Washington -- Texas' investment fund, TexPool, suffered paper losses of $70 million as a result of its investment in U.S. treasury securities, the state treasurer's office said yesterday.

"The loss was a result of changes in interest rates," said Steve Garven, a spokesman for the treasurer's office.

Martha Whitehead,the state treasurer, denied that it as the fund's derivative investments or its repurchase agreements that were the cause for the paper loss. She said it was simply a decline in the value of the treasuries the fund had purchased.

State officials maintain, however, that TexPool's paper losses can't be compared to Orange County, Calif.'s problems because the Texas fund will not be forced to take actual cash losses.

"No one is going to lose a dime. Comparing us to Orange County is comparing apples to oranges," Garven said. "We have over $650 million in cash, so we can hold those securities until they mature."

The fund's policy is to hold onto its investments until maturity, Garven said.

Sharon Cobb, the first assistant for the Texas state auditor's office agreed.

"There is a paper loss, but they haven't sold them and they won't have to," Cobb said. "There is difference between Orange County and Odessa, where they have had to do some selling and you have actual losses."

Cobb aid he didn't have specific figures on the losses but she believes the fund has enough liquidity.

"We think we have enough liquidity to weather the current market," she said.

Cobb said a Texas state auditor's survey on derivative investments by state-funded agencies and schools is expected to be released Dec. 21.

TexPool was established in 1989. It currently has 1,370 participants, of which independent school districts account for the largest number. Others involved include cities, counties, and utility districts.

The fund allocates about 37 percent of its assets in Treasury notes, one percent in Treasury strips, 40% in government repurchase agreements, 12% in agency notes, five percent in Treasury bills, and five percent in agency discounts, according to Texas Treasurer Martha Whitehead.

Meanwhile, over the last year, the size of the fund has decreased to $3.7 billion from bout $11 billion earlier this year.

But the treasurer's office said a decrease at this time of year is normal because participants tend to take money out at the end of the year.

"The fund goes up and down," Garven said. "We are currently at our low point because now people are pulling the money to pay bills. Historically this is the case."

According to statistics provided by the state treasurer's office, TexPool's invested balance has typically dropped since its inception in the last months of each calendar year.

"We're a cyclical fund," said Whitehead.

Since the fund's inception n 1989, it has increased to as much as $11 billion in assets. The number of participants has also increased. In 1989 the fund started with less than 200 and has increased each year, with a 20% increase in participants in the last year, Whitehead aid.

Whitehead said the fund's decrease in size from a high this year of about $11 billion to $3.7 billion is mostly the normal course.

"I think it's going exactly where it's gone in the past," Whitehead said.

With respect to the investments that have dropped in paper value, Whitehead said most of them will mature soon.

"We will have them roll off the books" Whitehead said. "We have about $1 billion maturing in the next months," she said.

Whitehead said the derivative transactions the fund has entered into did not lose value nor did any of the repurchase agreements.

"Our repurchase agreements lost no value," she said, amid press reports hat the repurchase agreements were the reason for the $70 million paper loss. "All our repurchase agreements are overnight. We run a matched book."

Meanwhile,management of the fund has faced some criticism in large part from David Hartman, an Austin, Tex., banker who ran against Whitehead in the recent election.

"I see no way in which TexPool will wind up not being liquidated," Hartman said two days after he November election. "If this were an SEC fund, it would have been shut down," he added.

Under current laws, the Securities and Exchange Commission doesn't regulate the day-to-day activities of municipal funds as it does mutual funds, which are required to provide regular net asset value and disclosure of the fund's investment activities.

Whitehead said Hartman's comments were only political rhetone with little merit. She said she hasn't seen more participants pull out of the fund than usual, nor has she heard of any dissatisfaction.

"David Hartman was my opponent and I don't think a thing about his opinion," she said.

Earlier this year, Southwest Securities Group started an investment cooperative for local Texas government agencies. The group hired former Texas Treasury officials to manage the effort, which is competing with TexPool.

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