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Hundreds of Local Governments, including many school boards, can’t touch their cash reserves  for the second day in a row. The State Board of Administration froze a state investment account yesterday after panicked local governments withdrew large cash reserves, threatening the solvency of the fund. As Mike Vasilinda tells us, at least one county had to cancel payments to vendors to make its payroll today.

Hear it here: Local Government Investment Blues

It was business as usual in Derrick Martin’s 8th and 9th grade Jefferson County math class. But Martin almost didn’t get a paycheck Friday. Jefferson is just one of hundreds of local governments with money invested in a state operated account. The fund was frozen Thursday after a 1920’s-style run on the bank.  The small county had to scramble to make payroll.

“I had almost a million-dollar pay roll today,” Jefferson County Schools CFO Hal Wilson said.  “The only way I could meet that payroll was to stop payment on checks issued to vendors.”

The way the fund works is that counties empty their checking accounts every night. And then when they need to pay bills they call up the fund by eleven in the morning and the money is back in the account by two that afternoon.

Fears over sub prime mortgage investments caused local governments to withdraw more than half the fund’s value over the last month. If the withdrawals hadn’t been frozen, there wouldn’t have been enough cash to pay everyone.

Jefferson County High School Principal Juliette Jackson says no one panicked.

“Now, we know that its probably going to cause some implications later,” Jackson said.

A meeting Tuesday will decide the next step. It can’t come soon enough for the Jefferson County School System, which just wants the 4. 3 million it has in the fund.

But more withdrawals could sink the fund, causing widespread losses…and almost guaranteeing that Derrick Martin won’t get his next paycheck.

A consulting firm was being hired late Friday to make recommendations. Counties with cash in the fund were invited to participate in a conference call to raise their concerns to the state.