Washington State Treasurer
Local Government Investment Pool
Investment Policy

October 1, 1995

Purpose Policy Scope Prudence Objective(s) Investment Authority and Delegation Ethics and Conflict of Interest Authorized Financial Dealers and Institutions Authorized and Suitable Investments Portfolio Diversification

Maximum Maturities Market Valuation Safekeeping and Custody Securities Lending External Control Internal Review Advisory Committee Performance Standards Reporting

1. Purpose
   It is the purpose of the Washington State Local Government Investment Pool (LGIP) to enable political subdivisions to participate with the state in providing maximum opportunities for the investment of surplus funds consistent with the safety and protection of such funds.  The legislature found and declared that the public interest was served by providing maximum prudent investment of surplus funds, thereby reducing the need for additional taxation.  The legislature also recognized that not all political subdivisions are able to maximize the return on their temporary surplus funds.  The legislature therefore provided in RCW 43.250 a mechanism whereby political subdivisions may, at their option, utilize the resources of the State Treasurer’s Office to maximize the potential of surplus funds while ensuring the safety of public funds.
2. Policy
   It is the policy of the State Treasurer’s Office to invest the public funds residing in the LGIP in a manner that ensures maximum safety, allows adequate liquidity for LGIP participants and achieves the highest investment return consistent with the primary objectives of safety and liquidity.

   The Investment Officer(s) shall carry out their duties under this policy in a manner that is responsible, ethical, professional and always consistent with maintenance of the public’s trust.  It is always encouraged for entities to review and evaluate the practices of the State Treasurer’s Office so as to conserve the high standard of excellence that is expected of Washington’s treasury.

3. Scope
   This investment policy embodies all the public funds on deposit with the LGIP where public funds includes moneys from eligible participants in the Investment Pool as defined in RCW 43.250.020.
4. Prudence
   Purchase of securities shall be made for investment and not for speculation.  The Investment Officer(s) shall act responsibly and prudently in order to maintain the safety of the public’s funds.  The standard of prudence that shall be practiced at all times without exception shall be the “Prudent Person Rule,” which reads:
   • Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.

   The Investment Officer(s) will be exempt from personal responsibility for any loss of principal resulting from major market fluctuations.  Should any such loss occur, however, the Investment Officer(s) shall report it immediately to the Assistant State Treasurer who shall take appropriate action to prevent any future occurrence.

5. Objective(s)
   The primary objective of the LGIP is to provide local governments with an alternative money market equivalent investment vehicle.  The LGIP may be utilized at the sole discretion of the individual investors (RCW 43.250.010).

   All investment decisions will be made in accordance with the following objectives, in order of priority:

   • Safety:  Integrity of the original principal is the foremost priority in this investment program.  In order to obtain this objective, the portfolio will be well diversified to guard against losses in any one securities class.
   • Liquidity:  The LGIP investment portfolio will be structured in order to maintain adequate liquidity for its Pool participants.  This will be achieved by limiting maturities of securities purchased, limiting the average maturity of the portfolio and by maintaining a large portion of the portfolio in securities that are actively (daily) traded.
   • Return on Investment:  The portfolio will be structured so as to attain maximum yield throughout cash flow and market cycles.  Cash flow needs and the risk constraints of the portfolio will be taken into consideration.
6. Investment Authority and Delegation
   The authority to execute investment transactions or transfer funds shall be limited to those persons specifically granted such written authority by the State Treasurer.  The list of authorized persons shall be published in the Administrative Policy Manual of the State Treasurer’s Office.
7. Ethics and Conflict of Interest
   Officers and personnel involved in the investment process and members of the LGIP Advisory Board shall adhere to the provisions of the Ethics in Public Service Act (RCW 42.52).
8. Authorized Financial Dealers and Institutions
   Investment transactions will be conducted with those broker/dealers recognized by the Federal Reserve as primary dealers and those financial institutions that are qualified by the Washington Public Deposit Protection Commission (RCW 39.58).

   Five additional NASD qualified broker/dealers may be selected by the Treasurer’s Office to compete for LGIP transactions.  This group will be reviewed/revised annually by the Investment Policy Committee.

   Prior to undertaking any transaction other than eligible Certificates of Deposit with the state, each broker/dealer and financial institution is required to read this investment policy, certify its understanding of the policy parameters, and pledge to honor the policy in all transactions with the Office of the State Treasurer.

