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LTC 269-2007 Freezing of Deposits/Withdrawals from Fla Local Govm't Investment Pool., ; , ,,,f h ~ ~~ ~ 2007 DEC 4 AID I I ~ 56 _ ~ CITY C~.E,,~~'~ ~~~ ~~_;f~. City of Miami Beach, 1700 Convention Center Drive, Miami Beach, Florida 33139, www.miamibeachfl.gov OFFICE OF THE CITY MANAGER NO. LTC # 269-2007 TO: Mayor Matti Herrera Bower and Members of the City Commission FROM: Jorge M. Gonzalez, City Manager DATE: December 3, 2007 SUBJECT: Freezing of Deposits/Withdrawals from Florida Local Government Investment Pool This Letter to the Commission is to advise the Mayor and Members of the City Commission that on November 29, 2007, the Trustees of the State Board of Administration (SBA) held a special meeting to temporarily stop the accepting or processing of deposit or withdrawal requests from the Florida Local Government Investment Pool (FLGIP) after 11:00 am November 29, 2007. The City of Miami Beach and the Miami Beach Redevelopment Agency do not have any funds invested in the Florida Local Government Investment Pool or in any of the five securities individually mentioned below. The City of Miami Beach selected MBIA Asset Management to manage our investments in January, 2004 and based on their recommendations the City has not invested any funds in the FLGIP. MBIA Inc., the parent company of MBIA Asset Management, is a premier financial guarantor and a leading provider of fixed-income investment management services. The Company's core business is credit enhancement of municipal bonds and asset-and mortgage-backed transactions in the new issue and secondary markets. MBIA's financial strength, underwriting performance and record of service are reflected in the Triple-A rating of MBIA's claims-paying resources by Moodys Investors Service, Standard & Poor's Ratings Services, Fitch Ratings, and Rating and Investment Information, Inc. The FLGIP was established to provide local governments a low cost, low risk, fully transparent investment option for their surplus funds. The SBA has operated the FLGIP since January 1982 for no-qualified funds (i.e. non-pension). However, in recent weeks several of the securities which the FLGIP holds have been downgraded below purchase credit rating guidelines which resulted in many municipalities withdrawing their funds from the FLGIP. The downgrading and potential defaults are associated by five issuers: Axon Financial, KKR Atlantic, KKR Pacific, OTTIMO Funding and Countrywide. This downgrade is a result of the sub-prime concern that is spreading throughout the country. On December 4, 2007, the Trustees of the SBA will hold a regularly scheduled meeting and consider options with respect to resuming accepting and processing deposit or withdrawal requests. I have attached two articles which provide additional information, one from The Bond Buyer and one from The Sun Sentinel. If you have any questions, please contact me or Trish Walker, Chief Financial Officer at 305-673-7574. JMG\PDW\jr Attachments C: \Documents and Settings\FINAWALP\My Documents\(TC Template\(TC regarding Freeze FfGIP.doc We are committed to providing excellent public service and safety to all who live, work, and play in our vibrant, tropicol, historic community. 7HE DAILY NEWSPAPER OF PUBLIC FINANCE Friday, November 30, 2001 Florida ConNrwtdFanPo9e t proceeds, began Nov. 14 when executive director Coleman StJpanovieh reported to a cabinet meeting that the $24.3 billion investment pool included some S2 billion of securities that had been downgraded below the state's investment policy guide- lines due to exposure to subprime mortgage problems. The pool is now down to S15 billion, Stipanovich said, with withdrawals of 53.3 billion by Plorida local governments yester- day: He said between 950 and 1,000 local gmexnntents participate in the pool. "If we don't do something quidrly, we're not going W have sn investment pool,,' he said "Our participants are scarod to death." Stipanovich said the fund has no direct exposure to subprime mortgages, but the bad debts affect S 1.3 billion of commercial Paper held by the pool that was issued by Axon Financial, KKR Atlantic Funding Trust, KKR Padec Ftirneling Trost, Ot- timo Fending, and Countrywide Bank PSB. Earlier this inortth, the board said matu~i- ties had been extended from November to• February 2008 for 5723 million of highly rated ahoR-ta'm ineestments collateralized by subprime residexttial mortgagees. Trustees will moat 7lresday on a plan to provide crsdit protectiatr fm the commercial paper tasuod by the five firms:. Flay Nabs I ; ~~~~ . - ~ 1 Wjtbdrawals By Jnr W' ~ ~ Alex Sink. and Attorney . BIILMcCollam unani- D,4LLAS - Tni .- n1,, -• decided to suspend -with- 1~1s from the. food until. the Florlda Stain Board op lion yesterday halted all vrithdraw- overn ont l l ` ' 'tax meet oa 'IYretday: to; ~tder possible solutions to the g oca s of funds from us al meat investment pool after more. s1on• • than Sl0 billion was pulled from. The tun on the pool, which the; food in the paat.two weeks. holds and invests local .gpvern- s aa pue ~t-tt-T. tsx~ reve who include Gov m xs t ~b~ n w . e , The trus p es C6arlle Grist, t~icf Financial "Even if that Paper defaults, we would still hold tt-e collatexal behind it, which is the single-family residwdal mortgages;' Stipanovich said He said that even though certain pool investments have been downgraded be- krw ptuchase crodir rating guidelines, they continue to Pay Principal and interest. Sti- panovich said the pool has collected ap- proximately S64 million in principal and interest payments since August on these downgraded investrneats. "Far the past mouth we've bas in a onto- in-Q-lifetime event,' hc•seid: "Everyone I tulle ro on Wall Street and in the.financial community tells me they've never seen a liquidity crisis like we're seeing today. There is no liquidity out t6ae. Ic ;s aes simple as that." Sink asked