Dec. 7 (Bloomberg) -- Florida schools and towns pulled more than $1.7 billion from a state investment pool in the two days since a freeze on their accounts was lifted, as local governments remained wary of keeping money in a fund with subprime mortgage-tainted holdings.

The withdrawals amounted to 15 percent of the portion of the fund's assets to which local governments were given access under a restructuring by BlackRock Inc. Investors removed $560.7 million today, compared with deposits of just $8.5 million since yesterday, according to the State Board of Administration, overseer of the Local Government Investment Pool.

``People are still in the calming down phase, when we fully expect there will be withdrawals,'' said Simon Mendelson, managing director and chief operating officer of cash management at BlackRock, in a telephone interview from Tallahassee.

The withdrawals suggest state officials have yet to restore confidence in an investment fund that was the largest of its kind in the U.S. at $27 billion before schools and cities pulled almost half their deposits last month. Municipalities used the fund like a bank account and were accustomed to tapping it on short notice for day-to-day expenses.

Paying the Price

BlackRock, hired Nov. 30 to salvage the fund, walled off $2 billion of the weakest investments and imposed restrictions to limit withdrawals, including imposing a 2 percent fee on redemptions that exceed certain levels. Some governments have been willing to pay that price to get their money out.

``The city council met and decided that the pool had done nothing to inspire confidence,'' said Bob Brown, city manager of Perry, Florida, which paid a $110,000 penalty to take out $5.5 million more than it was allowed under the limits. ``They were concerned there would be another run.''

Perry, the Jacksonville Electric Authority and Desoto County together paid $1.4 million in penalties yesterday to remove $66.7 million from their accounts, the State Board of Administration said in a statement.

The withdrawals were ``well within what we expected and well within the capacity of the pool to handle,'' said Mendelson at BlackRock, the largest publicly traded U.S. fund manager.

Participants are able to withdraw the greater of $2 million or 15 percent of their deposits, and have full access to new deposits under BlackRock's plan.

`Building Trust' Phase

None of today's withdrawals triggered the 2 percent penalty and those who paid yesterday did so on ``a very small amount of assets,'' Mendelson said. He expects withdrawals to decline in the next few days and weeks as the fund enters what he called the ``building trust phase.''

Perry officials decided the state didn't do enough to inspire trust at a special city council meeting called the night of Dec. 5, said Brown. The meeting came after state officials approved the restructuring Dec. 4 without considering a request from pool members for a guarantee that investors would get all their money.

``We decided we wanted a bird in the hand after the state ran away from the proposal for a guarantee,'' said Brown. ``They said the fund was either going to sink or swim on its own.''

Jacksonville Electric Authority also pulled its funds after deciding the state hadn't done enough to reduce its risk in the fund, said Paul McElroy, chief financial officer of the authority. The authority ``came to the conclusion that it was in the best interest of the company to incur the penalty and invest the funds elsewhere.''

Testing the System

The South Florida Water District withdrew $3.4 million yesterday, leaving $92 million still in the pool.

``I'm not sure when we'll be making more deposits,'' said Paul Dumars, finance chief for the utility. ``We want to allow to the fund to work itself out.''

Hernando County Schools made a small deposit, adding $759,000 to the pool and withdrawing $9 million.

``We took out our maximum amount -- 15 percent -- to test the system,'' said Deborah Bruggink, chief finance officer for the Hernando schools. ``As long as liquidity is there, we have some confidence.'' Hernando will deposit $10 million more in January and probably do so for each month afterward, Bruggink said.

To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

Last Updated: December 7, 2007 16:33 EST