Investment pool panic in Florida is limited

Since 1982, cities and counties in Florida have used the state's Local Government Investment Pool (LGIP) to magnify returns on their savings. In November, however, investors ran to withdraw money from the pool after learning that a portion of its portfolio is comprised of asset-backed commercial paper supported by subprime home loans. On Nov. 29, Florida State Board of Administration (SBA) officials closed the fund to withdrawals and called an outside consultant to repair the damage. However, the problems with Florida's LGIP does not seem to have dampened interest in the use of investment pools nationwide.

When the Florida fund reopened to withdrawals on Dec. 6, it lost $1.1 billion by close of business, followed by several days of money flowing out of the pool. However, by mid-December the fund had experienced two days of positive inflow. “It has stabilized,” says Michael McCauley, the SBA senior corporate governance officer. At that time, the fund stood at a little less than $10 billion.

New York-based Black Rock has assumed management of the pool's portfolio for the next two months, though McCauley says the SBA continues to manage daily operations, and the state is searching for an outside company to manage the pool, which was formerly handled in-house. The pool has been split into two funds, Group A for lower-risk instruments, and Group B for higher-risk instruments, including the commercial paper. Fund participants have been allowed to withdraw up to 15 percent, or at least $2 million, from their Group A accounts, but the Group B accounts are frozen.

Seminole County, Fla., had withdrawn $240 million from Florida's LGIP when the shutdown occurred, but $93 million of the county's money remained locked in the account, says Maryanne Morse, clerk of the county's circuit court, who oversees the county's investment in the pool. After the fund reopened, the county removed an additional $12 million, the maximum amount allowed under the new rules of the fund.

The Chicago-based Government Finance Officers Association (GFOA) posted several tips on using LGIPs on its Web site after news broke of Florida's situation. However, GFOA Executive Director Jeff Esser says they have not received much feedback from members on the issue. “We have not heard of any other investment pool that has had the same problem as Florida, but [GFOA has not contacted every pool],” he says.

Indiana opened an LGIP in January, and State Treasurer Richard Mourdock and his staff have been attentive to the situation in Florida, saying Indiana's LGIP will be far more conservative than Florida's. “Our investment policy is about safety, liquidity [and] yield — in that order,” Mourdock says. “The problems that we see around the country right now have occurred when that order has been reversed and people have been going after yield first.”

Most of the 44 state LGIPs Indiana studied are run by outside investment managers. While that is more costly, Mourdock recommends it, especially for funds dealing with commercial paper. “If we're buying commercial paper, we're going to be doing it through the advice of professionals,” Mourdock says. “[They will be professionals] who are in fact doing a full, [independent] credit analysis.”

McCauley says Florida likely will stay with professional management for the LGIP. “[The LGIP's trustees] are not only looking at outsourcing the LGIP but perhaps some of the other short-term funds that the board manages,” McCauley says.

Before diving into a Local Government Investment Pool:

• Study the earnings performance history of the fund. Any pool with above-average yields or longer maturities should be further evaluated for risk.
• Understand the investment objectives, legal structure and operating procedures of the investment pool.
• Review the pool's eligible securities to determine if they comply with the participating government's investment policy.
• Evaluate the qualifications and experience of the pool's portfolio manager, management team and/or investment advisor.

Source: Government Finance Officers Association.