State investment pool tanks amid stormy economy-WEB ONLY

State officials had high hopes for an investment pool created last year to give Indiana’s school districts and local governments a safe, short-term place to deposit taxpayer money and earn interest.

Then the economy tanked.

The account’s daily interest rate fell from 3.23 percent last February to just 0.53 percent today. Its balance dwindled from a peak of more than $1 billion in December to $473 million – and that includes $200 million the state government invested to demonstrate that the fund is secure.

Things may not be going exactly as state officials envisioned, but local treasurers and school finance leaders say the Trust Indiana fund is still a safe port in the stormy economy.

“Overall, I think it’s been a success,” said Dennis Costerison, executive director of the Indiana Association of School Business Officials. “Hopefully when the economy picks up, many more schools will be involved.”

Nearly 130 schools and local governments are investing in the account, said state Treasurer Richard Mourdock. He’s been pitching the plan to local leaders, but said it’s been difficult persuading them to become new investors.

“There’s a natural pushback,” Mourdock said. “At some point – we’re not there yet – it will be selling itself based on the word of mouth of its users. We have to keep earning credibility every day.”

The fund was created by the General Assembly so that counties, cities and schools could pool their cash for the state treasurer to invest, often earning higher interest rates than if they invested smaller amounts of money on their own. Local governments can withdraw the money when needed to issue paychecks or pay bills.

There are no transaction fees and – unlike some bank investments – governments can deposit money one day and take it out the next. Some who have used the fund say it’s an easy way to earn interest overnight without having cash tied up in lengthier investments such as certificates of deposit.

“There have been times when the rates with Trust Indiana have been better than rates we’ve been able to get with our high-balance savings account or CDs,” said Kathy Friend, chief financial officer for the Fort Wayne Community Schools.

Tom Creasser, chief deputy treasurer for Marion County, said investments of 30 days or more often carry greater interest than the state fund. But he said Trust Indiana is perfect for short-term investments, such as the several-week period after property taxes come in but before that money distributed.

“For parking money overnight, you just can’t beat it,” he said.

Marion County invested hundreds of millions of dollars in the fund in December, temporarily lifting the balance to more than $1 billion. The balance has since declined to $473 million, partly because of the cycle of taxes and distributions and partly because local governments aren’t dealing with as much money as they might in a robust economy.

“A lot of school districts just don’t have the money to invest,” Costerison said.

“Budgets are very tight and we don’t have the excess dollars.”

Mourdock is confident the fund will eventually expand beyond the $1 billion mark, which officials had hoped to reach within 18 months of its February 2008 inception. And officials hope the economy will start to recover soon, boosting interest rates.

But those aren’t Mourdock’s top goals. His first priority is making sure the investments are safe and secure, he said. That could help prevent problems experienced by other states.

Florida’s local government investment fund, for example, was hit by a multibillion-dollar run in 2007 after investors discovered it contained downgraded mortgage-backed securities. The fund’s assets dropped nearly in half, to $14 billion, by the time the account was temporarily frozen to stop the run.

Indiana is not investing in the same type of securities as Florida, Mourdock said. By law, at least half of the investments must be in Indiana banks backed by the FDIC.

The investment mix today includes 60 percent in Indiana depositories and about 40 percent invested in government agencies.

Local finance officials said the fund is a safe option – even though it may not seem as good a deal compared to interest rates last year.

“There are not a lot of other good options out there,” said Friend, the Fort Wayne schools CFO.