LOCAL
GOVERNMENT
INVESTMENT
POOL
State Treasurer
|
WASHINGTON STATE LOCAL GOVERNMENT INVESTMENT POOL |
Michael J. Murphy State Treasurer |
| Fourth Quarter 1998 Update | Volume 2, Number 4 |
|
The Federal Open Market Committee (FOMC), in a pre-emptive strike against recession and guarding against a liquidity crisis, had cut the federal funds rate 25 basis points on September 29. Following on the heels of this cut, major banks reduced their prime rates by 25 basis points to 8.25%, the first reduction in two years. Rumors of further failures and financial deterioration continued as Fed Chairman Greenspan defended the rescue of hedge fund Long Term Capital Management, saying the damage to global economies would have been severe if the rescue had not occurred. Further evidence of the severity of the crisis was seen in the losses and poor third quarter results reported by many firms including CitiGroup, Bank of America, and Bankers Trust. The liquidity crisis continued with cautious lending and unsettled financial markets cited daily in the headlines. Hoping to eliminate disruptions and return liquidity to the markets, the Fed again reduced the federal funds rate by 25 basis points (bp) on October 16, the first inter-meeting move in over four years. The Fed also eased by 25 bp at their November 18 meeting.
Low inflation and high employment remained the highlights of the domestic economy which remained relatively strong. Profits are expected to decrease in 1999, reflecting the expected slowdown. As compared to quarter three, the fourth quarter brought only a slight rally to the market. As of 12/31/98, 3- and 6-month bills had rallied 10 and 7 basis points to 4.45 and 4.54, respectively, while 2-, 5- and 10-year notes had rallied over 20 basis points each to yield 4.53, 4.54 and 4.65, respectively. The front end of the curve continued flat. The 30-year bond rallied 13 basis points to 5.09. While the treasury market’s rally continued during the fourth quarter, the Dow Jones Industrial Average recovered from its 1206 drop in the third quarter and closed out the year at 9181, up 1548 from 9/30/98. The net return on the LGIP during the fourth quarter of 1998 ranged from 5.01% to 5.18%. Although further Fed eases do not appear to be imminent, further policy accommodation cannot be ruled out. Therefore, as with the third quarter, the average days to maturity of the portfolio has maintained near 65 days and the maturity structure has moved away from the straight barbell to moving funds into the 3-month, 6-month, and one-year areas of the yield curve. Invariably, however, the LGIP maintains significant liquidity in order to take advantage of any cheapness in the yield curve and still provide liquidity to the LGIP participants.
A brief historical overview of repo collateralization and procedures for monitoring repo collateral was given. There was a discussion of OST responses to market events and the changes in the operating procedures that have been established. Copies of the draft LGIP Investment Policy were distributed and the proposed revisions were explained to committee members. The primary changes to the policy involved the collaterization and monitoring of repos. A motion was made and seconded, and it was unanimously agreed by committee members to accept the revisions as presented in the draft policy. A brief summary of the condition of the financial markets in October 1998 was given. A brief update on the statement faxing system was presented. About 57% of all statements are being faxed at this time, and a reminder will be sent to those customers who are not signed up for this option. Committee members were asked for their input regarding submitting an application to the Government Finance Officers Association (GFOA) this year for certification of the 1998 LGIP Comprehensive Annual Financial Report (CAFR) at a cost of $550. It was unanimously agreed by committee members to submit an application for GFOA for certification of the 1998 LGIP CAFR. A letter of intent regarding the independent audit of the LGIP was sent to State Auditor Brian Sonntag as was stated in the September 24, 1998 LGIP advisory committee meeting minutes. SAO confirmed OST would receive a written response to our letter of December 1, 1998, and as soon as that response is received from SAO, copies will be mailed to committee members. It was agreed that there will be LGIP advisory committee representation on the evaluation committee and that Treasurer Murphy will select LGIP committee representatives. Committee members were informed of proposed legislation that OST is planning to introduce this session regarding the creation of a statewide custody contract. Information will be sent to committee members regarding proposed legislation as soon as it is developed. |
| Investment Policy Update |
he Local Government Investment Pool (LGIP) has revised its investment policy as of December 10, 1998 per approval by the LGIP Advisory Committee. The changes are primarily in the area of repurchase agreement collateralization. An additional option for testing collateralized mortgage obligation (CMO) collateral volatility was added, the Federal Financial Institutions Examination Council (FFIEC) test. The policy calls for operating guidelines to provide details relating to the frequency of collateral pricing, collateral substitutions and margin calls.
A copy of the revised LGIP investment policy will be in the Fiscal Year 1999 LGIP Comprehensive Annual Financial Report. However, you can see it now on the OST web site at: http://tre.wa.gov/LGIP/Newsltr/1998/lgippoli0204.htm or call to request a copy at (360) 902-9010.
| Proposed Statewide Custody Services Legislation |
he 1999 State Legislature will vote on legislation proposing a statewide custody contract which authorizes the state treasurer to negotiate custody services for local government investments. This would enable all local governments to obtain the best rate and terms from a single financial institution for custody banking services.
