Lake County Government Avoids Possible Loss of a Percentage of their $144 million Investments in State's "Local Government Investment Pool"
This blog entry was started before 8am on 11/29/2007
(Update 1:20 pm - Note - this is a critical issue - I will be updating this posting periodically with new info or corrections - just added the State press release on the issue at the bottom, and the link to the State's Nov. 9 report that started the run of withdrawals). Updated Nov. 29 - 1:20pm
UPDATE - 2:40 pm Thursday - I received calls from County Commissioner Jennifer Hill and from Lake County Finance department Chief Deputy Clerk Barbara Lehman that Lehman also was concerned about the investment risk, and started pulling out the funds this morning at 9am. As a result, all $144-million in County short term investments are NOW out of the State Investment pool as described below. The below articles remain as written to give background on the issue. However, we don't know if other local government agencies, including the School District, have any investments with the State.
UPDATE - 4pm - Lake County School District Board member Jimmy Conner said they moved their short term money out of the State investment fund yesterday - Jimmie asked them about it then. He said that today the State investments staff froze fund movements, and I don't know who that affected.
UPDATE FRIDAY Morning 11/30/07 - next day - The Orlando Sentinel published another page one story on the issue, saying the State FROZE withdrawals yesterday (but after Lake County got their funds) - that article was added at the bottom of this post, or you can see it and other relevant sidebars at www.orlandosentinel.com/withdrawals
vj
Since none of this makes sense unless you read the articles below, read them if you have not.
ORIGINAL BLOG POSTING - with updates inserted
Today, Nov. 29, 2007, the Orlando Sentinel had a front page article (at the bottom of this document) that said Central Florida County investment managers ( BUT NOT Lake County) and other Florida agencies had pulled $8-billion in short term cash investments out of a Florida State investment pool fund run by the State Board of Administration (SBA) because the fund had invested about 25% of their funds in sub-prime mortgage paper which could collapse in value (and probably already has, but not been recognized by the fund managers.) The fund is known as the Local Government Investment Pool (LGIP).
My high concern is that in 1994, I lived in Orange County, California which had a similar situation using a different type of risky investments, and they RAN the investment pool for local cities also, and lost $2-billion plus the County had to declare bankruptcy. See this link for background on the investment manager, Robert Citron, the only elected Democrat in the Republican Orange County (California): http://en.wikipedia.org/wiki/Robert_Citron . "Citron pled guilty to six felony counts and three special enhancements. Charges also included filing a false and misleading financial summary to participants purchasing securities in the Orange County Treasury Investment Pool. While in bankruptcy, every county program budget was cut, about 3,000 public employees were discharged and all services were reduced. Citron was ordered to serve five years of supervised probation, and to perform 1000 hours of community service. Citron did not serve any time in prison." said this wikipedia article.
Additionally, I have over 20 years internal audit experience, including being the lead auditor in the late 1970's of the County of Los Angeles, and I audited the Treasurer operations for 12 months and their $16-billion in cash flow, thus I understand this subject more than many.
Analyzing the figures from the Sentinel Article, it seems that the original $27-billion LGIP fund balance was reduced by the recent $8-billion in withdrawals to $19-billion. Then, if the sub-prime investments are $6-billion, and they incur large losses, those losses either must be made up by funds from other State accounts, or by downgrading the value or remaining investors. That is the huge risk for remaining in the fund. (Note - the State press release added later in this document says there is a risk of a default of $1.5 billion).
And, to make it worse for Lake Countians, most local counties bailed out of the fund, EXCEPT Lake County, where "Barbara Lehman, chief deputy clerk for the county finance department" said they were keeping $144-million of County investments in the State investment fund "because she had talked to SBA (fund) officials in recent days and was fairly confident that the investments were sound...". Later in the article were several quotes from other observers who "suggested that every agency withdraw its money". (Lehman's Finance Dept. works under the Clerk of Courts at 352-343-9808 - at 2:40 pm today, Lehman called and said they pulled out all the County funds from LGIP this morning.)
Another risk is that this Sentinel article below is about risky short term investments in LGIP. What about all the other SBA managed funds for long term, including pensions, etc.? If they invested in risky sub-prime paper for LGIP, did they do the same for the other funds? Are any other local government pensions, etc. at risk?
I also sent an email to the Lake County School District CFO to ask if they have any exposure in LGIP. No reply yet.
And, I left a message and email with a representative of Florida State CFO Alex Sink's office, Tera Klimek, but no response yet.
