California ‘pooled’ funds said to be on solid ground

Financial trouble at a huge Florida fund that invested cash for the state’s municipalities has turned the spotlight on similar funds nationwide, including in California.

But managers of the California funds say they own little or none of the kind of dicey short-term IOUs that have sent investors fleeing from the Florida fund, causing authorities there to halt withdrawals Thursday.

In Sacramento, a spokesman for California Treasurer Bill Lockyer said some of the 2,620 municipalities that use the state’s $61-billion Pooled Money Investment Account have been calling with questions about the fund’s investments.

But “not one participant has withdrawn” from the pool, spokesman Tom Dresslar said.

At the $517-million CalTrust funds, which were set up by the state’s counties in 2005 as an alternative to the state pool, “there’s been no run whatsoever,” said Terry Crow, a Los Angeles-based money manager at Wachovia Corp., which manages the funds.

State investment pools are designed to invest municipal entities’ short-term cash to match or beat returns on money market mutual funds.

The corporate and government IOUs that such pools own historically have been safe securities. But Wall Street in recent years has created short-term securities that have been backed by sub-prime mortgages and other high-risk assets.

As U.S. bond and stock markets have reeled since midsummer from surging mortgage defaults, the value of some short-term IOUs has plummeted. That has slammed some investment funds that loaded up on the securities.

In Florida, the Local Government Investment Pool invested about $2 billion in IOUs of so-called structured investment vehicles and other sub-prime-tainted debt, according to a Bloomberg News analysis. As worries about that debt have mounted in recent weeks, some of the pool’s municipalities have yanked their money, slashing the portfolio’s assets from $27 billion to $15 billion.

Faced with another round of withdrawals Thursday, Florida officials froze the fund.

California’s Pooled Money Investment Account holds no structured investment vehicle debt, Dresslar said.

The fund does own $3.7 billion of asset-backed commercial paper, another kind of IOU that often is backed by sub-prime home loans. But Dresslar said just $4.2 million of the fund’s asset-backed commercial paper was tied to sub-prime loans.

Many investment funds have pared back their holdings of tainted IOUs in recent months by allowing the debt to mature and then investing in safer securities.

The main short-term CalTrust fund has exited all asset-backed commercial paper except for one “tiny bit” that will mature next week, Crow said. The fund owns no structured investment vehicle IOUs, he said.

Unlike some state pools, the CalTrust funds calculate a value for the portfolios each day. So investors know what’s happening with the underlying assets, Crow said.

“We set the program up to be transparent,” said Chuck Lomeli, treasurer of Solano County and chairman of CalTrust.

The turmoil in credit markets has slightly shaved the per-share value of the main CalTrust fund in recent months, Crow said. But investors still are earning an annualized yield of 4.83% on the fund.

Individual California counties also run pooled funds for their local municipalities and agencies. In 1994, Orange County’s fund blew up because of aggressive bets on interest rate trends, triggering a bankruptcy filing by the county.

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