if some provision could be trtade to allow governments needing fiords frorrr the pool to meet payrolls or debt ser- vice to make withdrawals beforc'Ilresday, but Stipanovich said that would be impos- Bible. "We can stop all withdrawals, but we can't be in a position of deciding who gets money and w)w does not; he Bard Grist said local governments will have to draw on other sauces of bquidiry for neoos- sary funds until next weak. Snpanovich said heal govemments have lost confidence due to mispdcepaons end misinfomtstioa about the safety of the pool "We need ro eat the roeord strhight, and build the credibility back into the program that the Legislamte had in mind whin it cro- aced this board 23 years ago; he said, `That confidence Hoods to be restored:' he said "Participants need to know that if they put a dollar in, they'll get a dollar our" Stipenovich said the hoard is comnritted to obtaining as AAAmratirrg from Standard poor's for the pool. The board hasn't made any purchases of asset-backed commercial paper since Oc- tobu Stipanovich_said He said the pool's asses-bacJred exposure would be lrss than 15% by January 2006. .The board dirocted the: SBA staff to con- ardex options for using the state's retirvrreot system to guarantee the investment pool. The board will also bring ip an outside fi- nancial coosultiog fun to review its invest- ment policy and recommeetd more conaer- vative investmenrt guidelir-es. Jim Moye, chief deputy controller of Orange Canty. said none of those actions would bring the county back iruo the invest- mert pool Orange County removed its 5310 million from the pool two days after the subprime mortgage problem was revealed. `They need tp change their investmwt policy, and communicate it with greater transpateacy, before we come back; Moye said 'The board knew it had this problem for some time but tt was rwt communicated to the participants •• The roomy withdrew floor the investmenu fund to protect the money it bad Invested, Moye said - `These are operational funds. not retire menu funds or other long-term sinratioa:' he said "We need that money for payroll and other ercpexrees. These is no legal obligation for the state to guarantee the safety of the funds in that pool. `The state has its own budget problems; Moye said. "If something happened, there's no way I can see the Legislature taking tnoaey from the ge~aal brad to reimburse the imestmmt pool" O Questions, answers about the Local Government Investment Pool -- South Florida Sun-Sentinels... Page 1 of 2 sun-sentinel.com/news/local/southflorida/sfl-flfdebtquestions 1130sbnov30,0,243 895 7. story South Florida Sun-Sentinel.com Questions, answers about the Local Government Investment Pool November 30, 2007 QUESTIONS, ANSWERS ABOUT INVESTMENT POOL What is the Local Government Investment Pool? It's like a money market fund open only to Florida's local governments. It is a place where they can put surplus funds for investment until they need them. The fund is designed to be highly liquid, which means it should be easy for governments to withdraw their money when needed. It is not used for pension money. What does the Local Government Investment Pool invest in? According to the its Web site, the fund is supposed to be invested in short-term, highly rated government and non-government securities. Why is the money at risk? Some of the pool's investments are at risk of default. The reason is the sub-prime mortgage crisis. The pool purchased securities backed by these mortgages, including some from Countrywide Financial. As the housing crisis deepened, mortgage-backed securities have plummeted in value, if they trade at all, as a growing number of borrowers began to default on their home loans. Now, investors see these securities as too risky. State Board of Administration Executive Director Coleman Stipanovich told Bloomberg News Thursday, "There is no liquidity out there, there are no bids." What does that do to the fund? The pool's investment guidelines don't allow the pool to hold securities that are no longer highly rated, but at the moment, there's practically no way to sell these securities. How much money is at risk? In a Nov. 9 report, the State Board of Administration indicated that $2.28 billion worth of short-term securities had been downgraded and now were below investment grade. The Local Government Investment Pool had $27.3 billion at that time. The actual losses to the pool could be smaller than $2.28 billion, however. On Thursday, the board released a statement saying that despite the downgrades, the pool still is collecting principal and interest on these investments and that has totaled about $64 million since August. Has the fund made any money? Yes, but its returns are not outstanding. Through September, the fund produced a return of 5.56 percent. That compares to a return of 5.51 percent on an index of money market funds used by large institutional investors. Is the state going to fix this? http://www.sun-sentinel.com/news/local/southflorida/sfl-flfdebtquestions 1130sbnov30,0,3599071,... 12/3/2007 Questions, answers about the Local Government Investment Pool -- South Florida Sun-Sentinels... Page 2 of 2 The state is no longer allowing cities and counties to withdraw their money from the pool until a rescue plan is adopted. That is supposed to happen next Tuesday. Administrators said they want the state to buy $1.5 billion in credit insurance for downgraded and defaulted investments. The tentative rescue plan also calls for the state board to adopt a more conservative investment policy and to aim to secure a top credit rating for the pool. Will the state make good on any money that could be lost to local governments, or will local taxpayers have to fund a bailout? State officials assert no local governments have lost money, but details of the state's plan are to be discussed at next Tuesday's meeting. 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