Lake County, and any other local agencies, need to pull their funds out now from the LGIP fund run by the State Board of Administration. I would not trust the Florida State government, Charlie Crist or the legislature to "guarantee" investments if it turns out they lost billions. For instance, if the fund value drops by $3-billion, who exactly absorbs that loss? Do you want to trust that the State Govt. will scrape up the funds to reimburse the remaining investors, or will they FREEZE withdrawals (which happened in California), reduce the value on remaining investor accounts, and let lawsuits sort out where the losses are allocated.
Will they actually be able to sell required collateral to cover all the investment losses?
Are they deferring recognition of actual losses by negotiating extensions of final payment dates? These are short term investments, like 12 months, thus if LGIP bought 12 month investments of $1-billion, with term expirations at the end of this month, they should get the principal value plus promised interest back. If, however, the investments dropped in value, and payment dates are extended, they could be covering up possible losses so as not to recognize them. That is known as a Ponzi scheme, where you pay high, expected interest rates for awhile, but the original investment value has declined, thus cannot all be returned.
AND, if there are losses, where in the ranking is Lake County on getting repaid. They might have low priority in getting repayment, either through existing agreements, or via lawsuits. Just like 1st and 2nd mortgages, investors may have different rankings on ability to get payments from declining investment funds.
I also sent an email County Commissioner Jennifer Hill, who called back at 2:30 pm to say the funds had been pulled out this morning.
Postcript: After reading the originating State Report "Update on Sub-Prime Mortgage Meltdown and State Board of Administration Investments" - see link below – Issued by the State Board of Administration Nov. 9, 2007 - it seems there is a lot of deal re-negotiation, EXTENDING of payment deadlines, and they are counting on collateral to cover investment losses, but it could all be smoke and mirrors. Do you trust your State Government to REALLY tell you how good or bad the investments are? And, AFTER this report was issued, other government agencies pulled out $8-billion, so maybe they know something Lake County doesn't???
vj
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Below is the Orlando Sentinel 11/28/07 front page article "Fear Rocks State Fund":
orlandosentinel.com/news/politics/orl-run2907nov29,0,935928.story?coll=orl_tab01_layout
OrlandoSentinel.com
Orlando, Orange County yank millions from state fund
Also LOOK at these REFERENCE links to State issued reports and press releases at:
http://www.orlandosentinel.com/news/local/state/orl-run2907nov29,0,138068.story
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Read the state's assessment report of the risk (PDF) at:
http://www.orlandosentinel.com/media/acrobat/2007-11/34000631.pdf
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State Board of Administration issues press release statement to reassure investors - added below this article.
Dan Tracy
Sentinel Staff Writer
November 29, 2007
The nation's subprime-mortgage crisis is prompting Florida cities, counties and agencies to pull billions of dollars out of a state-run investment fund.
They fear they could have lost their money because a state agency invested it in funds backed by loans to homeowners with questionable credit -- the same loans that have triggered an international credit crunch.
Governments and agencies typically take money intended to pay for such basics as teacher salaries or road repairs and invest it in the short-term state fund so they earn interest before the bills come due.
So far, at least $8 billion has been withdrawn -- almost a third of the fund's assets -- since the run began in late October.
"We don't really know for sure what is going on, and we can't risk our money," said John Pavelchak, director of finance and budgeting for Seminole County schools.
Pavelchak said he has withdrawn about $100 million from the state. He left $1,000 to keep the account open.
The agency that made the investments, the State Board of Administration, released a statement late Wednesday saying the fund was safe and continues to pay interest. The agency also promised to produce a plan to make the fund safer.
The subprime investments, which total as much as $6 billion, are part of an overall fund that stood at $27 billion before the withdrawals began.
'It could result in a loss'
The run on the fund quickened during recent weeks after Bloomberg News broke a story about the possibly precarious nature of the investments. Orlando, for example, yanked all of its money, $50 million, Wednesday.
"As more and more agencies pull out, it could result in a loss, so we needed to pull out," Orlando spokeswoman Heather Allebaugh said.
Gov. Charlie Crist said Wednesday that he was aware of the run and added that he might have "more of the full faith and credit of the state support it [the account] to stem these concerns."
That could mean the state would be asked to cover any possible losses suffered by those in the so-called local-government investment pool.
Agencies that have pulled money include Orange schools, $438 million; Orange County, $370 million; Polk County, $300 million; Seminole County, $200 million; Osceola County schools, $160 million; Volusia County, $152 million; and the Greater Orlando Aviation Authority, $57 million.
