LGIP Quarterly Newsletter |
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| Market Summary |
Financial markets continued to focus on the domestic economy, as the bond market remained range bound throughout the third quarter. Market participants became bearish anticipating higher rates and at the beginning of October the upper band of the range was broken as rates headed higher. We are now waiting to see if a new range is being established or if we have entered a trending market with rates going higher into the new millennium.
Oil prices continued to rise, the dollar weakened and gold prices skyrocketed during the quarter, causing fears and expectations of higher inflation amongst market participants. The increases in commodity prices and the continued strength of the economy have reinforced the FOMC’s resolve to preempt any indication of inflation by tightening monetary policy.
During the July Humphrey-Hawkins address to Congress, Chairman Greenspan cautioned that the Fed would tighten again this year if they perceived inflationary risks. In the weeks following the testimony there were several strong economic reports and the markets responded by backing up in expectation of a Fed tightening. For once the markets were right and at the August 24 meeting the Fed tightened by 25 basis points but retained a neutral bias. At the beginning of September the Federal Reserve Board announced measures to ensure liquidity over year-end. This caused a modest rally but the general trend in the market was, and continues to be, towards higher rates. While the FOMC did not raise rates at their October 5 meeting, they did go to a tightening bias. The targeted federal funds rate now stands at 5.25%.
Since our last update, the yield curve remained steep although it flattened a bit as rates in the 3-month to 1-year sector increased more than longer-term rates. Yields have risen 28 to 41 basis points across the curve, as shown in the Historical Yield Curve graph (see Figure 1, below). Throughout this period, the Dow Jones Industrial Average zigzagged downwards to close at 10,019 on October 15.
The net return on the LGIP during the third quarter of 1999 ranged from 4.95% to 5.22%. The LGIP has maintained a defensive stance due to the threat of the Fed tightening. Since this threat is still imminent, the LGIP is positioned to re-price quickly in response to a Fed move.
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| Summary of Advisory Committee Meeting |
he
LGIP Advisory Committee met on September 17, 1999, in the State Treasurer’s
Office in Olympia. A brief discussion of the LGIP returns for the last quarter was
given. The net return of the LGIP versus the Donoghue benchmark has been very solid
and outperformed the benchmark by 48 basis points. The LGIP is maintaining a
defensive stance due to the threat of the Fed tightening in coming months and is
positioned to re-price quickly in response to a Fed move. The average life of the
LGIP was 44 days.
In response to concerns regarding cash flows during December, committee members were asked if they had any plans regarding LGIP activity in December in response to Y2K. The consensus of the committee members was there were no significant changes to their normal cash flow patterns.
A handout was distributed to committee members outlining Fiscal Year (FY) 1999 actual and FY 2000 projected expenses. While the expenses for FY 99 were right on target, the actual rebate for FY 99 was higher than expected, due to the LGIP average daily balance being larger than anticipated. A brief review of the costs for FY 2000 was given. It was stated that $20,000 has been tentatively allocated for reimbursement of travel expenses to be incurred by local governments participating in the statewide custody search as members of the evaluation team, but the actual expense amount should come in less than $20,000. Committee members were asked for their input regarding these expenses being absorbed by the LGIP. It was unanimous that $20,000 was a reasonable amount based on the size of the LGIP, and it was reasonable for the LGIP to pay for the expense. A motion was made and seconded to approve the budget as presented.
A brief update on the statewide custody contract selection process was given. The first step in this process was to identify potential participants by means of a survey. The second step will be to narrow the list of possible custodial providers to 3 or 4 finalists using a process similar to an RFI (Request for Information), which is scheduled to be released October 20, 1999. The finalists from Phase 1 will participate in the formal Request for Proposal (RFP) process. A brief explanation of the criteria and role of the review and evaluation teams was given. Committee members agreed that site visits are very essential to see firsthand how the vendors conduct their operations.
The next advisory committee meeting has been scheduled for January 28, 2000, in order for the evaluation team to make a presentation of the statewide custody finalist to the LGIP Advisory Committee. Committee members were asked for their input regarding the timeline of dates.
The Certificate of Achievement for Excellence in Financial Reporting was presented to the LGIP by Dean Walz, Government Finance Officers Association Representative. This was awarded to the LGIP for the LGIP’s Fiscal Year 1998 Comprehensive Annual Financial Report (CAFR).
| LGIP Holiday Schedule for 1999 & 2000 |
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| Update on Statewide Custody Contract |
ue to
the groundbreaking nature of this venture, Treasurer Murphy has stressed that the
participation of likely clients in the selection process is critical in developing a
successful product. Additionally, providing an opportunity for likely clients and
potential custody providers to interact during the selection process will increase the
probability of success. Therefore, a two-phased selection process has been designed.
