TURMOIL IN MUNICIPAL FINANCE

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#666666" TEXT="#080000" background="001b85a3.jpg"> <div> <FONT SIZE="5" COLOR="#FFFFFF" FACE="Arial" ><B>FLORIDA FUTURES FORUM</B></FONT><B>    </B><B> |     </B><A HREF="index.htm" TARGET="_top" TITLE="FLORIDA FUTURES FORUM"><B>home</B></A></div> <div> <A HREF="index.htm" TARGET="_top" TITLE="FLORIDA FUTURES FORUM">FLORIDA FUTURES FORUM</A><B>   |   </B><A HREF="the_cost_of_immigration_cont.htm" TARGET="_top" TITLE="COST OF IMMIGRATION CONTROL">COST OF IMMIGRATION CONTROL</A><B>   |   </B><A HREF="free_trade_vs_neopopulism.htm" TARGET="_top" TITLE="FREE TRADE vs NEOPOPULISM">FREE TRADE vs NEOPOPULISM</A><B>   |   </B><B>TURMOIL IN MUNICIPAL FINANCE</B></div> <div> </div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#666666" TEXT="#080000" background="00209093.jpg"> <div> <IMG SRC="01a76730.gif" border=0 width="118" height="115" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> <A HREF="index.htm" TARGET="_top" TITLE="FLORIDA FUTURES FORUM"><B>FLORIDA FUTURES FORUM</B></A></div> <div> <A HREF="the_cost_of_immigration_cont.htm" TARGET="_top" TITLE="COST OF IMMIGRATION CONTROL"><B>COST OF IMMIGRATION CONTROL</B></A></div> <div> <A HREF="free_trade_vs_neopopulism.htm" TARGET="_top" TITLE="FREE TRADE vs NEOPOPULISM"><B>FREE TRADE vs NEOPOPULISM</B></A></div> <div> <B><IMG BORDER="0" SRC="Symb075c00b700c8dddddd00.png" HEIGHT="13" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">TURMOIL IN MUNICIPAL FINANCE</B></div> <bR> <bR> <bR> <bR> </td> <td valign="top" height=390 width="100%" BGCOLOR="#FFFFFF" TEXT="#080000"> <div> TURMOIL IN MUNICIPAL FINANCE</div> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Once staid municipal bond market will be roiled by the distress of bond insurers obligated to cover losses from the subprime mortgage fiasco. The era of cheap money will end for many municipalities.</B></div> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Most affected will be municipalities with lower credit ratings. Backing from top-rated insurers will be difficult to find.</B></div> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Trouble financing projects will have adverse trickle-down effect on local economies.</B></div> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Municipal budgets will be thrown off balance by problems with investment pools.</B></div> <bR> <div> Credit guarantee insurance companies  (the "monolines") play an important role in the $2.5 trillion muni bond market by providing conservative investors some protection against default.  One of the unnerving surprises of the spreading credit crisis has been the exposure of bond insurers to subprime mortgage losses.<A HREF="http://www.nytimes.com/2007/11/30/business/30norris.html?_r=2&ref=business&oref&oref" TARGET="_top" TITLE="http://www.nytimes.com/2007/11/30/busine"> With their own creditworthiness in question, there is less confidence in the trustworthiness of their guarantees. </A>  Buying muni bonds has become more risky, and borrowing money has become more costly for many municipalities. </div> <div> At least one Florida bond issuer is delaying critical infrastructure improvements until the market takes a more favorable turn.</div> <div> <A HREF=" http://www.washingtonpost.com/wp-dyn/content/article/2007/11/28/AR2007112802486.html?hpid=topnews" TARGET="_top" TITLE=" http://www.washingtonpost.com/wp-dyn/co">Miami-Dade County pulled a $540 million offering backed by airport revenue </A>that would have financed capital improvements at MIA.  When the airport project received only <A HREF="http://www.forbes.com/businesswire/feeds/businesswire/2007/10/25/businesswire20071025006449r1.html" TARGET="_top" TITLE="http://www.forbes.com/businesswire/feeds">an A-minus rating</A>, the county tried to burnish its investment appeal with guarantees from a AAA-rated bond insurer.  But the interest rate was still set too high to be economically feasible for the county.  </div> <div> The sharp downgrading of one well-known insurers forced Okaloosa County to seek another insurer or risk a poor rating -- and higher cost --  for its airport project bond issue.</div> <bR> <div> Across the nation, municipalities were on track to set a new record in bond issuance when the debt markets suddenly seized up in August because of fears about mortgage-linked securities. </div> <bR> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" ><I>The uncertainty has raised the cost of financing for municipalities such as hospitals and school districts, helping to push new issuance in the municipal bond market down more than 20 per cent year-on-year, marking the first meaningful decline in the market since 2003.</I>  -- </FONT>“<A HREF="http://www.ft.com/cms/s/0/c7f65d06-cf85-11dc-854a-0000779fd2ac.html" TARGET="_top" TITLE="http://www.ft.com/cms/s/0/c7f65d06-cf85-">Municipal bonds hit by monocline uncertainty”, </A><A HREF="http://www.ft.com/cms/s/0/c7f65d06-cf85-11dc-854a-0000779fd2ac.html" TARGET="_top" TITLE="http://www.ft.com/cms/s/0/c7f65d06-cf85-"><I>Financial Times</I></A><A HREF="http://www.ft.com/cms/s/0/c7f65d06-cf85-11dc-854a-0000779fd2ac.html" TARGET="_top" TITLE="http://www.ft.com/cms/s/0/c7f65d06-cf85-">, 30Jan08.</A></div> <bR> <div> <B>The credit crunch will force municipalities to decide either to put off projects or pay higher interest rates on their bonds.  Both will have negative consequences for their local communities and economies. </B></div> <bR> <div> <IMG SRC="03ee8360.jpg" border=0 width="1000" height="566" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> <B>One doomsday scenario -- the bond-rating selloff</B></div> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" ><A HREF="http://online.wsj.com/article/SB119513955507594253.html" TARGET="_top" TITLE="http://online.wsj.com/article/SB11951395">Rating services will force bond insurers to raise capital to cover possible losses from their mortgage holdings.</A> </FONT>><FONT SIZE="1" COLOR="#333333" FACE="Arial" >consequently</FONT>> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Failure to raise sufficient capital will be punished with a downgrade in the insurers' credit rating.<I> </I></FONT>><FONT SIZE="1" COLOR="#333333" FACE="Arial" >consequently</FONT>> Muni bonds will be repriced at their own intrinsic value. ><FONT SIZE="1" COLOR="#333333" FACE="Arial" >consequently</FONT>> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Repricing will trigger forced selling by institutions that are not allowed to own high risk bonds. </FONT>><FONT SIZE="1" COLOR="#333333" FACE="Arial" >consequently</FONT>> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Institutions will unload some bonds at fire sale prices. ></FONT><FONT SIZE="1" COLOR="#000000" FACE="Arial" >consequently> </FONT><FONT SIZE="3" COLOR="#000000" FACE="Arial" >Prices of muni bonds will fall in the secondary market when the likelihood of default rises. </FONT>><FONT SIZE="1" COLOR="#333333" FACE="Arial" >consequently</FONT>> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Some bond holders will exercise their right to immediate repayment, further straining local government finances.</FONT><FONT SIZE="1" COLOR="#000000" FACE="Arial" >>and> </FONT><FONT SIZE="3" COLOR="#000000" FACE="Arial" >Falling muni bond prices will make it more difficult for other municipalities to finance projects through the debt markets. </FONT><FONT SIZE="1" COLOR="#000000" FACE="Arial" >- "Credit pressure filters down to muni market," <I>Wall Street Journal</I>, 16Nov07</FONT></div> <bR> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Failure to raise capital will be punished with a downgrade in the insurers' credit rating. </FONT>><FONT SIZE="1" COLOR="#333333" FACE="Arial" >consequently</FONT>> Banks owning downgraded bonds will be forced to raise capital reserves. ><FONT SIZE="1" COLOR="#333333" FACE="Arial" >consequently</FONT>> <A HREF="http://online.wsj.com/article/SB119794339190835701.html?mod=todays_us_money_and_investing" TARGET="_top" TITLE="http://online.wsj.com/article/SB11979433">Bond-ratings blowup will “create an even more serious capital clinch-up than that being experienced today”.