The State Board of Administration, which manages many of Florida's public investments, has seen its assets plummet by $62-billion, a third of their value, in the last 13 months.
The decline — the steepest in the agency's 65-year history — reflects both big investment losses in the global financial crisis and the decision by hundreds of local and state agencies to withdraw money from shaky SBA accounts.
In both cases, the SBA plowed money into higher-risk investments with the potential for bigger profits. But in the ongoing financial meltdown, they generated big losses instead.
Combined, the investment losses and withdrawals slashed SBA assets from a high of $187.5-billion on Sept. 30, 2007, to $125.4-billion as of Oct. 31.
The SBA manages 34 public funds. The largest is the state's retirement system pension plan for almost 1-million public employees, retirees and their family members.
The SBA also handles investment accounts for the Florida Lottery, the state's hurricane catastrophe fund and a local government investment pool where nearly a thousand counties, cities, school districts and other state and local entities keep surplus cash.
In the last 13 months, the state pension plan lost more than a quarter of its value, or $37.9-billion. It peaked at $138.4-billion on Sept. 30, 2007, and was worth $100.5-billion on Oct. 31.
The local government pool, which was once the largest in the country, shrank by $21.2-billion, from $27.3-billion to $6.1-billion, largely because of withdrawals.
Spokesman Dennis MacKee said all SBA funds are built to survive losses in the market, even severe ones, adding that they will recoup those losses over time.
"We remain confident with the long-term soundness of the funds we manage,'' he said.
MacKee also said the benefits of pension plan participants and retirees are guaranteed by the state. Florida is better off than many states, he said, because its pension plan has more than enough money to cover future retirement benefits.
But that surplus has been declining for the last eight years — not because of poor performance, the state says, but because government employers were allowed to make smaller contributions to the plan.
If the surplus disappears, the Legislature might have to turn to government employers — and taxpayers — to increase contributions to meet benefit obligations.
The SBA, which employs about 160 people, is governed by a three-member board of trustees who also make up a majority of Florida's Cabinet — the governor, the attorney general and the chief financial officer.
Gov. Charlie Crist did not respond to an interview request. Chief Financial Officer Alex Sink was traveling for two days and unavailable, an aide said.
Attorney General Bill McCollum said Florida is "doing pretty well compared to the market overall."
"It's going to have down years and it's going to have up years, and we've had a lot more up years,'' he said. "The overall result of this pension fund is still very good — better than the norm. Will it be lower this year? Yes. But it has still been beating the market.''
Florida isn't alone. Across the country, the financial crisis is wreaking havoc on public pension funds and investment agencies. The meltdown is spurring a debate over whether those government agencies are gambling too much.
"In the current environment, we should replace the reach for yield with a return to basics,'' said Thomas Tew, a Miami securities lawyer. Earlier this year, he was hired by the Legislature to review the near-collapse of the SBA's local government investment pool. "That means less aggressive investments and less risks.''
Like big banks and mutual funds, the SBA and other public investment agencies are complex financial institutions. But unlike banks and mutual funds, they face no comparable oversight. There is no requirement that they fully disclose their finances, and they don't have to undergo annual, independent audits.
"It's appalling that those whose public pensions are at risk don't have the same disclosure that a retiree who owns mutual funds would have,'' Tew said.
In September, some members of Congress called for more oversight of public and private pension funds after a federal study found more of them were putting money into higher-risk, lightly regulated investments.
Sen. Charles Grassley of Iowa has long raised concerns about opaque investments creeping up in Americans' pension plans, and whether they pose a danger to workers' retirement security.
"We don't have the facts about these swaps and derivatives and hedge funds and whatever they are,'' said Grassley, the top Republican on the Senate Finance Committee. "It's one thing when a $5-million investor buys these investments. It's quite another when it involves pension funds of your average middle-class person.''
Florida's investment problems came to light late last year after reports that the SBA held billions of dollars of securities tied to bundles of loans that included subprime mortgages, which are loans granted to risky borrowers with poor credit histories.
In November 2007 alone, nervous counties, cities and school districts withdrew $12.2-billion from the local government pool.
Citizens Property Insurance, the state-run insurer of homes and condos, pulled more than $5-billion this year and closed several SBA accounts. It still has about $743-million in the local government pool.
The city of St. Petersburg has withdrawn more than $111-million from the local government pool since mid November 2007.
"We won't make any more investments in the SBA until we have assurances that it's as safe an investment as where we have our dollars now,'' said Tish Elston, the city's first deputy mayor.
The SBA "put whole school systems in jeopardy'' when it temporarily froze the account to prevent it from collapsing, said Jackie Pons, superintendent of Leon County school district. He says he had to call a local banker late at night to get a $10-million loan to meet payroll for school employees.
"Everybody's lost confidence in this account and everybody wants their money back,'' he said.
But bank failures of recent months may be changing things.
Take the Hillsborough County Tax Collector's Office. It decided to reinvest with the SBA in June after commercial banks began struggling.
"The SBA started looking good,'' said Scott McAlister, an auditor in the tax office.
The SBA has not acknowledged losses from the subprime mortgage debacle. MacKee said the information was too difficult to get.
But the agency is still holding about $2-billion in troubled securities. That means the tax collector, the pension plan and many state and local agencies that invest with the SBA face losses.
The SBA also has sustained big losses in the stock market.
With more than half of its assets invested in stocks, Florida's state pension plan lost about 15 percent in value, or $23.9-billion, for the year ended Sept. 30. It lost another $14-billion, or an additional 12 percent of value, in October. That decline roughly parallels the performance of other large public pension funds.
The market turmoil wiped out 22 percent of the value of domestic stocks in Florida's pension plan. Foreign stocks dropped 29 percent.
A riskier strategy
One factor in the sharp decline of the SBA's assets appears to be a recent change in its investment strategy.
In the last few years, the SBA — like many other investment agencies around the country — has invested in complicated, sophisticated tools with the potential for dramatically higher gains.
They have names like structured investment vehicles, 130/30 funds, derivatives, credit default swaps and private equity investments, and they are lightly regulated, unpredictable and not routinely reported to the public.
Instead of big payoffs, however, the new tools have apparently produced big losses for the SBA.
The size of the losses are difficult to determine, partly because some of the investments are traded privately and are notoriously hard to value. In addition, the SBA says it doesn't focus on prices of individual assets. Instead, it tracks the entire fund or asset category and compares the performance to established objectives and other large pension funds.
But congressional committees and the Securities and Exchange Commission are now examining the role some of these higher-risk investment tools have played in the global financial turmoil.
The SBA's executive director, Ash Williams, says he, too, plans to review some of the more aggressive strategies.
"When you're talking about investments that are still in process, you don't know where they will end up,'' said Williams, a former Wall Street investment fund manager who recently joined the SBA. "It's sort of like being at a football game in the second quarter. You don't know who won the game because it's not over.''