Overstretched state funds go south

--As the mortgage investment crisis has rippled through Wall Street, high-paid hedge funds and deep-pocketed banks seemed most prone to taking on too much risk in exchange for a little extra return. Now it's clear that even some money-market funds -- supposed to be bastions of low expectations and safety -- missed on this trade-off. --Florida's Local Government Pool, a state-run fund that manages money for local governments seeking a stable place to park extra cash, boasted market-beating returns. In 2006, it yielded about 5.4% while the average money-market fund yielded 4.8%. --As the credit crunch unfolded, the plan's managers took on even more risk by cutting their U.S. Treasury securities holdings to zero from an already tiny 3%. The fund held $27 billion at the end of September. That dropped to $15 billion after the local governments that parked money there took a hard look at the holdings and pulled out. The rush for the exits prompted the state to freeze redemptions. --Florida isn't alone. Money-market funds run by Wachovia-unit Evergreen Investments and Bank of America's Columbia funds bolstered returns with SIV debt and other opaque securities. Their corporate parents are stepping in to back them up. Florida is in a tougher spot -- municipalities need cash to pay employees. A plan to tap a state pension fund as a stopgap has been shot down.