</A> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >-- </FONT><FONT SIZE="1" COLOR="#000000" FACE="Arial" >"Credit crunch could worsen if...", <I>Wall Street Journal,</I> 18Dec07</FONT></div> <bR> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Credit downgrades of monolines will cause direct pain for some banks, forcing them to write down their counterparty exposures to the downgraded insurers. </FONT>>>consequently>><FONT SIZE="3" COLOR="#000000" FACE="Arial" > Banks will be persuaded to provide back-up liquidity lines to banks as an alternative to straight bailouts.  </FONT>-- “Fed quiet on bond insurers rescue”, <I>Financial Times</I>, 28Jan08.</div> <bR> <div> Credit downgrades will unleash wider financial turbulence in sectors such as money market funds, which have been heavy buyers of insured securities. <A HREF="#the_state_managed_investment_pool" TITLE="TURMOIL IN MUNICIPAL FINANCE">Affected will be some supposedly "plain vanilla" funds in which local municipalities have deposited money. </A> <FONT SIZE="1" COLOR="#000000" FACE="Arial" >-- “Fed quiet on bond insurers rescue”, <I>Financial Times</I>, 28Jan08.</FONT></div> <bR> <div> Weak housing market will drain local coffers of property taxes. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently> </FONT> Lower revenues will damage credit ratings. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently></FONT> Bonds will need higher interest rates to sell. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently><A HREF="http://www.heraldtribune.com/article/20071220/BUSINESS/712200550" TARGET="_top" TITLE="http://www.heraldtribune.com/article/200"> </A></FONT><A HREF="http://www.heraldtribune.com/article/20071220/BUSINESS/712200550" TARGET="_top" TITLE="http://www.heraldtribune.com/article/200">"Higher borrowing costs for cities will force them to charge higher property taxes, which will increase the strain on consumers. And some cities may be shut out of the credit </A>markets." -- <FONT SIZE="1" COLOR="#000000" FACE="Arial" >Peter Schiff, Euro Pacific Capital</FONT></div> <bR> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >The credit mess will lead to a broader slowdown.  "When access to credit is being restricted to a municipality that borrows money," observed Robert Nelson of Thomson FInancial, "there are trickle-down effects throughout the economy." </FONT>(quoted in <I>Washington Post, 29Nov07)</I></div> <div> <B>Turmoil will create openings for the shrewd and solvent. </B></div> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" ><A HREF="http://online.wsj.com/article/SB119882407904955371.html" TARGET="_top" TITLE="http://online.wsj.com/article/SB11988240">Warren Buffett, seeing an opportunity to profit from turmoil in the nation's muni market</A>, is starting up a bond insurer that will offer a financially secure source of insurance for local governments and will offer tough competition to  the industry's embattled incumbents</FONT>.<FONT SIZE="3" COLOR="#000000" FACE="Arial" > The startup, Berkshire Hathaway Assurance Corp. will seek approval in Florida and other states that account for a large portion of muni debt issurance. </FONT> - “Buffett to start a bond insurer for cities, states”, <I>Wall Street Journal</I>, 29Dec07. </div> <div> Berkshire Hathaway Assurance Corp., will almost certainly receive a triple-A rating. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently></FONT> The startup will take business away from existing insurers at a time when they need new business to bolster their finances. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently></FONT> Loss of business to a new competitor will put further pressure on the already imperiled credit ratings of existing guarantors.