Participation in this contract is optional and each local government retains responsibility and control over its participation and its investments. Similar to the economies of scale realized in the LGIP, this concept allows smaller local governments to take advantage of the same competitive custody fees and terms available to large entities.
| LGIP Advisory Committee Role Will Expand |
urrently, the Advisory Committee advises the state treasurer on issues involving the LGIP. Pending the adoption of the statewide custody contract legislation discussed above, the role of the LGIP Advisory Committee will expand to include custody issues. This would be a smooth transition since committee members are familiar with the investment and custodial environments.
The names and numbers for Treasurer’s Office LGIP representatives and Advisory Committee members are on page one of this LGIP newsletter. We encourage you to call with any questions or concerns.
| IMPORTANT… THIS APPLIES TO YOU! State Investment Board Proposed Commercial Paper Policy Change |
he Washington State Investment Board (SIB) has drafted a change to its policy regarding the purchase of commercial paper. On February 2, 1999, the Public Markets Committee of the SIB met and approved of the proposed change, which will now go before the full board for approval at their February 18, 1999 meeting. If approved, this policy would be effective February 18 and will be available on the Office of the State Treasurer web-site at: http://tre.wa.gov/Invest/invest.htm.
Why should you care? Pursuant to RCW 39.59.020(4) local governments can invest in "…any investments authorized by law for the treasurer of the State of Washington…" and the state treasurer is authorized by law to invest in commercial paper by RCW 43.84.080(7), but only to the extent consistent with the policy of the SIB.
The DRAFT policy guidelines, with respect to investment in commercial paper, for entities with funds under management of less than ten billion dollars, are as follows:
| LGIP Holiday Schedule for 1999 |
he Local Government Investment Pool will be closed on the following days:
| Monday | February 15 | President’s Day | ||
| Monday | May 31 | Memorial Day | ||
| Monday | July 5 | Independence Day | ||
| Monday | September 6 | Labor Day | ||
| Tuesday | October 12 | Columbus Day | ||
| Thursday | November 11 | Veteran’s Day | ||
| Thursday/Friday | November 25 & 26 | Thanksgiving | ||
| Friday | December 24 | Christmas Day | ||
| Friday | December 31 | New Year’s Day |
| LGIP Marketing & Education Effort |
taff from the State Treasurer’s Office will be traveling to various conferences and meetings in the coming months in order to educate LGIP participants, and potential participants, on this beneficial investment alternative. We have provided a schedule below and hope to see you at these events. Please introduce yourself!
| WA Municipal Treasurers Association (WMTA) | April 7-9, 1999 | |
| WA Public Utility District Association (WPUDA) Financial Officers meeting | April 28, 1999 | |
| WA Association of County Treasurers (WSACT) | June 14-18, 1999 | |
| WA Public Ports Association (WPPA) Financial Officers meeting | June 16-18, 1999 | |
| Association of Washington Cities annual conference (AWC) | June 22-25, 1999 | |
| WA Finance Officers Association (WFOA) | September 22-24, 1999 |
Washington State Local Government Investment Pool
Position and Compliance Report
as of December 31, 1998
LGIP Portfolio Holdings
Cost Percentage
of PortfolioRepurchase Agreements $ 354,354,000 11.54% U.S. Treasury Securities 140,128,631 4.56% U.S. Agency Bullets ------ 0.00% U.S. Agency Generic Floaters ------ 0.00% U.S. Agency Discount Notes 2,562,455,208 83.42% Certificates of Deposit 14,700,000 0.48% Banker’s Acceptances ------ 0.00% Commercial Paper ------ 0.00% Reverse Repos ------ 0.00% *Total Excluding Security Lending 3,071,637,839 100.00%
Security Lending Holdings
Cost Repurchase Agreements $ ------ Banker’ Acceptances ------ Commercial Paper ------ Bonds Borrowed ------ Total Security Lending $ ------
Total All Assets
$ 3,071,637,839 Policy Limitations
The policy limitations include investment of cash collateral by a securities lending agent calculated as percentages of the portfolio holdings Total Excluding Security Lending.*
Size Limitations Holdings Percentage
of PortfolioPolicy Limitations
PercentageCertificates of Deposit $ 14,700,000 0.48% 10% Banker’s Acceptances ------ 0.00% 15% Commercial Paper ------ 0.00% 15% Securities With Higher Volatility ------ 0.00% 10% Repos Beyond 30 days ------ 0.00% 30% Leverage (30% total Limit) Securities on Loan (dollars out on loan) ------ Reverse Repos ------ Total Leverage ------ 0.00%
Maturity Limitations Currently Policy Limitations Portfolio Average Life 63 days 90 days Maximum Maturity 334 days 397 days Maximum Maturity of Repo 4 days 180 days Maximum Maturity or Reverse Repo 0 days 90 days Average Life of Reinvestment of Cash by Lending Agent 0 days 14 days
Repo Limits Per Dealer December 31, 1998 Total Repo
Percentage
(20% limit)Term Repo
Percentage
(10% limit)Projected
Redemptions
01/04/1999Projected
Position
01/04/1999BancAmerica $ 229,354,000 7% 0% $ 229,354,000 ------ Bear Stearns & Co. ------ 0% 0% ------ ------ CS First Boston ------ 0% 0% ------ ------ Chase ------ 0% 0% ------ ------ DLJ 65,000,000 2% 0% 65,000,000 ------ HSBC Markets ------ 0% 0% ------ ------ Lehman Brothers Inc. 60,000,000 2% 0% 60,000,000 ------ Merrill Lynch Pierce Fenner ------ 0% 0% ------ ------ Morgan Stanley ------ 0% 0% ------ ------ Paine Webber Inc. ------ 0% 0% ------ ------ Prudential Securities ------ 0% 0% ------ ------ SalomonSmith Barney ------ 0% 0% ------ ------ State Street Bank ------ 0% 0% ------ ------ Total $ 354,354,000 $ 354,354,000 ------
Issuer Limitations
**Commercial Paper Cost
Percentage
(5% limit)
Rating
(A2/P2 or Better)
No Commercial Paper holdings as of 12/31/1998.
