Florida’s pension fund owns more than $1 billion of the same downgraded and defaulted debt that sparked a run on a state investment pool for local governments and forced officials to freeze withdrawals, Bloomberg reports.
The State Board of Administration, manager of $37 billion in short-term assets, including the pool, also oversees the $138 billion Florida Retirement System. The board purchased $3.3 billion of debt whose top ratings were reduced following the collapse of the subprime mortgage market, according to documents obtained by Bloomberg News through an open records request.
Like the hundreds of school districts and towns unable to access $14 billion frozen in the Local Government Investment Pool, Florida’s 1.1 million current and retired state workers rely on the board’s management to boost returns on the funds that pay their pensions. That has left them vulnerable to the same potential for losses. A state-created home insurer and the treasury are also at risk.
“These were highly inappropriate investments for taxpayers’ money,” says Joseph Mason, a finance professor at Drexel University in Philadelphia. “This is the tip of the iceberg for pension funds. We know the paper is sitting there. There are substantial subprime-related losses that haven’t shown up yet.”
As officials in the fourth-largest state weighed options for the local government pool last week amid unprecedented withdrawals, Florida CFO Alex Sink rejected a proposal to have the state pension fund assume the risk of its $1.5 billion of downgraded or defaulted debt in exchange for a payment from the pool. She asked “whether or not it’s advisable to put these suspect instruments in the Florida Retirement System.”