Fort Walton Beach Council minutes — 12-20-07 emergency minutes — reading text

I. l~{ The Finance Director asked the City Attorney if she knew of anyone else that is withdrawing their funds. The City Attorney said all she knew is that the is implications whatever one of the School Boards do, all the Superintendents throughout the State will do, and it is unknown whether or not that will happen.  12- 20- 07 Emergency Council meeting 263 INVESTMENTS IN THE SBA cant. Mr. Garvie wished to know if the entities have a cause of action against the fund and if the fund is backed up by insurance. The City Attorney said to her knowledge it is not insured because it is an investment fund, and attorneys across the state are trying to figure out if there is a cause of action. She said it comes down to SEC law and whether or not they violated some form of Securities and Exchange Commission Rules and Regulations. She said that is above her expertise but in her base opinion it will be the State that can recoup any funds for local governments if they chose to stay in or if they will get recompense r after the end of the law suit, but she did not believe the City would be able to do much individually. I The Finance Director gave a brief outline of the history. She said the City invests money in the SBA, which has historically been equal to a money market account but is extremely low in risk so it is a very unique situation where like this would all of a sudden go defunct and has never happened in something the history of the State of Florida and is quite significant in its financial impact. She explained what happened is that over the summer and into the fall there were certain things that happened in the wide spread financial market which caused a very small portion of the SBA investments, about 2.40/ 0, to be considered or devalued to be worth less. She said nothing was in default but what happened was there was a wide spread lack of investor confidence in the SBA and because of that a few, but very significant investors in the fund pulled all their money out and when that happened the SBA had to take certain actions to be able to be liquid to address those large withdrawals. She said it was the actual act of liquidity, having to sell off the assets because of that demand has caused what they are experiencing today, more than the actual downgrading or lack of value in the SBA. She said the entire problem they are having today has more to do with people panicking and withdrawing than the actual real assets that are valued. She said as of today there is shaky information as to whether or not even the funds that are considered to be devalued will become zero in value. She said what happened after those large funds withdrew and did a run on the SBA all of a sudden, the SBA said they had to cut everybody off, they have to freeze the accounts, they can' t have people withdrawing money; they took an emergency action and froze everybody' s accounts and then they allowed on December 6th an open period where people could withdraw a certain amount. She said on that date the City took their best option to withdraw up to the total amount allowed without penalty, with a $ 2 million withdrawal; so up to this point the City has withdrawn everything they could. She said at this point the SBA has been taking severe action, firing people, hiring new investment advisors, and sending out press releases and information updates daily. She said what has happened is that many in the State of Florida feel that the information the SBA has sent out or the there is a complete lack of investor way the SBA has moved or the management of SBA is not sufficient; confidence driving the withdrawals and the withdrawals is what is ultimately hurting the City and they don' t want to be the last one standing if there is a run on the bank again. She said she checked with Clay took a County Utilities who made a big withdrawal this week to ask why they withdrew the money and 225, 000 penalty and it comes back to fear, lack of investor confidence, and not wanting to be the last person. Mr. Garvie asked for clarification on the three categories of monies with the SBA. The Finance Director and they explained one of the actions the SBA did was to freeze everyone' s money to put a 20/0 penalty, will AAA rating, and the City' balance in Fund A separated out the funds into a Fund A that they feel get a s is $ 7. 764 million. She said the SBA put funds into a Fund B which represented 140/ 0 of the City' s funds at a certain date and point in time, and they put 140/0 into Fund B because they felt that was their best guess on what would cover any possible losses they could have off the questionable securities. She said the B. SBA will not allow anyone to touch Fund B and the City will not be able to withdraw the $ 1. 757 in Fund The City Manager said based on infotmation she is hearing she has a real concern if Citizens start to pull to out their $ 1. 9 billion and what th~ t does to the liquidity and the balance of the funds. She did not want lose any money for the City but she thought the City needs to seriously consider withdrawing their funds and paying the 20/0 penalty of $155,288. 83. She said as a management they can move the funds at any time but she did not have the authority to spend the $ 155, 288. 83 so staff is asking for permission to withdraw the funds. She acknowledged six months from now it might not seem like a good idea but today to remove the funds and pay knowing the information they have, her recommendation to Council would be the penalty.  12- 20- 07 264 Emergency Council meeting INVESTMENTS IN THE SBA cant. Mr. Reeves wished to know where the funds would be placed. The Finance Director replied the $ 2. 7 million already withdrawn was placed in CDs and they would put the $7. 6 million in the Beach Community Bank account until it is moved into a money market account as they work out a plan on what to do with the funds. She mentioned it is important to realize that the SBA and that investment product has been such a backbone of local government throughout the State of Florida for so long that it is going to enter very new territory for most governments who do withdraw their money from the SBA to find new vehicles for the same or equivalent type of investment. Dr. Pullen asked what interest would be received if the funds are placed in a money market. The Finance Director said the fund they are looking at has gotten low 4' s but mentioned it is important to emphasize that the SBA has operated that particular investment vehicle for local governments so favorable that generally the interest rate received in the past beats 12- 18 month CDs. She said on an overnight money market investment, anywhere they go they are going to see lower interest on conservative comparable I investments. She felt it her job to remind Council there is an investment policy that the rate of return is the third highest priority; the number one priority is preservation of principal, the second priority is liquidity, and the third priority is rate of return. The City Manager said it is important to note also that they do not to expect the SBA return in December to be what it has been in the past. The Finance Director speculated on Fund A, because of the way they isolated the investments that it would continue to be the same. In response to the question on Fund B, the Finance Director said the City does not have access to Fund B and guessed the SBA would be hoping they do not default. Mr. Garvie received clarification that the total available cash balance that can be withdrawn is $ 7. 764 million in Fund A and the funds remaining that cannot be withdrawn is $ 1. 757 million in Fund B, and the reason for the meeting this evening is to decide whether or not to withdraw the $7. 764 million. Mr. Miller expressed his understanding that this is a small part of a bigger problem dealing with the housing market across the United States and the federal government has taken other steps to lower the federal interest rates and there should be some shake out in the near future on those things with a restructure on the ARMS to adjust interest rates on mortgages, and understood a lot of the problem has developed between the Countrywide CDs which is backed by real estate. The Finance Director expressed her belief that they are experiencing a bad situation off the withdrawals and off the lack of investor confidence. She said the actual market place and the problems with Citi Bank and Countrywide are actually improving and a lot of the sub prime mortgage situations are correcting and have been correcting themselves. but they are in a situation where it is the liquidity and people having lack of investor confidence and taking out their funds that is hurting the fund. The City Manager expressed her thought that there is no guarantee about the sub prime investments in Fund B. The Finance Director replied there is no guarantee in all of the funds. t~~ fu:ifi~:~~~~ f~~ i[~t~FI~f~ i:f,~ i~ J ::~rf~~~~~~:~:::;: f~~?~~!~ C~:~;~~~~~~ Mr. Miller asked if the funds placed in Fund B are those that have been downgraded but still have value. The Finance Director said that some of the investments in Fund B are brand name investments. I Mr. Miller asked if it was true that the reason