9. Authorized and Suitable Investments
   1. Eligible investments are only those securities authorized by RCW 39.58 and RCW 43.84.
   2. Repurchase agreements and reverse repurchase agreements are subject to the following limitations:
      1. Transactions will be conducted only with primary dealers
      2. A PSA Master Repurchase Agreement is required
      3. The term of any reverse repurchase agreement shall not exceed 90 days and reinvestment of proceeds shall be matched within 14 days or shorter.
      4. No securities will be accepted for repurchase agreement transactions whose market value is not readily available
      5. Mortgage-backed securities with a Fitch rating of V-6 to V-10 will not be accepted as collateral.
   3. Collateralization for repurchase agreements and reverse repurchase agreements shall be as follows:
      1. Treasury, agency and money market securities will be priced at 102 percent of market value
      2. Mortgage related securities utilized in a term repurchase agreement with a maturity date longer than seven (7) days will be priced at 105 percent of market value
      3. Any repurchase agreement with a maturity date longer than 7 days must be priced by the custodian on a weekly basis
   4. Derivative and structured notes will be limited to those allowed by the Securities and Exchange Commission for money market mutual funds and will not exceed 10 percent of the total portfolio.  For the purposes of this policy, a derivative is a financial instrument created from, or whose value is derived from, the value of an underlying asset, reference rate or index.  A structured note is a debt security whose cash-flow characteristics (coupon rate, redemption amount, or stated maturity) depend upon one or more indices and which may have embedded forwards or options.
      1. Derivative securities and structured notes not previously utilized must be approved by the State Treasurer or Assistant Treasurer prior to investment.
10. Portfolio Diversification
    Investment decisions by the State Treasurer’s Office on behalf of the LGIP will be made with the intention to diversify the portfolio in order to minimize risk and still maintain adequate rates of return.  Security limitations by type, as of the date of purchase are as follows:

    Treasury and Federal Agency - 100%

    • Repurchase Agreements - 100% (no more than 30% may mature beyond 30 days)
    • Reverse Repurchase Agreements - 20%
    • Bankers Acceptances - 15% (A1 or P1 only)
    • Commercial Paper - 15% (A1 or P1 only)
    • Certificates of Deposit - 10%

    Term repurchase agreements with any single securities dealer or financial institution may not exceed 10% of the portfolio.

11. Maximum Maturities
    Maintenance of adequate liquidity to meet the cash flow needs of participants is essential.  Accordingly, the securities in the portfolio will be structured in a manner that ensures sufficient cash available to meet anticipated cash flow needs of LGIP participants based on historical activity.  Any cash in excess of that necessary to meet the anticipated needs of participants may be invested with the following maturity limitations:
    1. No single security will be purchased with a maturity date of more than thirteen months from the settlement date.
    2. The average days to maturity of the portfolio will not exceed 90 days.  For the purposes of calculation of average daily maturity, the reset date of floating rate notes will be the maturity date.
    3. The maximum term of reverse repurchase agreements will be 90 days. Reinvestment of the proceeds from a reverse repurchase agreement may have a maximum maturity of no longer than 14 days past the term of the agreement.
12. Market Valuation
    The market value of the portfolio will be calculated by an independent pricing service under contract with the State Treasurer’s Office on at least a monthly basis.
13. Safekeeping and Custody
    All investment transactions will be performed on a delivery versus payment (DVP) basis.  The repurchase agreement collateral and all other securities will be held by a third party custodian under contract with the State Treasurer.
14. Securities Lending
    Securities in the portfolio may be loaned out by a securities lending agent which is under contract with the State Treasurer.  Any securities on loan must be made available by the agent for next day liquidity at the option of the State.  Reinvestment of cash collateral by the lending agent will be restricted to only those securities authorized in state statutes (RCW 43.84) and this investment policy.  The maturities of any securities purchased must be matched within 14 days of the term of the loan.  The State Treasurer will provide a list of approved dealers, and the maximum limits for those dealers, to the lending agent.
15. External Control
    The Washington State Auditor will continue to audit the LGIP as a component of state government.  This will provide an external control by ensuring compliance with all state and federal statutes and the policies and procedures that the State Auditor considers adequate.  In addition the LGIP will contract, through the State Auditor’s Office, for an outside independent audit of LGIP operations.
16. Internal Review
    It is of the utmost importance that the upper management of the State Treasurer’s Office monitor investment activity and be aware of strategies employed in the management of the portfolio to ensure compliance with this investment policy. Accordingly, the following steps will be taken:
    1. Investment staff will prepare and distribute a monthly report summarizing investment activity and policy compliance
    2. A summary of investment activity will be included in the Treasurer’s Annual Report
    3. An Investment Policy Committee composed of the Investment Officer(s), the Deputy Treasurer for Cash Management and Investments, and the Assistant State Treasurer will meet at least semi-annually to review this investment policy.  Any changes to this policy will require the approval of the State Treasurer after consultation with the Advisory Committee.
17. Advisory Committee
    The Treasurer’s Advisory Committee for the Local Government Investment Pool shall comprise twelve (12) members, appointed from among active LGIP participants.  Eight members shall be appointed by participant associations, and four members shall be appointed by the Treasurer.

    The Advisory Committee shall meet quarterly and shall advise the Treasurer on the operation of the pool.

18. Performance Standards
    For the purpose of evaluating LGIP performance, a benchmark comparison index will be established.  The index will be composed of money market funds with reasonably similar portfolio compositions as the Investment Pool.
19. Reporting
    In accordance with WAC 210-01-110, established by the State Treasurer’s Office, each pool participant will be provided a monthly statement of account.  As provided in RCW 43.250.080, the State Treasurer will submit an annual summary of LGIP activity to the Governor, the State Auditor and the Legislative Budget Committee.

© 1996

[Updated: May 6, 1996]