About 1,000 cities, counties, school districts and assorted agencies across Florida have placed their money in accounts that SBA invests and manages on their behalf. The agency was not able to provide information Wednesday about how much each agency has remaining in the fund.
Orange County Deputy Comptroller Jim Moye said his office took its money because the state was evasive when questioned about how much was invested in subprime funds and how stable those accounts were.
"One of the problems is transparency," Moye said. "We haven't been satisfied with the answers we've been given."
Added Orange Comptroller Martha Haynie: "I finally learned that lesson that is so difficult for women. You have to take care of yourself first. I decided to take care of Orange County first."
Orange County and other agencies invested with the state because the account paid a good return -- generally exceeding 5 percent -- while allowing them to easily withdraw money when bills came due.
It was that rate of return that prompted the Palm Beach County School District to withdraw $307 million earlier this month. They figured it was too high, meaning the money was being placed in accounts that were not as safe as the board wanted.
"We were not comfortable with the risk associated with the underlying security the pool was investing in," district Treasurer Leanne Evans said.
But not everyone is taking out their money. Lake County, for instance, is keeping its $144 million with the state.
"We just want to wait and see what the SBA says," said Barbara Lehman, chief deputy clerk for the county finance department. Lehman said she had talked with SBA officials in recent days and was "fairly confident" that the investments were sound.
Those making withdrawals largely are putting the money into accounts that rely on government-backed notes paying a lower interest rate than the state has been returning.
'Clearly smart to pull out'
University of Florida economics professor David Denslow said concerns about the state's investments are especially troubling for local governments already dealing with revenue losses related to falling property values and cuts in state funding.
"These governments are clearly smart to pull out," Denslow said.
Jim Gilkeson, an associate professor of finance at the University of Central Florida, suggested that every agency withdraw its money.
"The wisest thing to do now is get your money out as fast as you can and put it in T-bills [U.S. Treasury bills] and let the mess settle out," Gilkeson said.
The investments spooking the various governments basically use subprime mortgages as collateral. But because many people have defaulted on those loans, the value of the funds based on them is dropping. The agencies that judge their value have downgraded the ratings on them as well.
David Damron, Aaron Deslatte, John Kennedy and Mike Thomas of the Sentinel staff contributed to this report. Information from the South Florida Sun-Sentinel also was used. Dan Tracy can be reached at 407-420-5444 or dtracy@orlandosentinel.com.
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Here is the Nov. 29, 2007 press release issued by the State of Florida to "re-assure" investors, as posted on the Orlando Sentinel's website. After reading it, it sounds like they didn't have any control procedures in place and adopted risky investment strategies that have resulted in a recognizable loss of $1.5 billion.
vj
orlandosentinel.com/news/local/state/orl-sba112807,0,7338794.story
OrlandoSentinel.com
State Board of Administration issues statement to reassure investors
Today Coleman Stipanovich the Executive Director of the State Board of Administration announced that there will be a recommendation to the Board of Trustees to formally adopt a plan to provide investors in the Local Government Investment Pool (Pool) with assurance that the Pool will continue to provide safety of principal in the midst of an unprecedented absence of market liquidity.
"It is important that every investor in the Pool has an accurate understanding of the facts regarding our holdings, not misinformation" said Stipanovich. A November 28, 2007 article by Bloomberg News erroneously stated that: "The Florida pool's $900 million of defaulted asset-backed commercial paper now amounts to almost 5 percent of its holdings." In fact, certain Pool investments have been downgraded below purchase credit rating guidelines, but they have continued to pay principal and interest. The Pool has collected approximately $64 million in principal and interest payments since August on these downgraded investments.
At the December 4, 2007 meeting, the State Board of Administration Trustees consisting of Governor Charlie Crist, Chief Financial Officer Alex Sink, and Attorney General Bill McCollum, will consider the following recommendations to provide assurance to Pool investors:
1. Credit protection for the Pool against the potential for default by approximately $1.5 billion in securities from four issuers: Axon Financial, KKR Atlantic, KKR Pacific, OTTIMO Funding and Countrywide. The proposal would provide a cost-effective backstop against the risk of any of these securities fail to return par.
2. Commitment to obtain a AAAm rating from Standard and Poor's on the Pool, including adopting more conservative investment guidelines and establishing an external Pool advisory council.
3. Continued restructuring of the Pool investments to become more liquid and conservative. The Pool has not made any purchases of asset backed commercial paper in November and expects the total asset backed exposure of the Pool to be under 15 percent by the end of 2007. New risk controls with respect to sector exposure will be adopted.
