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Subprime fears fuel run on Florida fund

Florida state capitol buildings

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KAI RYSSDAL: The subprime mess took a detour today. From Wall Street down to Florida. For about the past 25 years Florida's run a fund to give school districts and local governments a safe place to park their investments. If you can guess where this one's going, just stick with me for a minute. Some of those investments were tied up in subprimes. The groups that had money at risk got nervous. They led a run on the fund, which lost $10 billion in two weeks. State officials froze withdrawals last Thursday to stop the bleeding. After a meeting today they announced it'll reopen on a limited basis this Thursday. But in the meanwhile schools and local governments still have bills to pay. From Miami, Marketplace's Dan Grech reports.


DAN GRECH: Tiny Jefferson County in the Florida panhandle has just four schools serving 1,900 students. Hal Wilson is the school district's chief financial officer. He says the district had $4.1 million in the Florida investment pool, and used it like a checking account:

HAL WILSON: For daily operating expenses: payroll, food deliveries to our schools, fuel deliveries to our buses, to pay for pencils and paper. All of our money is tied up in that pool.

When the state froze withdrawals last week, Jefferson County schools were suddenly broke. To pay his teachers, Wilson stopped payments to the electric company.

WILSON: What if they weren't so understanding and they just shut off power to our schools? What are we going to do with our kids? We'll bus them over to the steps of the capitol and give them a lesson on how government works? This kind of thing's not supposed to happen.

Yet similar problems are cropping up in investment pools in Washington state, Montana and Maine. Peter Morici is an economist at the University of Maryland.

PETER MORICI: Throughout the country, we're going to find that governments at all levels have invested in subprime securities and now they've lost their money. In the end, it will come out of all of us in the form of higher taxes.

Higher taxes, economists say, and perhaps a recession. Florida told Jefferson County schools it won't be able to access its money until Thursday.

WILSON: Two more days now our vendors are holding our worthless paper, our checks. This is a somber, very serious situation.

In Miami, I'm Dan Grech for Marketplace.

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