During the first phase, potential vendors will be asked to respond to a Request for
Information (RFI). The purpose of this first phase is to narrow the field of potential
vendors to 3-5 finalist vendors by getting a general feel of the institution, their
customer service plans for this program, services available, technology and systems
utilized, and fees. The finalist vendors would then proceed to the second phase, which
will begin with collaborative sessions between the finalist vendors and likely users of
the service. Following the collaborative sessions, the finalist vendors will respond to a
formal Request for Proposal (RFP). The vendors’ responses to the RFP are then
evaluated, site visits conducted, and the process culminated by the selection of the
custody service provider. The LGIP Advisory Committee will be providing oversight of this
selection process. In response to the survey mailed to potential participants in June and
subsequent discussions with respondents, the Evaluation and Review Teams were formed. Team
members were chosen from those respondents who were "very likely" participants
in the survey sent in June, currently utilize a third-party custodian, and are able to
commit to participation in the process of searching for a statewide custodian. The role of
the Evaluation Team will involve assisting in the development of the final RFI and RFP
documents, evaluating the vendor responses, participating in collaborative sessions and
site visits with potential providers, and in making a final evaluation and recommendation
to the Treasurer regarding which institution should provide the statewide custodial
services. The Evaluation Team will include up to five local entities, in addition to OST
representatives. Additionally, there will be a review team, comprised of seven local
entities that will also participate in the development of the RFI and RFP documents. The
preliminary timeline calls for the winning institution to be notified on January 31, 2000.
It is hoped that the statewide custodial contract will be available for use on April 1,
2000.
| Certificate of Achievment for Excellance in Financial Reporting |
The following is the news release dated July 30, 1999 from the Government Finance Officers Association: The Certificate of Achievement for Excellence in Financial Reporting has been awarded to the State of Washington Local Government Investment Pool, WA by the Government Finance Officers Association of the United States and Canada (GFOA) for its comprehensive annual financial report (CAFR). The Certificate of Achievement is the highest form of recognition in the area of governmental accounting and financial reporting, and its attainment represents a significant accomplishment by a government and its management. An Award of Financial Reporting Achievement has been awarded to the individual designated by the government as primarily responsible for preparing the award-winning CAFR. This has been presented to the Office of the State Treasurer, State of Washington Local Government Investment Pool. The CAFR has been judged by an impartial panel to meet the high standards of the program including demonstrating a constructive "spirit of full disclosure" to clearly communicate its financial story and motivate potential users and user groups to read the CAFR. The GFOA is a nonprofit professional association serving approximately 13,500 government finance professionals with offices in Chicago, Illinois, and Washington DC. Treasurer Murphy would like to extend a special thanks to OST staff members Gayleen Cox, Toni Doyle, Dan Mason, Alberta Quinlan, and Cindy Shave for their hard work on the CAFR and their dedication to producing a quality product.
| WFOA 1999 Public Finance Track “Seeds for the Future” |
he
Washington Finance Officers Association (WFOA) is having its annual conference in Yakima,
Washington, from September 21-24. The Office of the State Treasurer is coordinating
the Public Finance track for the conference. In addition to the other educational
opportunities at the conference, below are the classes slated for the Public Finance
Track:
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| Wednesday, September 22 |
Thursday, September 23 |
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| Local Government Investment Pool |
It Is Not Your Parent’s Business Cycle |
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| Basics of Investing |
Fixed Income Investment Options |
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| Eligible & Appropriate Investments |
Investment Analysis |
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| Custody Issues |
Investment Analysis (part 2) |
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| Active Portfolio Management |
Lease Option Capital Asset Lending |
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| Cash Management |
Debt Policies |