4. Building a larger reserve fund to protect the Pool against future episodes of market illiquidity.
5. Improvements in the investment infrastructure supporting the Pool, including daily pricing, performance measurement and risk analytics.
Copyright © 2007, Orlando Sentinel
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This article was published the next day, Nov. 30, 2007 by the Orlando Sentinel.
For more details, go to www.orlandosentinel.com/withdrawals or the link below.
orlandosentinel.com/news/politics/orl-run3007nov30,0,4348385.story?coll=orl_tab01_layout
OrlandoSentinel.com
Florida freezes fund to halt withdrawals by local agencies
An earlier version incorrectly state that money was withdrawn from the state investment fund on Wednesday.
Aaron Deslatte and Dan Tracy
Sentinel Staff Writers
November 30, 2007
TALLAHASSEE
Florida government suspended withdrawals from a state investment fund Thursday after cities, counties and school boards -- fearful over the fund's financial stability -- withdrew $3.7 billion in just one day.
The unanimous vote by the State Board of Administration -- Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink -- halted at least temporarily a run on the fund that has seen withdrawals totaling $16.5 billion in the past several weeks. That's nearly two-thirds of the assets the fund reported Nov. 1.
The freeze will last at least until Tuesday, prompting concern from some local governments that they might have trouble making payroll without access to their money. That's because they invest their operating money in the state fund as a short-term investment.
"They've got bills. There's payroll in the next couple of days. You've got bond proceeds that have to pay debt service," SBA executive director Coleman Stipanovich warned the board. "If you just arbitrarily cut off liquidity, I have no idea what the ramifications will be."
The surprise vote came at the close of a tense emergency meeting at which Stipanovich had urged the board to back up the fund with a pledge of credit from Florida's massive $137 billion employee pension fund.
"If we don't do something quickly, we're not going to have an investment pool," Stipanovich said.
'A higher duty'
But the board, led by Sink, soundly rejected that idea as too risky. "We're talking about transferring really an unknown risk over onto the backs of our retirees," she said.
Instead, the board directed Stipanovich's office to freeze withdrawals until next Tuesday, hire an outside financial adviser to review its options and form a committee of fund investors to come up with an orderly way to parcel out withdrawals of the remaining $14 billion.
"We have a higher duty not to just help local governments make a mound of dough," Crist said, "but to make sure those who invested in the pension -- the people -- are protected."
About 1,000 cities, counties, school districts and assorted agencies across Florida had placed their money in the Local Government Investment Pool. Typically, the cash is intended to pay for such basics as teacher salaries or road repairs, and the governments are seeking to earn interest income before their bills come due.
The SBA is supposed to invest the money in high-rated short-term instruments such as Treasury bills and top-rated commercial paper before returning it -- plus interest -- when the governments or agencies ask for it.
What sparked the run
But in recent weeks, requests for withdrawals have poured in, ranging from as much as $388.4 million by the Orange County School Board to $1.59 by the city of Coconut Creek.
On Thursday alone, $3.7 billion was withdrawn, raising fears that the fund would run out of money. And to raise the cash, SBA was forced to sell assets at a discount, further eroding the fund's value.
What sparked the run is under dispute. Stipanovich blamed it on a Nov. 14 Bloomberg News report that he said contained "some not factual information" that the fund had bought financial instruments backed by subprime mortgages. That, he said, is "not true."
What Bloomberg and other news organizations reported was Stipanovich's disclosure that day that the fund's assets included some $2.2 billion in notes issued by companies involved in the subprime mortgage meltdown, including industry giant Countrywide, and that those holdings had been downgraded by credit agencies to junk or default status.
Stipanovich insisted Thursday that the pool had "no direct exposure to subprime mortgages." Instead, he said, "a climate of fear" over the downgraded holdings sparked the rush of withdrawals.
But several local governments have said they thought Stipanovich's office wasn't being upfront about where their money was being invested and suspected it was exposed to higher risk than they were being told.
Alarmed local officials at the meeting and across the state said the freeze could jeopardize local governments' payrolls if they are not able to take money out of the fund to pay employees. "We needed leadership today, and we didn't get it," said Bob Inzer, clerk of court for Leon County, which removed millions of dollars from the pool this month.
Florida 'screwed up'
State Rep. Carl Domino, R-Jupiter, called the SBA's actions misguided and possibly illegal, saying he did not think the board had the right to stop governments from withdrawing money.
