"We have liquidity right now in the amount of $2 billion," Deputy State Treasurer Howard Rifkin said. "If every municipality were to completely liquidate their positions, we would have available cash to pay them."
"We have a 35-year-old investment fund, and we have over the years developed a reserve which amounts to about $53 million against any potential losses," he added. "Even if the worst were to happen, we don't believe investors would lose any money, any principal."
At immediate issue is the Connecticut fund's $400 million in investments in four entities called "structured investment vehicles," or SIVs, which raise money by selling short-term debt and use it to buy higher-yielding, long-term securities.
The treasury officials, for example, have since last year invested a total of $100 million in an SIV called Cheyne Finance, which was organized by the London-based hedge fund management firm Cheyne Capital.
The $7 billion Cheyne Finance, however, became one of the first SIVs to have trouble funding itself when the credit crunch first hit last summer. It defaulted in September and went into receivership.
The Wall Street Journal reported last week that Cheyne's creditors are close to a deal that would allow them to avoid being forced to realize hundreds of millions of dollar in potential losses in the short term. The newspaper said senior creditors would be offered the opportunity to refinance their debt into longer-term instruments or to take a discounted cash payout.
Rifkin said the treasury hadn't yet "revalued" its stake in the SIV "because they're in negotiations."
"They are in the process of seeking potential bids from other financial entities," he said. "The Cheyne fund is a series of mortgage-backed securities, not all of which was subprime. There are two distinct groups of investors, people who hold senior debt and subordinate debt, and we hold senior notes."
He added that that means the state fund would be among the first creditors in line in the settlement.
"We would expect we would get some of our money," he said.
Rifkin said the Short-Term Investment Fund also had invested $300 million in other SIVs run by Citibank, which he said had been "triple-A" rated by both Standard & Poor's and Moody's.
He acknowledged that those instruments had recently been placed on a watch list by the latter rating agency and said treasury officials were now monitoring the investments.
Rifkin said the treasurer's office began moving more funds into U.S. Treasury bills and other government agencies' securities last summer, "not so much in response to the SIV things, but in response to some of the credit issues.
"We were reducing our risk exposure, sacrificing a little bit of yield on those investments," he said.
Rifkin, who said the treasurer's office had been getting "calls of inquiry and concern" from some municipal officials, also said the Short-Term Investment Fund was distinguished from the Florida-run fund in a number of ways.
He said the Florida fund was an exclusively local government investment pool, while the Connecticut fund "is largely organized for state cash," which he said accounts for about 40 percent of its assets.
He added that "one of the problems in Florida is that they couldn't meet the demand for cash from the municipalities, so they froze the fund and now are letting loose some of the assets but with caps on the amount taken out."
The Connecticut fund, he said, has more than adequate liquidity.