Fort Walton Beach Council agenda — 01-08-08 regular agenda — reading text

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 after the end of the law suit, but she did not believe the City would be able to do much individually. 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 something like this would all of a sudden go defunct and has never happened in 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 2.4 %, 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 6th an open period where people could froze everybody's accounts and then they allowed on December 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up to the total amount allowed without penalty, with a $ 2 million withdrawal; so up to this point the City has withdrawn everything they could.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 way the SBA has moved or the management of SBA is not sufficient; there is a complete lack of investor 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 County Utilities who made a big withdrawal this week to ask why they withdrew the money and took a 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 explained one of the actions the SBA did was to freeze everyone's money to put a 2% penalty, and they separated out the funds into a Fund A that they feel will get a AAA rating, and the City's balance in Fund A is $ 7. 764 million. She said the SBA put funds into a Fund B which represented 14% of the City's funds at a certain date and point in time, and they put 14% 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 SBA will not allow anyone to touch Fund B and the City will not be able to withdraw the $ 1. 757 in Fund B. The City Manager said based on information she is hearing she has a real concern if Citizens start to pull out their $ 1. 9 billion and what that does to the liquidity and the balance of the funds. She did not want to lose any money for the City but she thought the City needs to seriously consider withdrawing their funds and paying the 2% 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 $ 1.55, 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 knowing the information they have, her recommendation to Council would be to remove the funds and pay the penalty.  12 -20 -07 264 Emergency Council meeting INVESTMENTS IN THE SBA cont. 2. 7 Mr. Reeves wished to know where the funds would be placed. The Finance Director replied the $ 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 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 7. 764 million. reason for the meeting this evening is to decide whether or not to withdraw the $ 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. Mr. Miller expressed his understanding that the $ 7.7 million is in a Fund that has been set aside and is backed by high grade investments. The Finance Director said they believe Fund A will come out to be a AAA rated money market fund, and the SBA has said they quarantined out away from Fund A the bad investments so it will not affect Fund A. 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. Mr. Miller asked if it was true that the reason some of the people pulled their money out is because it was short time investments for them and they needed it to pay salaries, etc., and the City has that money in there for the long term and does not need the money right away.  12 -20 -07 Emergency Council meeting 265 INVESTMENTS IN THE SBA cont. The Finance Director said the City is in a situation like many cities in Florida, this is the richest time of the year when they receive the ad valorem taxes and they would not otherwise be withdrawing the SBA fund. Dr. Pullen wished to clarify in his mind that the money being considered for withdrawal is actually the safest money which will probably received a Triple A rating, and the shaky money is in Fund B which cannot be touched. The City Manager said they did not know that. with any certainty and she would not be able to advise Council with any certainty that it will receive a Triple A rating. She said the question is one of liquidity and thought what the Finance Director shared about the investment policy; it is the safety of the principal, liquidity and interest rate. She said her concern to Council is that if tomorrow the School Board starts to pull out their money that makes everyone's investment less viable; the more people that withdraw those monies there more concern there is that other people will withdraw their money. The Finance Director commented they need to focus on the fact that it is the lack of investor confidence and the possibility of a run on the bank that the City is considering taking a $ 155, 288. 83 expense right now; it has nothing to do with the qualities of the investments. She agreed that Fund A probably will come out to be exactly what the SBA is saying and they will make the right adjustments to make that Fund A Triple A rated. Dr. Pullen threw out the question on the chances of the State of Florida going bankrupt. The Finance Director, on the question whether there was any backup to the Fund, said there has always been a perception that the State of Florida considers it a guaranteed fund, but when the Governor made a negative comment in a press meeting that he would not back up the local government with State funds is one of the reasons why there is a severe lack of investor confidence. Mr. Minich received clarification that the Finance Director heard of a statement by the