Banker’s Acceptances No Banker’s Acceptance holdings as of 12/31/1998.
** These are the limitations of the formal Investment policy. However, operating guidelines place limits of 3% per issuer and a rating of A1/P1 or better.
Average Net Rate of Return of Government Only/Institutional Only Money Market Funds, Money Market Insight, IBC Donoghue, Inc., Ashland, MA
NOTE: Rates are calculated on a 360-day basis.
The above comparison shows how the LGIP has performed relative to its benchmark since July 1994. This benchmark is the IBC Donoghue Government Only/Institutional Only Money Market Funds, which is comprised of privately managed money market funds similar in composition and investment guidelines to the LGIP.
The LGIP net rate of return has outperformed its benchmark since July 1994 by an average of 44.2 basis points. This translates into the LGIP earning $42.10 million over what the average comparable private money fund would have generated.
| Assets | |||||
| Investments, at amorized cost: Securities purchased under agreements to resell |
$ | 354,354,000 | |||
| U.S. Agency Securities | 2,562,455,208 | ||||
| U.S. Treasury Securities | 140,128,631 | ||||
| Commercial Paper | |
------ |
|||
| Total excluding Securities Lending & Securities Purchased But Not Settled |
$ |
3,056,937,839 |
|||
| Securities Lending Investments, at amortized cost: | ------ | ||||
| Total Securities Lending | ------ | ||||
| Total Investments (Settlment Date Basis) | 3,056,937,839 | ||||
| Due from Brokers - Securities Purchased But Not Settled, at amortized cost: Commercial Paper |
|
74,685,625 |
|||
| Total Due from Brokers | 74,685,625 | ||||
| Total Investments (Trade Date Basis) | 3,131,623,464 | ||||
| Certificates of Deposit | 14,700,000 | ||||
| Cash | 333 | ||||
| Interest Receivable | |
22,515,499 |
|||
| Total Assets | $ |
3,168,839,296
|
|||
| Liabilities | |||||
| Accrued expenses | $ | 164,196 | |||
| Obligations under securities lending agreement | ------ | ||||
| Due to Brokers | |
74,685,625 |
|||
| Total Liabilities | $ |
3,093,989,475
|
|||
| Net Assets | $ |
3,093,989,475 |
|||
| Participant Net Asset Value, Price per Unit | $ |
1.00
|
|||
| Market Value (Investments & Certificates of Deposit | |||||
| Settlement Date Basis | $ | 3,071,637,839 | |||
| Total investment purchases:* | $ | 15,180,752,142 | |||
| Total investment sales: | $ | 934,931,030 | |||
| Total investment maturities: | $ | 14,293,837,732 | |||
| Total net income: | $ | 42,836,749 | |||
| Net of realized gains and losses: | $ | 221,501 | |||
| Net Portfolio yield (360-day basis): | |||||
| October | 5.1760% | ||||
| November | 5.0629% | ||||
| December | 5.0068% | ||||
| Average weighted days to maturity: | 64 days | ||||
|
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© 1999 [Updated: February 8, 1999] |
olatility and turmoil continued to define the financial markets throughout the fourth quarter of 1998. Financial troubles continued in Asia, Japan and Russia with Latin American countries struggling to maintain stability. Currencies and spread product were still negatively affected. October saw U.S. treasury bond yields fall below 5% as nervous investors flocked to Treasury securities looking for safety.
After reducing the federal funds rate three times in seven weeks, the Fed left rates unchanged at the December FOMC meeting. As of January 6, the federal funds rate was 4.75%. There is widespread belief that the Fed will leave the funds rate unchanged at the next FOMC meeting, scheduled for February 2 and 3.