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| Cash Management (part 2) | Debt Issuance |
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Washington State Local Government
Investment Pool
Position and Compliance Report
as of September 30, 1999
LGIP Portfolio Holdings
Cost Percentage
of PortfolioRepurchase Agreements $ 1,084,657,000 34.19% U.S. Treasury Securities 60,200,656 1.90% U.S. Agency Bullets 174,900,764 5.51% U.S. Agency Generic Floaters ------ 0.00% U.S. Agency Discount Notes 1,328,036,311 41.85% Certificates of Deposit 66,800,000 2.11% Banker’s Acceptances ------ 0.00% Commercial Paper 458,082,785 14.44% Reverse Repos ------ 0.00% *Total Excluding Security Lending $ 3,172,677,515 100.00% Security Lending Holdings
Cost Repurchase Agreements $ ------ Banker’ Acceptances ------ Commercial Paper ------ Bonds Borrowed ------ Total Security Lending $ ------ Total All Assets
$ 3,172,677,515 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 $ 66,800,000 2.11% 10% Banker’s Acceptances (BA) ------ 0.00% 20% Commercial Paper (CP) 458,082,785 14.44% 25% Securities With Higher Volatility ------ 0.00% 10% Repos Beyond 30 days ------ 0.00% 30% Aggregate BA & CP Holdings $ 458,082,785 14.44% 35%
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 32 days 90 days Maximum Maturity 343 days 397 days Maximum Maturity of Repo 6 days 180 days Maximum Maturity or Reverse Repo 0 days 90 days Average Life of Reinvestment of Cash by Lending Agent 1 days 14 days
Repo Limits Per Dealer September 30, 1999 Total Repo
Percentage
(20% limit)Term Repo
Percentage
(10% limit)Projected
Redemptions
10/01/1999Projected
Position
10/01/1999BancAmerica $ 169,657,000 5% 0% $ 169,657,000 ------ Bear Stearns & Co. ------ 0% 0% ------ ------ CS First Boston ------ 0% 0% ------ ------ Chase ------ 0% 0% ------ ------ DLJ 200,000,000 6% 0% 200,000,000 ------ HSBC Markets ------ 0% 0% ------ ------ Lehman Brothers Inc. 465,000,000 15% 0% 465,000,000 ------ Merrill Lynch & Co., Inc. ------ 0% 0% ------ ------ Morgan Stanley ------ 0% 0% ------ ------ Paine Webber Inc. 150,000,000 5% 5% ------ 150,000,000 Prudential Securities 100,000,000 3% 0% 100,000,000 ------ SalomonSmith Barney ------ 0% 0% ------ $ ------ State Street Bank ------ 0% 0% ------ ------ Total $ 1,084,657,000 $ 934,657,000 $ 150,000,000
Issuer Limitations
**Commercial Paper Cost Percentage
(5% limit)Rating
(A1/P1 or Better)Emerson Electric $ 49,954,750 1.6% A1+/P1 Park Avenue Rec 64,816,122 2.0% A1/P1 Variable Funding 64,749,317 2.0% A1/P1 Eureka Securities 49,697,056 1.6% A1+/P1 Newport Funding 39,709,267 1.3% A1+/P1 Bavaria Univ Funding 64,719,344 2.0% A1+/P1 Bavaria TRR Corp 64,690,311 2.0% A1+/P1 Altair Funding 34,854,361 1.1% A1+/P1 Triple A One Funding 24,892,257 0.8% A1/P1 Total
$ 458,082,785 14.4% Banker’s Acceptances No Banker’s Acceptance holdings as of 09/30/1999.
** These are the limitations of the formal Investment policy. However, operating guidelines place limits of 3% per issuer.
Local Government Investment Pool STATEMENT OF NET ASSETS
September 30, 1999
Assets Investments, at amortized cost: Repurchase Agreements $ 1,084,657,000 U.S. Agency securities 1,502,937,075 U.S. Treasury securities 60,200,656 Commercial Paper 458,082,785 Total excluding Securities Lending &
Securities Purchased But Not Settled$ 3,105,877,515 Securities Lending Investments, at amortized cost: ------ Total Securities Lending ------ Total Investments (Settlement Date Basis) $ 3,105,877,515 Due from Brokers - Securities Purchased But Not Settled, at amortized cost: U.S. Agency securities 29,925,750 Total Due from Brokers $ 29,925,750 Total Investments (Trade Date Basis) 3,135,803,265 Certificates of Deposit 66,800,000 Cash 260 Interest receivable 10,784,061 Total Assets
$ 3,213,387,586 Liabilities Accrued expenses $ 91,781 Obligations under securities lending agreement ------ Due to Brokers 29,925,750 Total Liabilities
$ 30,017,531 Net Assets $ 3,183,370,055 Participant Net Asset Value, Price per Unit $ 1.00 Total Amortized Cost - Settlement Date Basis $ 3,172,677,515
| Total investment purchases:* | $ | 17,034,908,270 | ||
| Total investment sales: | $ | 257,077,862 | ||
| Total investment maturities: | $ | 17,268,932,856 | ||
| Total net income: | $ | 39,351,484 | ||
| Net of realized gains and losses: | $ | (73,003) | ||
| Net Portfolio yield (360-day basis): | ||||
| July | 4.9519% | |||
| August | 4.0554% | |||
| September | 5.2239% | |||
| Average weighted days to maturity: | 32 days | |||
* Includes $29,925,750.00 in securities purchased but not settled.
| Net
Rate of Return Fiscal Years 1995 – 1999 (to date)  |
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 44.9 basis points. This translates into the LGIP earning $53.48 million over what the average comparable private money fund would have generated.
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