Sen. Dave Lewis, R-Helena, urged Gov. Brian Schweitzer to call the special session, but an administration spokesman said it wasn't necessary.
Lewis' call for the special session came after Bloomberg.com reported Monday that Moody's Investor's Services Friday had downgraded to “not prime” paper issued by Orion Finance structured investment vehicle or SIV. Montana's Short Term Investment Pool owns $50 million worth of that Orion Finance SIV paper in fund for state agencies, local governments and school districts.
However, state Budget Director David Ewer, speaking for the Schweitzer administration, said he doesn't see the need for a special session. Instead, STIP yields would have to be lowered and maturity dates on investments lengthened.
“The state money's staying in,” Ewer said.
Lewis' comments came after local governments and school districts pulled out $266 million from the fund last week.
STIP is like a money market fund where state agencies must deposit their extra cash, and local governments and school districts may invest funds there. As of Friday, STIP contained $2.2 billion, with local government and school funds making up $647 million.
About $550 million of STIP's total is invested in SIVs, which are bought by institutional investors and backed by underlying pledges for security. The state Board of Investments, which manages STIP, said only $15.7 million, or less than 2.86 percent of the assets backing the SIVs, are made up of subprime mortgages stemming from loans to people with bad credit. Less than 1 percent of all STIP investments are in subprime mortgages.
Besides the $50 million in downgraded Orion Finance paper, Montana has a $90 million investment in Axon Financial Funding Debt, whose rating was downgraded last week to a D, triggering a liquidation. The Board of Investments is expected to have a seat on the creditors' committee.
“We have two pieces (investments) that have had dramatic reductions in their credit quality, and it totals $140 million,” Lewis said. “If it can't be recovered, we need to determine who takes the loss.”
Lewis said the Schweitzer administration has said the state will take the losses. State agencies are required to invest surplus cash in STIP, while it's optional for local governments and schools.
If this money can't be recovered, the state needs to determine who will take the losses, the state agencies alone or state agencies, local governments and schools, Lewis said,
“It should be a legislative decision,” said Lewis, a former state budget director and former executive director of the Montana Board of Investments. “I'm just suggesting the administration should consider it because it's a major policy decision.”
As of Friday, local governments and schools had $647 million of the $2.2 billion invested in the pool.
Last week, nervous local governments and schools yanked $266 million out of STIP and looked for other places to invest the money.
Ewer said there are three ways to deal with the problem: lower STIP yields, extend the maturity dates on investments and “the last and least favorable is reduction in principal.”
“Yields would come down in STIP and anyone who participates in STIP, including local governments, would see lower yields,” Ewer said. “I think it's wrong to categorize that the state is the sole risk-taker. You'd have to say there won't be any local money (in STIP). That's clearly not the case.”
On Monday, STIP saw mostly “regular transactions,” with some buys and sells, said Linda Hunter, its program manager.
STIP's transactions for the day showed these major sales: Chouteau County, $3 million, Lincoln County $2.9 million and Whitefish, $2.6 million.
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