State portfolio, Illinois Funds investors are safe

Not at risk of $2.2 billion Florida-style downgrade

Friday, November 16, 2007

The Illinois state portfolio and government investment pool are immune to a particular problem plaguing Florida investors and potentially other state pools, Illinois State Treasurer Alexi Giannoulias said today.

Neither the Treasurer’s Office, which invests about $8 billion in state taxes and fees, nor the Illinois Funds, which invests about $6.5 billion on behalf of state agencies, local governments and other taxing bodies, invest in any asset-backed securities like those affecting Florida state funds, he said.

“I want to assure all government entities of the safety and liquidity of the state and Illinois Funds portfolios,” Giannoulias said. “This administration protects the tax dollars of our state residents by refusing to invest in funds backed by mortgages, subprime or otherwise. Unfortunately, other states already have had some exposure to these securities.”

The Illinois Funds Money Market Fund and Illinois Funds Prime Fund invest in U.S. Treasuries; repurchase agreements collateralized by U.S. Treasuries; and time deposits in Illinois institutions insured by the FDIC up to $100,000. For time deposits exceeding $100,000, U.S. Treasury Securities are pledged as collateral. The Prime Fund also invests in U.S. Agencies and financial commercial paper rated A1P1 or better.

The State Portfolio invests in U.S. Treasuries; U.S. Agencies; financial commercial paper rated A1P1 or better; repurchase agreements backed fully by U.S. Treasuries or U.S. Agency Securities; and time deposits in Illinois institutions insured by the FDIC up to $100,000. For larger time deposits, sufficient collateral is pledged to cover any bank deposit amount over $100,000.

The State Treasurer and Illinois Funds do not invest in any asset backed securities, nor do they own any structured investment vehicles (SIVs), collateralized debt obligations (CDOs) or any mortgage-backed securities. Both the Illinois Funds have received Standard & Poor’s AAA rating.

Giannoulias issued his statement one day after the Florida agency that manages about $50 billion of short-term investments for its state, school districts and local governments reported it holds $2.2 billion of debt that was downgraded to junk status. Another $3.6 billion is at risk of being downgraded.

The Florida State Board of Administration's state funds were affected by bad investments in asset-backed commercial paper and short-term debt sold by financial institutions that is secured by collateral such as mortgage securities and credit-card receivable, according to a Bloomberg report. As the value of that collateral dropped, investors were unwilling to reinvest their money when the short-term debt matured, creating a liquidity crisis for the financial institutions, Bloomberg reports.

Florida is not the only government whose short-term investments are sagging due to the increasing number of mortgage defaults.

Last month, Fitch Ratings said Washington state's King County, which includes the city of Seattle, may have its rating lowered on $1.5 billion of bonds because of debt investments plagued by rising defaults on U.S. home mortgages, Bloomberg reports.

A Connecticut fund that invests cash for more than 300 state agencies and municipalities was holding $100 million of defaulted debt sold by a structured investment vehicle as of last month, Bloomberg reports.

“Given the subprime mortgage meltdown, this is probably not the last we’ll hear of troubled government investment pools,” Giannoulias said. “Illinois investors should remain confident that their money is safe as we ride out this volatile time in the markets.”