Bloomberg News reports that school districts, counties and cities across Florida are struggling to raise cash in order to make routine expenditures like paying employees now that they have been denied access to the $15 billion dollars remaining in the state-run investment pool.
There had been a rash of redemptions from the fund by local governments, cities and school districts after it was reported that the fund contained at least $1.5 billion dollars of downgraded and defaulted debt.
Florida officials froze the fund yesterday after redemptions reduced the assets in the fund by 44%.
Here's how it affected some of the districts:
The Jefferson County school district was forced to take out a short-term loan to cover payroll for the 220 teachers and other employees in the system after $2.7 million it held in the pool was frozen yesterday. At least five other districts also obtained last-minute loans, said Wayne Blanton, executive director of the Florida School Boards Association.
``The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, located 30 miles (48 kilometers) east of the state capital Tallahassee. ``What we just experienced here is a classic run-on-the bank meltdown.''
Thousands of school districts, municipalities, towns and municipal organizations keep their money in state- and county-run pools. These state- and county-run pools, similar to money market accounts, are supposed to invest in safe liquid short-term financial products like Treasuries and certificates of deposit from highly-rated banks.
But many of these funds have invested in high-risk products like structured investment vehicles (SIVs) backed by sub-prime mortgage debt or CDs from banks with a decent probability of failure (like Countrywide Financial.)
Hal Wilson says he should have seen the writing on the wall when other counties and school districts started withdrawing money from the fund earlier in the month.
But Wilson listened to state officials who told him the money would be safe.
He screwed up - he believed them.
Now he and his school district will have to scramble to raise cash to meet expenses until Florida state officials can find some way to fix this mess.
You can bet that if state officials don't fix the problems soon, teachers and other public employees will start to work without pay and local governments will start to default on debt service payments.
As for Jefferson County, Wilson says as soon as the fund is unfrozen, the county plans on pulling all of its cash out:
"They won't have to worry about little Jefferson County any more,'' he said.
That's why Florida probably won't unfreeze the fund any time soon.
The Bloomberg News article notes that there have also been problems with a state-run investment pool in Montana where school districts, cities and counties withdrew $247 million from the state's $2.4 billion investment pool in the past three days.
The Montana investment pool held $90 million in a SIV downgraded to a default rating by Standard & Poor.
With news breaking tonight that Moody's says $64.5 billion dollars of debt sold by Citigroup has either been cut to default status or placed on review for downgrade, you can bet that there will be more old-fashioned bank runs on state- and county-run investment pools in the very near future.
This stuff is getting scary.
UPDATE: The NY Times reported today that one scheme Florida officials are considering to shore up the state-run investment fund and help local school districts meet payrolls and other routine expenditures is raiding the state's $137 billion dollar public employee pension fund for cash.
The Florida public workers' union is understandably concerned about this proposal since it transfers risk to the pension fund.
I can understand why.
There's nothing like having to worry about the solvency of the investment funds that pay for both your salary and your pension.