State fund’s manager rakes in big fee

Orlando Sentinel, 12/18/2007

One reason local governments invested billions of tax dollars in a now-struggling state fund was because of the low management fee.
But now, the private company hired by Florida to salvage the account damaged by exposure to the subprime-mortgage crisis is getting a fee up to 26 times greater than the state charged. ‘It’s a bad deal, and it’s for a fund that already can’t afford it,’ said Edward Siedle, a money-management expert and former federal Securities and Exchange Commission attorney based in South Florida.

The State Board of Administration, which oversees the $12 billion government fund, defended the fees of consultant BlackRock as fair. ‘BlackRock’s experience is in crisis situations where there are distressed securities,’ SBA spokesman Mike McCauley said. ‘I don’t know if you’d call this standard or not, but it’s a reasonable fee for one of these kind of standard money-market vehicles.’ The SBA charges hundreds of governments, including many in Central Florida, 1.5 cents per $100 to manage the money sent to it.

BlackRock is charging the state two different fees, 7.5 cents per $100 and 39 cents per $100, because it split the so-called Local Government Investment Pool.

The lower fee is for Fund A, which holds $10 billion worth of investments that the state contends are safe and highly rated. The higher fee is for Fund B, a $2 billion account where securities tainted by the bad mortgages were placed. Some of those investments have defaulted or been downgraded in value, making them difficult to sell without losing money.

90-day contract

BlackRock has a 90-day contract to manage the funds and would make nearly $2 million on Fund A and almost $1.9 million on Fund B by the time the agreement ends. The state also paid BlackRock $125,000 as an initial consulting fee.

Based in New York City, a BlackRock official would not comment.

Siedle, who counsels government agencies on pension plans and investments, is particularly critical of the Fund B fee because there promises to be little activity or expenses generated in that account. BlackRock has advised the state to hold onto Fund B investments for a year or more in hopes that they regain their face, or full, value. ‘The definition of active management is buying and selling,’ Siedle said. ‘And here we don’t have any selling or buying.’ Orange County Comptroller Martha Haynie said the fees ‘bother’ her and she recommended that the state renegotiate to lower rates once the contract expires. ‘It seems like a pretty good deal for BlackRock,’ said Haynie, whose agency pulled more than $370 million out of the SBA fund.

McCauley of the SBA said BlackRock may not be trading anything in Fund B, but added, ‘They’re trying to analyze it and determine when certain actions in the future can take place. It’s portfolio-management responsibilities.’ Alex Sink, Florida’s chief financial officer, has been overseeing SBA’s efforts to save the fund. Sink, Gov. Charlie Crist and Attorney General Bill McCollum act as the SBA’s board of directors, or trustees.

Sink’s spokeswoman Tara Klimek said in an e-mail to the Orlando Sentinel that the BlackRock contract was arranged by Coleman Stipanovich, the SBA director who resigned last week. ‘Our office (along with the other trustees’ offices, I imagine) encouraged Coleman to get the best deal he could for the state given the urgency of the situation; however, we did not discuss the 2nd contract with BlackRock,’ Klimek wrote, referring to the 90-day fund-management agreement.

Stipanovich could not be reached.

The SBA has run the local government pool and a much larger state pension fund for 25 years, generally offering moderate returns and quick, easy access to the money.

That reputation, in part, led the state-run Citizens Property Insurance to place $7 billion with the SBA last summer, including nearly $2 billion in the local government pool.

Citizens spokesman Rocky Scott said his agency previously paid between 4 cents and 7 cents per $100 to managers of the funds it placed with the SBA. The agency expected to save $2 million annually in management fees by switching to SBA.

Lending crunch

The pool ran into trouble last month after word spread that some of its investments were with companies trading in variable-rate mortgages made to homeowners with spotty credit. Many of those notes are defaulting as they reset to higher interest rates, creating an international lending crunch.

The pool, as a result, had a run that dropped its assets from $27 billion to $14 billion in less than a month. The SBA temporarily closed its doors and, after reopening, restricted withdrawals. Little more than $2 billion has been withdrawn during the nine business days since reopening.

On Monday, governments and agencies for the first time put in more than they took out since the run. The SBA reported $43.9 million in deposits and $8.4 million in withdrawals.

Dan Tracy can be reached at 407-420-5444 or dtracy@orlandosentinel.com. Aaron Deslatte can be reached at adeslatte@orlandosentinel.com or 850-222-5564.