Domino, who is an investment manager, said the SBA "screwed up" by investing in commercial paper issued by firms such as Countrywide with a stake in subprime mortgages. He called for an investigation into how the investments were made and who is responsible.
Lake County was one of the last governments to pull its money from the fund. Barbara Lehman, chief deputy clerk for the county finance department, said officials decided to withdraw $144 million Thursday morning, not long before the freeze vote.
"There was some uncertainty about what the SBA was going to do, so we felt it was prudent to take our money out," Lehman said.
Osceola County withdrew $149 million Thursday morning, leaving only $900 to maintain the account. Comptroller Imtiaz "Fazie" Khan said the county has been monitoring the fund for about a week.
"I did not expect a run on the market, because I think the state was a pretty safe bet to have your money," Khan said. "But because everybody else ran, I didn't want to be caught."
'There is no confidence'
Deputy Orange County Comptroller Jim Moye said the SBA's actions Thursday did nothing to persuade his agency to reinvest with the state. "There is no confidence right now. None," he said. Orange County has pulled $370 million.
John Pavelchak, director of finance and budgeting for Seminole County schools, said the SBA's actions reinforced his previous decision to withdraw $100 million. The freeze, he said, is "very worrisome. That's what we were afraid of."
The Orlando-Orange County Expressway Authority withdrew $62.6 million earlier this month but was one of the agencies that still has tens of millions of dollars in the SBA fund. Spokeswoman Lindsay Hodges said the authority retains confidence in the SBA.
"We still consider it to be a sound investment with strong rates -- it is just not where we want our whole basket of eggs, so to speak," she wrote in an e-mail.
Winter Garden City Manager Mike Bollhoefer said he's not worried about the $14.5 million his city still has in the pool.
"I am a little concerned, but I don't think there's any danger whatsoever of losing the city's money," he said.
Mark Schlueb of the Sentinel staff contributed to this report. Aaron Deslatte can be reached at adeslatte@orlandosentinel.com, or at 850-222-5564. Dan Tracy can be reached at dtracy@orlandosentinel.com or at 407-420-5444.
My guess is that Baker is too middle of the road and the party wanted someone who will toe the line on the issues. Doesn't matter to them if Baker would do a better job, or if Putnam would know a backhoe from a cultivator, just whether or not they will be true believers in the party.
Posted by: Jim A | 10/20/2009 at 12:41 PM
They ought to slap Baker the hell out of town. He's as dumb as my dore nobe.
Posted by: DougRobinson | 10/20/2009 at 11:10 PM
Doug is correct about Baker being slapped out of town. His attendance in Tallahassee hasn't brought out the best in him.
Putnam is the better candidate.
Posted by: wrench's wench | 10/21/2009 at 12:05 AM
I only remember the good senator for his bill on outlawing bull balls on truck trailer hitches and his support for JD Alexanders bill stripping me of protesting Niagara and all other water grabs. and lastly for never once ever answering my e mails or making a call on the issues of school fire safety not being enforced, Lake O levee not being brought up to code and the bill that made it possible for Progress Energy to tax my power bill to pay for a Nuclear reactor and Local Taxes added onro it for a AR100 westinghouse reactor that has never been approved by NRC to build. The good Senator has for me a Republican been a poor excuse for local representation and uninformed on the issues of Lake Co like WATER and Good JOBS and a expanded revenue base and state schools that meet state fire codes and file timely and posted state reports. Yes the Senators record is a great endorsement for term limits .
Posted by: lwheeler45@aol.com | 10/21/2009 at 04:06 AM
Unfortunately I have to agree with lwheeler45 on these Lake County issues. The "unread" amendments to his bill which disallowed localities any say in their water management was the big "speed bump" for me.
I DO agree with Rep. Baker's stand on legal hand gun ownership for licensed/trained owners. But then he owns the gun shop so it would probably be hard to sneak an amendment related to anti gun into any of his proposed bills.....It is a shame neither he nor his staff read what he votes on before he votes on it either.....
Posted by: Patrinka of the Lakes | 10/21/2009 at 09:14 AM
Never, ever, ever answers emails, letters, phone calls, etc. His office will even hang up on you. This is not representation.....
Posted by: Slow Turtle | 10/21/2009 at 10:33 AM
Senetor Baker brought this on himself when he signed Bills that he "Didn't know what was in there" meaning giving Niagra the right to pull our precious water and then sell it back to us. That wasn't the only thing he signed without reading first. At this point I'd rather have an 8th grader in there.
Posted by: Bob Harrison | 10/21/2009 at 11:07 AM