Florida state officials are scrambling to keep a $14 billion investment fund for local governments afloat. Spurred by a run from depositors stung by downgrades of some $2 billion of the investment pool''''s assets, they decided to isolate $2 billion of the fund''''s worrisome holdings and to restrict withdrawals on Tuesday 4 December.

Florida''''s governor Charlie Crist, a Republican who heads the three-member State Board of Administration, named BlackRock as the fund''s interim administrator. BlackRock representatives said the fund, whose assets have been frozen since last Thursday, could be reopened on a restricted basis as early as the coming Thursday.

Like other states, Florida runs a short-term investment pool similar to a money-market fund so that school districts and other local governments can earn higher interest on their cash holdings. Some of these deposits were invested in securities whose ratings and values have been badly damaged by the ongoing sub-prime mortgage crisis.

Florida is not the only state in this predicament. Maine, Connecticut, Montana and Washington state''''s King County have also admitted that their funds contain sub-prime-related holdings. But none of them have seen a run by depositors on the fund or had to take the extreme measures that Florida''''s 25-year-old investment pool has had to endure.

BlackRock executives have told Florida officials that about 86 per cent of the pool''''s assets, which are quite solid, would be placed in a high-quality fund. A second fund would contain the worrisome securities from issuers such as Axon Financial, KKR Atlantic and KKR Pacific, and would contain about 14 per cent of assets.

The proposal would allow investors to withdraw up to 15 per cent of their deposits or $2 million - whichever is greater - from the preferred fund. That would satisfy the liquidity needs of about 70 per cent of the investors, a BlackRock representative said.

Local government and school officials, the fund''''s major investors, reluctantly agreed to the BlackRock arrangement, even though it would levy redemption fees for larger investors who withdraw more than 15 per cent of their assets in the high-quality fund.

Right now, none of them have much choice in the matter. Small local authorities and agencies are feeling the squeeze. A representative of the Clay County Utility Authority said 95 per cent of the utility''s working capital was invested in the plan.

Moody''''s Investors Service, which has reviewed Florida local credits after last week''''s suspension of withdrawals from the pool, has said that most Florida local governments seemed to have received a large amount in property tax receipts, and so had adequate cash flows.

But Florida also has about $1 billion in similarly downgraded investments in its $137 billion pension fund. But that is a long-term fund, and is not affected quite as much by the liquidity issues that such problematic investments create for short-term investments.