</div> <bR> <div> Berkshire Hathaway Assurance will charge rates high enough to compensate for a bond's underlying risk. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently>   </FONT>High rates will restrain state and local governments from borrowing and spending beyond their means -- a temptation when rates are low. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently.></FONT> Governments will be less likely to default, leaving the insurers on the hook. </div> <bR> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >As the credit squeeze tightens, regulators will take the initiative in heading off fiscal catastrophes, following the lead of New York in encouraging the entry of Berkshire Hathaway into the market. --</FONT><A HREF="http://www.ft.com/cms/s/1/ebe3e730-be3a-11dc-8bc9-0000779fd2ac.html" TARGET="_top" TITLE="http://www.ft.com/cms/s/1/ebe3e730-be3a-">Lex, </A><A HREF="http://www.ft.com/cms/s/1/ebe3e730-be3a-11dc-8bc9-0000779fd2ac.html" TARGET="_top" TITLE="http://www.ft.com/cms/s/1/ebe3e730-be3a-"><I>Financial Times</I></A><A HREF="http://www.ft.com/cms/s/1/ebe3e730-be3a-11dc-8bc9-0000779fd2ac.html" TARGET="_top" TITLE="http://www.ft.com/cms/s/1/ebe3e730-be3a-"> 08Jan08.</A></div> <bR> <bR> <div> <B>The number of insured bond issues will decrease in 2008. For government issuers with strong credit ratings, the cost of insurance may not be worth the ratings bump that it produces. </B></div> <bR> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Disclosures about the insurers' precarious finances and uncertain ratings prospects will raise doubts about the value of bond insurance. </FONT>>consequently> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >The bond market will discount worries about downgrades by marking insured bonds down to where they would trade if they were not insured. </FONT>>consequently> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Cities, counties and states that have rarely if ever defaulted will decide that they do not need the protection and additional expense of insurance.  </FONT>>consequently>  <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Investors will be willing to buy uninsured munis when they appear less risky than insured corporate debt; the cumulative default rate on A-rated municipals is lower than AAA-rated corporate bonds, according to a Standard & Poor study</FONT><FONT SIZE="4" COLOR="#000000" FACE="Arial" >. </FONT>>but><FONT SIZE="3" COLOR="#000000" FACE="Arial" > Riskier uninsured bonds (from first time issuers, for projects in distressed industries like housing, and speculative projects which repay bonds with revenues instead of taxes)  will attract buyers if a higher premium is offered. </FONT>>consequently> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >“The biggest casualty of the crisis surrounding bond insurers may well be the insurers themselves”.</FONT> - “Bond insurers' future  unclear amid turmoil”, AP (Leslie Wines), 27Dec07; “The world of municipals and Mr. Buffett”, <I>Financial Times,</I> 03Feb08. <FONT SIZE="3" COLOR="#000000" FACE="Arial" >“Selling insurance to people who do not need it has to be a great business” -- Gary Vaughan-Smith, </FONT><I>Financial Times</I>, 03Feb08.</div> <bR> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" ><A HREF="http://blogs.wsj.com/deals/2007/12/26/a-happy-new-year-for-bond-insurers/trackback/ " TARGET="_top" TITLE="http://blogs.wsj.com/deals/2007/12/26/a-">But Bloomberg News columnist Joe Mysak disagrees:</A> </FONT>(<I>Wall Street Journal,</I> 23Dec07)</div> <bR> <div> Bond insurers will continue to receive premium payments on the muni bonds <FONT SIZE="1" COLOR="#000000" FACE="Arial" >and </FONT>the insurers do not have to pay off immediately  in the case of default - payments can be stretched out over the duration of the bonds.  <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently></FONT> Bond insurers will remain viable concerns, making plenty of money along the way. <A HREF="http://online.wsj.com/article/SB119885437041255743.html?mod=hps_us_whats_news" TARGET="_top" TITLE="http://online.wsj.com/article/SB11988543">Celent analyst Donald Light </A>said that the entry of  Berkshire Hathaway will help increase confidence in the bond insurers' business model. "Nobody calls Warren Buffett dumb," Light says. "He thinks there is money to be made in the sector." <FONT SIZE="1" COLOR="#000000" FACE="Arial" >-- <I>Wall Street Journal, 28Dec07</I></FONT></div> <bR> <div> <I>Watch Warren Buffett swoop in and take that boring old municipal bond insurance business. Watch a few large hedge funds buy the remains of the [other insurance companies]  to get their staff and experience (especially the municipal sales teams), and launch new companies with pristine credit. There will be huge winners, and there will be total wipe-outs. There are going to be more losses in the biggest banks, and even bigger investments by Sovereign Wealth Funds. Count on it</I>. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >-- <A HREF="http://www.frontlinethoughts.com/index.asp" TARGET="_top" TITLE="http://www.frontlinethoughts.com/index.a">John Mauldin, Thoughts From the Frontline, 18Jan08.</A></FONT></div> <bR> <div> <B> <A NAME="the_state_managed_investment_pool"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>The state-managed investment pool will likely "break the buck" -- local governments will get back less than they put in.</B></div> <div> <A HREF="http://online.wsj.com/article/SB119691112051615438.html?mod=mkts_main_news_hs_h" TARGET="_top" TITLE="http://online.wsj.com/article/SB11969111">The junk mortgage toxin even trickled down to poison the portfolio of Florida's state-run "money market fund",</A> with baleful consequences for some of the 1,000 cities, counties, school boards and other governmental units that "will have to raise taxes or cut spending" if they lose access to some of their cash. - <FONT SIZE="1" COLOR="#000000" FACE="Arial" >“How the credit crunch turned local”, <I>Wall Street Journal</I>, 06Dec07  </FONT></div> <bR> <div> The Local Government Investment Pool (until recently, the largest of the more than 100 such pools around the country) is managed by the State Board of Administration, which discovered that it also holds downgraded commercial paper in its Hurricane Catastrophe System and State Retirement System, 12trh largest in the country.  (<A HREF="http://floridatrend.com/article.asp?aID=44496" TARGET="_top" TITLE="http://floridatrend.com/article.asp?aID=">The SBA had attracted scrutiny in 2002 when it bought massive blocks of Enron stock</A> for the pension fund at the time other investors were unloading it. The fund lost $280 million.)</div> <bR> <div> Lawmakers have already trimmed   $1.1 billion from the state's $71 billion budget, and economists are predicting that the state might have to cut an additional $2.5 billion over the next 18 months. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently> </FONT>The state will be unable to bail out the investment pool, meaning depositors are likely to bear the losses. <FONT SIZE="1" COLOR="#000000" FACE="Arial" >>consequently>  </FONT><A HREF="http://www.nytimes.com/2008/01/01/us/01pool.html?_r=1&hp&oref" TARGET="_top" TITLE="http://www.nytimes.com/2008/01/01/us/01p">Small communities will have to borrow money and juggle the books to meet obligations. </A><FONT SIZE="1" COLOR="#000000" FACE="Arial" ><A HREF="http://www.nytimes.com/2008/01/01/us/01pool.html?_r=1&hp&oref" TARGET="_top" TITLE="http://www.nytimes.com/2008/01/01/us/01p">>and> </A></FONT><A HREF="http://www.nytimes.com/2008/01/01/us/01pool.html?