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Florida Trend Exclusive
Another Local Government Investment Fund Collapses
The Florida League of Cities has borrowed money to bail out the cities that invested in the fund through the League. But some cities, including St. Petersburg, aren't protected.
Another investment pool holding funds from Florida cities has collapsed, but the result for the communities is different this time because of a bailout from the Florida League of Cities.
The latest troubled fund involved some $187 million that more than a dozen smaller Florida cities, ranging from Flagler Beach to New Port Richey to Auburndale, pooled with the League. The cities were hoping to get a higher return on idle funds than they could get on their own. The League invested the money in the Columbia Strategic Cash Portfolio, a fund for institutional investors managed by Columbia Management, a subsidiary of Bank of America.
The Columbia fund, known as the Strat-Cash fund, consisted of supposedly safe securities with slightly longer maturities than a typical money-market fund. But that fund shut down on Dec. 10 and distributed its assets after it was unable to sell mortgage-backed securities in its portfolio to meet a $20-billion withdrawal demand by its largest investor, who hasn’t been identified.
To guarantee the cities wouldn’t lose their investments, the League assumed all the risk of loss from the troubled investments and took out a $156-million loan to create a new investment pool for the cities. The League is the major statewide organization of city governments and lobbies on their behalf.
Meanwhile, some Florida cities, including the city of St. Petersburg, invested in the Strat Cash fund directly and aren’t protected by the League’s bailout. St. Petersburg's finance director, Jeff Spies (pronounced Speez), confirmed Thursday that the city now holds about $65 million in illiquid mortgage-backed securities. Spies said the city does not need those funds for its current operations and plans to hold them until they mature. Florida Trend could not determine what other cities had made direct investments in the Strat-Cash fund.
» "The directive we got from Mike Sittig was that we're going to solve this problem if we have to
-- Bob Inzer |
The Strat-Cash collapse came less than a month after a much larger, state-managed pool of local government funds suffered massive withdrawals by local-government investors who were concerned about the pool's investments in mortgage-backed securities. In marked contrast to the approach the League would take, Gov. Charlie Crist and the other trustees of the state
Board of Administration, which oversees the state-managed fund, declined to offer state money to back the state-run fund or to give any guarantees to its local government-investors.
Lacking that reassurance, many local governments pulled their money out, with net withdrawals averaging $1 billion a day before the SBA froze its fund on Nov. 29.
Cities and counties that stuck with the state pool found their funds locked up. Even today most cannot withdraw all of their money.
State officials were the first to pick up indications that the Strat-Cash fund might be in trouble. The SBA never had put any local-government money in Strat-Cash, but the state did have about $1 billion of its own treasury money in the fund. Just before Thanksgiving, after a "routine" semiannual review, Florida Chief Financial Officer Alex Sink withdrew the treasury funds from Strat-Cash, according to Sink's communications director, Tara Klimek. "Our (staff) investment managers didn't feel comfortable with the information they were getting" from Columbia on its holdings, Klimek told Florida Trend on Thursday.
League officials began to sense something amiss on Dec. 4, the day Crist, Sink and Attorney General Bill McCollum - the three SBA trustees — met and voted to reopen the state investment pool.
Representatives of Columbia Management were in the audience that day. The League's finance director, Jeannie Garner, says she began asking them about Columbia’s investments and its other investors. Like Sink's staff a few days earlier, Garner didn't like the answers or, as she says, the lack of answers. She and the League's executive director, Mike Sittig, decided to pull money out of Strat-Cash.
The next day, Thurs., Dec. 5, before she made her move, Columbia began promising a conference call between investors and its president, but the call did not happen, Garner says. The following morning, when Garner called to notify the Strat-Cash fund that she would withdraw the League's $187 million, she was told the fund had been frozen and the assets would be distributed.
Sittig spent the day on the phone with the pool investors and the boards of the investment fund as well as a separate insurance investment fund managed by the League.
"He talked to every single executive board member," Garner says, "and within about five hours had a written consent from every board member. . . They had lots of questions, but there was no question we had to fix this."
The League's executive board, headed by Pembroke Pines Mayor Frank Ortis, unanimously supported Sittig's bailout plan. "It's all elected officials," Garner explained Thursday, "and they don't want to see the towns and cities suffer. The state doesn't feel that responsibility to local government like we do."
"You know, that's some courage," says Leon County Clerk of Court Bob Inzer, a member of the League's investment advisory board, though Leon is not an investor in the League's pool. "The directive we got from Mike Sittig was that we're going to solve this problem if we have to mortgage the building and all the furniture of the League of Cities."
Within a week, the League worked out a loan from another Bank of American subsidiary, Blue Ridge Investments. The loan ended up being about $156 million, since the rest of the Strat-Cash investments were cash instruments and could be readily withdrawn, Garner says.
The new investment pool, funded with the League's borrowed cash, is now paying about 3.6% to the various local-government investors. Only two of them withdrew funds, Garner says - a total of about $9.8 million out of the $187-million invested.
So far, the League's bailout of its members' investments has actually made money for the League. The return on the distressed assets it purchased is running more than 5%, more than the cost of the loan, Garner says. The League also continues to collect an administrative fee of six hundredths of a percent (6 "basis points") on what is now a $175-million fund. She thinks the troubled assets will eventually pay out in full.
"We'll make back our $300,000," Garner says. The SBA-run pool “could've made money" with a similar bailout, she says. The portion of the SBA-run pool containing the troubled assets "is still paying above 5%," she noted.
So far, the League's risk seems contained. Garner says the current estimate is that 90% of the old Strat-Cash portfolio will mature or can likely be sold for face value by mid-year.
Even before the League initiated its bailout, Garner had been critical of Crist and the other SBA trustees for not standing more firmly behind the SBA-run investment pool. "They really should have been on top of this and pledged the full faith and credit of the state," she told Florida Trend in early December.
Meanwhile, in St. Petersburg, Spies notes that his city is also continuing to collect interest at more than 5% on the securities it received when the Columbia fund shut down. He said the investments are currently valued at 98.4% of their original value, meaning they have lost just over 1.5% in principal even as they pay 5% interest each year.
Spies got caught in what he calls "atrocious" timing. He says he had gotten City Council approval to move $40 million out of the Strat Cash and into three money-market funds, run by AIM, Fidelity and Morgan-Stanley, but as with Garner, the day he called was the day Columbia froze the fund.
And then there is Pembroke Pines, which luckily drew about $53 million out of the SBA-run investment pool just before it was frozen on Nov. 29. Around Dec. 3, the city moved that cash to a new investment — the Strat-Cash fund.
It was a bad move for a moment, but a lucky one as it turns out. Had Pembroke Pines stayed in the SBA pool, most of its money would still be frozen. In the League's fund, it can get its money whenever it wants it.
Cities with investments in the League pools as of Nov. 30 were Auburndale, Boynton Beach, Davie, Flagler Beach, Gulf Breeze, Indian Harbour Beach, Lake City, Lauderdale Lakes, New Port Richey, Pembroke Pines, Ponce Inlet, Seminole, Stuart and West Palm Beach.
