Helping Government With Their Money

A major issue in the news of late has been the state fund used by local governments to earn interest on the tax money they collect before they have to spend the money on the things that local governments spend money on. Usually these are things such as payroll that need to be budgeted, but are not spent right away.

Last week there was a rush of withdrawals from the fund after it was learned that the fund managers had invested in some investment products that had a dependence on the subprime mortgage market. Late in the week, the board that oversees the fund (including such little-known people as Charlie Crist and Alex Sink) had to suspend withdrawals from the fund to prevent it from having to sell securities at a loss to fund the withdrawals. In other words, this board prevented local governments from accessing the funds that they had trusted with this state group.

Again, the purpose of the fund was to give local governments a place to park their revenues for a short period until they needed to be spent, and earn interest on that money, while preserving the capital. Obviously, the fact that the state has such a fund, complete with their own advisors, board, and structure, means that there wasn't anything commercially available, right?

Well, someone did some research and found that the state fund's returns through September of this year were 5.56%. They compared that to an index money market fund which had a return of 5.51% through September. You may have heard about index funds... they're a common recommendation for retirement funds for individual investors, and they approximate the return of a given stock index (like the S&P 500).

So, for that additional 0.05% return, we have this little mess going on, and the local government funds turned out to not be as safe and secure in their own investment fund as the local governments had been led to believe. This situation also begs the question of governmental roles. Is it the government's responsibility to act like Wall Street financial wizards with other people's money? After all, it is tax money from the taxpayers of Florida that has been put at risk, with no input from anyone from the general public. Is this a government that trusts the private market?