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Florida Schools Struggle to Pay Teachers as Investments Frozen
By David Evans
Nov. 30 (Bloomberg) -- School districts, counties and cities across Florida are scrambling to raise cash after being denied access to their deposits in a $15 billion state-run investment fund.
Florida's State Board of Administration, manager of the Local Government Investment Pool, halted withdrawals yesterday at an emergency meeting after $12 billion was pulled out this month from participants. Governments from Orange County, home of Disney World, to Pompano Beach asked for their money back following disclosures that the fund held $1.5 billion of downgraded and defaulted debt.
``The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, which kept its entire $2.7 million of cash in the fund. ``What we just experienced here is a classic run-on-the bank meltdown.''
Thousands of school districts, towns and fire departments across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money-market funds, are supposed to invest in safe, liquid, short-term debt such as Treasuries and certificates of deposit from highly rated banks.
By freezing the Florida fund, officials left governments without ready access to cash they are accustomed to drawing upon for routine expenditures. The pool was the largest of its kind in the U.S. at $27 billion before the unprecedented withdrawals.
No Money
Just 30 miles (48 kilometers) east of the state capitol in Tallahassee, there was no money to pay the 220 teachers and other employees in Wilson's Jefferson County school district today. Wilson said he trusted the State Board of Administration's assurances that the money was safe even as other pool participants withdrew billions of dollars.
``We are in the process of working out provisions of a short-term loan with our bank to cover the overdrafts that will occur in our payroll account today,'' Wilson said.
State Board Administration officials plan today to select an independent investment adviser, who will work over the weekend to help analyze the pool's predicament, said Tara Klimek, a spokeswoman for Alex Sink, Florida's chief financial officer. Sink is one of three trustees of the board along with Governor Charlie Crist and Attorney General Bill McCollum.
Avoiding Conflicts
One complication of the search for an adviser is finding an investment bank without conflicts of interest, Klimek said. With input from that adviser, and a newly created advisory panel of pool participants, the board may announce a plan to permit emergency withdrawals at a meeting scheduled for Dec. 4 in Tallahassee, she said.
Standard & Poor's yesterday said it contacted state officials about whether the fund holds any money for debt service payments by local governments and whether that cash will be made available. The credit-rating company said it hadn't yet received information and was monitoring the situation.
The Florida fund has invested $2 billion in structured investment vehicles, or SIVs, and other debt tainted by the collapse of the subprime mortgage market, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding similar investments, in smaller quantities.
The Local Government Investment Pool had $3.5 billion of withdrawals yesterday alone, said Coleman Stipanovich, executive director of the State Board of Administration, at yesterday's special meeting in Tallahassee. The board manages the fund along with other short-term investments and the state's $137 billion pension fund.
Improvements Planned
The board is considering ways to shore up the fund, including obtaining credit protection for $1.5 billion of downgraded and defaulted holdings hurt by the subprime market collapse. In voting for the suspensions, officials sought to stem the flood of money leaving the pool and avoid losses on forced sales of assets.
The investment pool's debt holdings that were downgraded below its minimum standards have a face value amounting to about 10 percent of the pool. Officials disclosed the investments in a report delivered to Crist Nov. 14 following a month of inquiries by Bloomberg News.
``This situation points up the need for monies held in trust by local and state governments to be subject to searching due diligence and constant risk assessment,'' said Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission.
The fund's $900 million of asset-backed commercial paper that was downgraded to default amounts to 6 percent of its assets. Another $650 million, or 4 percent, is invested in certificates of deposit at Countrywide Bank FSB, a unit of Countrywide Financial Corp. The bank's rating was cut to Baa1, three levels above junk status, by Moody's Investors Service on Aug. 16.
KKR Trusts
The pool owns $168 million of debt from KKR Atlantic Funding Trust cut to D, or default, from B by Fitch Ratings on Oct. 8. It also has $356 million issued by KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2. Fitch said the cut to default on the debt reflected non-payment under the original terms. The debt was restructured to extend the maturities to February and March, and interest payments are continuing.
Florida's pool has $180 million of paper from Ottimo Funding, cut to D from C by S&P on Nov. 9. S&P said an auction of Ottimo's collateral ``did not generate cash proceeds'' to repay the asset-backed commercial paper.
The pool also holds $175 million of short-term debt issued by Axon Financial Funding, a SIV. It was cut to D from C by S&P this week. S&P said Axon failed to pay liabilities maturing Nov. 26, causing an ``automatic liquidation event.''
