Dec. 12 (Bloomberg) -- The Florida investment fund for local governments that lost half its assets to redemptions last month has been reduced by an additional $1.9 billion since the pool was opened following a freeze on accounts.

Towns, schools and cities withdrew $1.76 billion in the two days after the Local Government Investment Pool gave participants access to some of their money on Dec. 6, according to figures released by the state, the fourth-largest in the nation. They took out $174.6 million more this week. A total of $44.4 million was deposited.

``We have plenty of liquidity to meet redemptions,'' said Chris Stavrakos, a managing director with New York-based BlackRock Inc., the interim manager of the pool.

Florida's State Board of Administration hired BlackRock last month to restore confidence in the fund, which had $27 billion before depositors learned that it owned downgraded and defaulted debt issued by structured investment vehicles, or SIVs. Funds in Massachusetts, Montana and Connecticut also said they own debt issued by SIVs.

Schools and cities in the fund have had limited access to their money since the accounts were opened last week. The pool has $10.2 billion of assets, not including $2 billion in a still-closed, segregated account of securities that BlackRock, the largest publicly traded U.S. fund manager, says have ``indeterminate value.''

Reaching for Yields

Managers of the Florida pool were willing to gamble local government money on SIV debt because they had the safest credit ratings and offered higher yields than other short-term fixed- income investments. Now, downgrades and defaults on those holdings have left schools and towns statewide without full access to cash they are accustomed to drawing upon for routine expenditures such as payroll for teachers and police.

``Who would invest in a fund that had the kind of risk they did?'' said Michael Geoghegan, chief financial officer at Broward County, which includes Fort Lauderdale.

Geoghegan pulled out the county's $200 million investment in the pool in mid-November after he learned the fund held SIV debt that had been downgraded below investment grade.

If depositors demand additional cash from the pool, ``there are certainly some securities we can sell at par, and some at very, very close to par,'' or face value, Stavrakos said.

Redemption Fee

Losses on sales would be covered by a 2 percent fee levied on withdrawals exceeding the greater of $2 million or 15 percent of a local government's fund balance, said Simon Mendelson, a BlackRock managing director.

Six governments have had to pay the fee, which was part of BlackRock's plan to revive the pool after it was hit with $13 billion of withdrawals in November, shrinking what had been the largest such fund in the U.S. local governments withdrew money after finding out that some fund investments, tainted by subprime mortgages, were in default or facing lower credit ratings.

``How much the ceiling on withdrawals increases or when that happens, we simply don't know,'' said Jim Francis, senior investment officer at the State Board of Administration.

Mendelson said Fund A holds enough securities maturing over the next four months that some time around the end of March, ``we will be able to raise the limits'' on withdrawals.

Maturity Schedule

Maturing securities in December and the first three months of 2008 total more than $4 billion. By the end of September, there would be additional maturities exceeding $4 billion, according to BlackRock data.

``We don't have a quality problem with investments in Fund A, we only have a mix of maturities problem'' with too many securities not falling due until the last four months of 2008, Mendelson said.

SIVs are typically offshore companies created by banks that sell short-term debt and use the proceeds to buy higher-yielding finance company, mortgage and asset-backed bonds. Montana and Connecticut said their funds have had withdrawals since disclosing they owned subprime-related debt.

The Florida fund open for withdrawals and deposits, known as Fund A, had most of its holdings in variable-rate corporate notes, according to a list of assets as of Nov. 30 supplied by the State Board. Holdings include debt of investment banks, such as Bear Stearns Cos. and Merrill Lynch & Co., which have sustained subprime losses.

`Appropriate' for Fund

While the value of fixed-rate bonds of banks and brokers has dropped, the floating-rate notes have been more stable. All of the fund's corporate notes mature by the end of 2008 or have an option allowing investors to redeem them at face value by then, Stavrakos said.

Fund A's holdings ``are appropriate for a money market fund,'' Mendelson said in an interview late last week. The pool will have a AAA rating from an outside evaluator, and its $1 a share value will be independently confirmed by year-end, he said

Fund A also holds $390 million, almost 4 percent of its assets, in commercial paper of Rathgar Capital US Corp., a SIV which does business under the name Harrier Finance Funding. These investments, which have the highest A-1+ rating and are backed by WestLB AG, Germany's third-largest state-owned bank, were put under review with a negative outlook by Standard & Poor's on Dec. 7.

The $2 billion of segregated securities, called Fund B, include debt from companies that aren't in default though have sustained losses. Holdings include certificates of deposit from a banking unit of Calabasas, California-based Countrywide Financial Corp., the nation's largest home lender, and variable- rate notes of New York-based CIT Group Inc., the largest independent finance company.

Value Unknown

More than half of Fund B is expected to pay in full, according to a statement from the State Board. The remainder, including $867 million of defaulted or downgraded securities, has some value, though ``only time will tell what that is,'' the statement said.

Deposits totaled $8.5 million in the first two days after the fund opened, Mendelson said.

``We didn't expect any,'' he said. ``We're in conversations with a couple of quite large former participants'' about returning money withdrawn in late November, he said. ``It's going to take time, weeks and months, to rebuild confidence.''

There are about 1,000 schools and local governments with accounts in the pool. Of these, 573 have balances exceeding $1,000, according to state figures.

``I know they are looking to get us and other large governments back in the pool, but it will be a long time before that happens,'' said Geoghegan at Broward County.

To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net.

Last Updated: December 12, 2007 18:30 EST