_r=1&hp&oref" TARGET="_top" TITLE="http://www.nytimes.com/2008/01/01/us/01p">Some economically important projects will “stop dead in their tracks,</A>” says the mayor of Port St.. Lucie which is trying to create a biotech cluster and had just issued $155 million worth of bonds to lay roads, water pipes and sewer lines in a planned jobs corridor. -- <FONT SIZE="1" COLOR="#000000" FACE="Arial" >-- “Fund frozen, Florida towns feel the pinch”, New York Times, 01Jan08.</FONT></div> <bR> <div>  </div> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >Failure of the state to pledge its full faith and credit to support the SBA-run investment pool will undermine confidence in Tallahassee</FONT>. > consequently><FONT SIZE="3" COLOR="#000000" FACE="Arial" > Local governments will seek common solutions to fiscal problems, often bypassing the state. “<A HREF="http://floridatrend.com/article.asp?aID=48268" TARGET="_top" TITLE="http://floridatrend.com/article.asp?aID=">The state doesn't feel responsibility to local government,” observed an official of the League of Cities </A>explaining why it took out a loan to protect the $187 million deposited by more than a dozen smaller municipalities in another money market that failed.  The SBA could have taken similar action, but did not, said a League officer.  </FONT>- “Another local government fund collapses”. <I>Florida</I> <I>Trend</I>, 11Jan08.<FONT SIZE="3" COLOR="#000000" FACE="Arial" > </FONT></div> <bR> <div> <A HREF="http://www2.tbo.com/content/2008/jan/04/me-internal-audit-warned-state-board-of-investment/" TARGET="_top" TITLE="http://www2.tbo.com/content/2008/jan/04/">The damage done to the investment pool will become a political issue with </A><A HREF="http://www2.tbo.com/content/2008/jan/04/me-internal-audit-warned-state-board-of-investment/" TARGET="_top" TITLE="http://www2.tbo.com/content/2008/jan/04/">disclosures that early warnings went unheeded by the SBA and politics may have influenced bad investment decisions.</A> <FONT SIZE="1" COLOR="#000000" FACE="Arial" >-- "Internal audit warned state board of investment risk", Associated Press, 04Jan08.</FONT></div> <bR> <div> "The people who trusted in the good faith of the pool's management were burned", in the opinion of finance professor Joseph Mason of Drexel University, who predicted that <A HREF="http://globaleconomicanalysis.blogspot.com/2007/11/freeze-is-on-in-florida.html" TARGET="_top" TITLE="http://globaleconomicanalysis.blogspot.c">"t</A><A HREF="http://globaleconomicanalysis.blogspot.com/2007/11/freeze-is-on-in-florida.html" TARGET="_top" TITLE="http://globaleconomicanalysis.blogspot.c">his is a severe blow if not a death knell to the concept of state-run investment pools</A>."<FONT SIZE="1" COLOR="#000000" FACE="Arial" >(quoted in <I>Mish's Global Economic Trend Analysis,</I> 30Nov07) </FONT></div> <div>  </div> <div> <FONT SIZE="3" COLOR="#000000" FACE="Arial" >But outsourcing management of the investment pool will cost more, perhaps much more, reducing the income municipalities will receive ... without providing any guarantee of better results. Blackrock, the financial services firm called in by the state to sort out the mess, charged .39 cents on each dollar of troubled assets and .075 cents on the rest.  SBA's fee was .015 cents.  Subsequently,  Blackrock suspended redemptions from its own institutional cash strategies fund, which was then downgraded by Moody's to junk status.  </FONT>("More money funds are bailed out", <I>Financial Times</I>, 27Dec07)</div> <div> As state and local governments stop chasing higher yields in their investment pools, the decline in earnings will add to the fiscal pressure.  <A HREF="http://www.floridatrend.com/article.asp?page=1&aID=95305328.6881678.628589.0386883.7043508.993&aID2=48344" TARGET="_top" TITLE="http://www.floridatrend.com/article.asp?">Last year the SBA's above-average returns yielded a windfall savings of about $14 billion in future pension costs.</A> -- <FONT SIZE="1" COLOR="#000000" FACE="Arial" >"Florida's 'run on the bank'", <I>Florida Trend</I>, 01February08.</FONT></div> <bR> <div> Updated 05Feb08</div> <bR> <bR> <bR> <bR> </td> </tr></table></body>