Listening to the radio this morning, I heard a completely bizarre interpretation of the recent run on and closing of the State Board of Adminstration (SBA) fund of local government dollars. The State Representative on the talk show claimed the reason the SBA had hit the rocks was greed on the part of local governments, who somehow sought to ‘punish’ the State for the allegedly tax limiting amendment on the ballot for January 29th. If this is local government’s way of “getting even” with the State, they all sure waited a long time to do so.

The SBA is fully controlled by State Government. It has a Board consisting of the Governor and two Cabinet officials, and is tasked with managing a large investment pool of dollars from local governments. When comments were made describing the SBA as an investment fund like any other, the point that the State mandates how local government shall invest was lost. While the State could very well leave local governments somewhat short on their principle, they would likewise need to be prepared for the flurry of lawsuits coming from the State’s inability to invest as promised.

I do not know the SBA’s Chief Administrator, Mr. Coleman Stipanovich, but I do know of Mr. Mac Stipanovich, a very high powered lobbyist in Tallahassee for decades. Maybe the same names are coincidence, maybe not, but I surely hope there is staff on Board capable of independently managing multi-billion dollar portfolios.

Given how the State plans to distribute the assets, releasing funds as local governments demonstrate need, clearly it is their decision is to liquidate the fund. If one must explain why they are making withdrawals, then the investments are not truly short term and liquid. This means local governments will no longer place their funds in the SBA.  This is not ‘punishing’ the state, or ‘getting even’, but the same actions any of us would take if every time we went to withdraw money at our bank we had to tell the teller why.

Evidently, the State cannot be trusted to set up short term liquid investments which supposedly met the legal requirements of the Legislature for how local governments must invest their funds. Rules are in place to try to ensure local governments cannot invest in high risk investments, such as the former derivatives scandal. We already had lowered out exposure to mortgages and liquidated that a while back completely.

The State sets the rules for investment, the State creates a fund which they claim meets the rules they set for investments, and then they get involved over their head in instruments they may not even understand.

Brevard County has plenty of money to operate and will get back our principal still remaining, but it is highly doubtful we will place any money back into the SBA. As outlined by the Florida Clerks Association memo penned by Mr. Inzer from Leon County, the trust of a low risk, low yield, liquid investment has been broached.

On a much bigger picture, if this is how the State has invested the funds from local governments, how have they invested their own operating and retirement funds? Perhaps rather than being critical of depositors simply trying to get their deposits back, our State Representative should investigate how the State has invested its own operating funds and retirement funds.

Anyway, do not look for a lot of financial assistance for local governments or new spending from the State for a few years. With sales tax down, doc stamps plummeting, and now investment pools set to drop a billion or two, the State will be too busy plugging holes in its own budget.

By the way, Florida will not be the only fund hammered on the SubPrime dive. Watch for many State and Local governments, as well as private pension funds, to drop precipitously. Florida funds were solvent. Thus, their exposure to the higher risk, higher yield funds has not seemed to be devastating. Just as the case with the derivatives fiasco 15 years ago, though, you can bet many funds that were upside down and bleeding chose to invest for the higher yields to be able to maintain the payouts, risk be damned. The State of Florida was not supposed to be involved in these. But you can imagine if a State government is invested where it had been prohibited, many other fund managers, facing no such restrictions, are starting to look around for new jobs as their underfunded and overpromised retirement funds hit the rocks.