million cannot be pulled out. It's in Fund B, risky investments, Jamison said.

Security First

Those risky investments are subprime mortgages. The world's financial markets have been reacting like roller coasters while overextended mortgage giants like Countrywide and Wells Fargo try to negotiate their way out of trouble.

The problem, in a nutshell, is that mortgagors loaned billions of dollars at adjustable interest rates for a few years. But now, those interest rates are climbing dramatically, and 1.8 million troubled homeowners may default on their notes.

And now, what was a safe mutual fund is a risky proposition.

"This has always been the most secure fund there is," said Renee Green, finance director for the city of Avon Park, which had $2.7 million in the SBA fund.

Until Nov. 29, when Jeannie Garner, executive director of the Florida Governmental Finance Officers Association, notified members that no deposits or withdrawals would be accepted after 11 a.m.

In effect, the State Board of Administration fund was closed to stop a run on the fund, even though a spokeswoman for Florida's Chief Financial Officer, Alex Sink, said, "There is no run."

Mike Averyt, director of business and operations for the School Board of Highlands County, said the fund operated on the SLY principle - Safety, Liquidity and Yield. That means the most important factor to any investor is that their money is safe. Secondly, the investor wants to be able to redeem the money, and third, the investor wants to earn interest on the money.

"When I first became aware," said Jamison, "the SBA pretty much downplayed concerns that anyone should have about the security of those investments, as well as the liquidity of those investments."
But the SBA changed its goals in recent years, investing 14 percent of the pooled money in subprime loans, hoping to earn a higher interest rate. Jamison thinks that was because the fund managers earned bonuses based on the rate of return, rather than the security of the funds.

"They put yield first, then liquidity, then security," Jamison said. "I felt like they had violated that trust, by, unbeknownst to the depositors, investing that money in less secure, risky investments."

Their money was no longer safe, Green and Jamison said.

The SBA "lost that money," Green said. "It's already happened."

Averyt's criticism is softer. "Anything in the SBA is in danger," the school finance director said.
Just because the money is placed in Fund B - the 14 percent of their money at greatest risk - "doesn't mean we're going to lose the money. It just means it's highly speculative," he added.
Mike Eastman, budget director for the city of Sebring, disagrees. Sebring has about $15.5 million in two funds.

"I think it's safe. I'm not overly concerned about it."

The fund managers, who included SBA Director Coleman Stipanovich, portrayed the weakness in the fund as the end of the fall of a line of dominoes, Jamison said.

"Despite any official information, and contrary to the opinions of a vast majority of the clerks and county investment officers throughout Florida, I made the judgment call that this was a beginning of the domino fall," Jamison said.

"In my opinion, the SBA was stonewalling investors," said CFO Sink.

A Run On The Fund

David Denslowe, a University of Florida economics professor, told the Tampa Tribune if the investors had stayed together, they would have been better off.

Too many finance directors "acted in their own interest," said Hillsborough budget director Erick Johnson, also told the Trib.

Jamison makes no apologies. On the contrary, he has this to say about finance directors who didn't realize something was amiss, and didn't withdraw as much of their money as they could: "They were admitting they were asleep at the switch."

The school board has about $42 million in the fund, Averyt said. That includes $38 million that's saved for the construction of Memorial Elementary School, and two-story buildings at all three high schools and the middle school. Now, 14 percent is invested in the high risk Group B.

About $2 million has been withdrawn, Averyt said on Thursday morning, and moved to a local bank.
"The tax collector is helping us too," Averyt said.

"This is one of the biggest tax collection weeks of the year," Averyt said. Highlands County landowners are paying their property taxes.

"We should have gotten about $12 million today," Averyt said. Bryan did not send that money to the SBA, and is holding it in local banks for municipal and school governments.

Permanent Solution

Averyt believes local government finance directors will calm down in the coming weeks and that confidence in the fund will be restored.

The state, he thinks, can reassure local governments by guaranteeing the money.

"Since they're all taxpayer dollars, they could come in and guarantee our principal," Averyt said. "But I don't think any taxpayer dollars are in jeopardy at this point."

The SBA board has hired BlackRock Inc., a New York money management firm, to take over.

"I trust (the SBA board) to seek out the best financial advice they can," Sheriff Susan Benton said. She ordered the majority of the sheriff's office funds pulled out. About $104,000 remains in Pool B.

"Which we will monitor closely through to maturity," said the sheriff's chief of staff, Lisa McGehee. "We, like many other agencies, are hoping that the restructuring by the new advisor and investment policy will turn things around for this pool."

Jamison's trust will not be easily regained. "It should be based on deeds, not just promises."
Information Not Shared

Lisa McGehee, chief of staff for Highlands County Sheriff Susan Benton, wished when Jamison found out about the shakiness in the fund, he would have called the finance officers of other local governments.

"There is no complaint with the clerk's office," McGehee wrote Friday in an e-mail. "We simply started calling all constitutional offices to have a come-together on the issue and found out, as others did, that the clerk had already been in discussion on the issue, and a pull-out of funds by the clerk for the board had occurred.

"That is something normally that all agencies might meet and discuss, as it could affect all county funds and fees collected by all offices," McGehee said.

Jamison said Thursday that when he was pulling out the county money three weeks ago, he didn't realize other constitutional officers had invested in the fund.

Rick Helms, assistant county administrator who is also a board member of Florida Government Finance Officers Association, assured the sheriff that he will, in the future, assist all offices on issues that might widely affect the county, McGehee said.

None of the investments are needed to make payroll or other short-term obligations, the finance directors assured, and no city, county or school government has lost money at this point.