By David Evans
Nov. 30 (Bloomberg) -- School districts, counties and cities across Florida are scrambling to raise cash after being denied access to their deposits in a $15 billion state-run investment fund.
Florida's State Board of Administration, manager of the Local Government Investment Pool, halted withdrawals yesterday at an emergency meeting after $12 billion was pulled out this month from participants. Governments from Orange County, home of Disney World, to Pompano Beach asked for their money back following disclosures that the fund held $1.5 billion of downgraded and defaulted debt.
``The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, which kept its entire $2.7 million of cash in the fund. ``What we just experienced here is a classic run-on-the bank meltdown.''
Thousands of school districts, towns and fire departments across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money-market funds, are supposed to invest in safe, liquid, short-term debt such as Treasuries and certificates of deposit from highly rated banks.
By freezing the Florida fund, officials left governments without ready access to cash they are accustomed to drawing upon for routine expenditures. The pool was the largest of its kind in the U.S. at $27 billion before the unprecedented withdrawals.
No Money
Just 30 miles (48 kilometers) east of the state capitol in Tallahassee, there was no money to pay the 220 teachers and other employees in Wilson's Jefferson County school district today. Wilson said he trusted the State Board of Administration's assurances that the money was safe even as other pool participants withdrew billions of dollars.
``We are in the process of working out provisions of a short-term loan with our bank to cover the overdrafts that will occur in our payroll account today,'' Wilson said.
State Board Administration officials plan today to select an independent investment adviser, who will work over the weekend to help analyze the pool's predicament, said Tara Klimek, a spokeswoman for Alex Sink, Florida's chief financial officer. Sink is one of three trustees of the board along with Governor Charlie Crist and Attorney General Bill McCollum.
Avoiding Conflicts
One complication of the search for an adviser is finding an investment bank without conflicts of interest, Klimek said. With input from that adviser, and a newly created advisory panel of pool participants, the board may announce a plan to permit emergency withdrawals at a meeting scheduled for Dec. 4 in Tallahassee, she said.
Standard & Poor's yesterday said it contacted state officials about whether the fund holds any money for debt service payments by local governments and whether that cash will be made available. The credit-rating company said it hadn't yet received information and was monitoring the situation.
The Florida fund has invested $2 billion in structured investment vehicles, or SIVs, and other debt tainted by the collapse of the subprime mortgage market, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding similar investments, in smaller quantities.
The Local Government Investment Pool had $3.5 billion of withdrawals yesterday alone, said Coleman Stipanovich, executive director of the State Board of Administration, at yesterday's special meeting in Tallahassee. The board manages the fund along with other short-term investments and the state's $137 billion pension fund.
Improvements Planned
The board is considering ways to shore up the fund, including obtaining credit protection for $1.5 billion of downgraded and defaulted holdings hurt by the subprime market collapse. In voting for the suspensions, officials sought to stem the flood of money leaving the pool and avoid losses on forced sales of assets.
The investment pool's debt holdings that were downgraded below its minimum standards have a face value amounting to about 10 percent of the pool. Officials disclosed the investments in a report delivered to Crist Nov. 14 following a month of inquiries by Bloomberg News.
``This situation points up the need for monies held in trust by local and state governments to be subject to searching due diligence and constant risk assessment,'' said Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission.
The fund's $900 million of asset-backed commercial paper that was downgraded to default amounts to 6 percent of its assets. Another $650 million, or 4 percent, is invested in certificates of deposit at Countrywide Bank FSB, a unit of Countrywide Financial Corp. The bank's rating was cut to Baa1, three levels above junk status, by Moody's Investors Service on Aug. 16.
KKR Trusts
The pool owns $168 million of debt from KKR Atlantic Funding Trust cut to D, or default, from B by Fitch Ratings on Oct. 8. It also has $356 million issued by KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2. Fitch said the cut to default on the debt reflected non-payment under the original terms. The debt was restructured to extend the maturities to February and March, and interest payments are continuing.
Florida's pool has $180 million of paper from Ottimo Funding, cut to D from C by S&P on Nov. 9. S&P said an auction of Ottimo's collateral ``did not generate cash proceeds'' to repay the asset-backed commercial paper.
The pool also holds $175 million of short-term debt issued by Axon Financial Funding, a SIV. It was cut to D from C by S&P this week. S&P said Axon failed to pay liabilities maturing Nov. 26, causing an ``automatic liquidation event.''
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