City withdraws $230 million from beleaguered state fund

The Journal Sentinel staff

The City of Milwaukee withdrew $230 million from the beleaguered State Investment Fund but agreed to leave a portion of its cash in the account in response to pleas from Gov. Tommy G. Thompson and other state officials, the city's treasurer, Wayne Whittow, said Tuesday.

The city was poised Friday to withdraw all of the $300 million it had in the state's cash management account in response to the fund's recently announced losses from risky investments, Whittow said after a joint news conference with Mayor John O. Norquist.

Investments in derivatives that were linked to the value of the peso and the movement of Mexican interest rates lost $95 million for the fund $130 million counting interest costs.

Milwaukee officials agreed to leave about $71 million in the fund, Whittow said, after hearing from Thompson, State Investment Board Executive Director Patricia Lipton and State Auditor Dale Cattanach.

Cattanach's office was ordered by a legislative committee Tuesday to launch an audit of the Investment Board.

"In the immediate future, we want to limit our involvement with the Investment Board," Norquist said. The city could put more cash back into the fund in the near future, he said, once city officials "regain our full trust" in the state fund and its managers.

The governor wants "the fund to be given an opportunity to correct itself," Whittow said.

Municipal finance officials statewide have privately expressed fears that if a large amount of withdrawals were made from the fund, then those remaining in it would have to pay a larger portion of the losses.

The state, whose cash accounts for about half of that invested in the fund, also would have to absorb a larger amount of the loss.

Investment Board officials said they are not afraid of a run because there is ample money to cover any withdrawals.

"There is no rush from anybody to withdraw money from the fund," said Jack Voight, state treasurer.

However, Eau Claire withdrew $62 million last week, said Rebecca Nowland, city finance director.

Nowland said Eau Claire officials were concerned about the lengthy amortization period required to pay back the derivative losses. The decision to withdraw was made after a study of alternatives and a recommendation from an outside auditing firm.

Several small communities also have pulled some money out of the fund in recent days, Voight said. When the state disclosed its losses on March 17, local governments had $3.4 billion in the fund, Voight said. They now have $2.94 billion, he said, noting that the fund could normally fluctuate by hundreds of millions on any day.

Some municipalities have invested more money in the fund recently, he said.

A spokesman for Thompson confirmed that he called Whittow and Norquist and received assurances they would withdraw no more from the fund.

The city's big withdrawal should send a message to the Investment Board, Norquist said.

Most of the money the city withdrew is now earning higher interest than it was in the state fund, Whittow and Norquist said. The state fund is paying about 5.7% interest. All but $19 million of the city's new investments are earning more, Whittow said.

Norquist and Whittow said the city had lost faith in state fund managers because:

The Investment Board disclosed on March 17 that the fund had lost money on derivatives investments whose values are derived from the movements of other securities or interest rates. The State Investment Fund is a liquid, $6.7 billion account used like a money market fund by more than 1,000 governmental units.

"They were deeply involved in what I call very exotic derivatives," Whittow said. "I don't know what they were doing in Mexican pesos. I don't think that's a good investment."

m Investment Board officials had reassured the city earlier that it only invested in derivatives as a hedge against potential losses in other investments.

Norquist said the state reassurances were "at best misleading."

"We're going to watch them," Whittow said. "We're going to make sure this never happens again."

Similar assurances were sent late last year to municipal finance officials statewide.

Those letters would not have been written "if we knew then what we know know," said Keith Johnson, assistant general counsel for the board.

Lipton has said the leveraged investments in derivatives appear to have been made in violation of board policy. One fund manager, Richard Gibson, has been suspended with pay.

Journal Sentinel reporter Douglas D. Armstrong contributed to this story.

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