LGIP Quarterly Newsletter Third Quarter 2000

Treasurer’s Office LGIP Representatives Michael J. Murphy, Treasurer (360) 902-9001 Michael Colleran, Assistant Treasurer (360) 902-9002 Douglas Extine, Deputy Treasurer (360) 902-9012 Cristin Wilson, LGIP Portfolio Manager (360) 902-9010 Tracie Kier, LGIP Administrator (360) 902-9014 & 1-800-331-3284 Mary Pheasant, Administrative Support (360) 902-9004

LGIP Advisory Committee Members Bob Dantini Snohomish County Treasurer (425) 388-3300 Mary Dodge Douglas County Treasurer (509) 745-8525 Stan Finkelstein Association of Washington Cities (360) 753-4137 Lynn Hills Port of Bremerton (360) 674-2381 Doug Lasher Clark County Treasurer (360) 397-2255 Tim Jensen City of Yakima (509) 576-6639     Duane Leonard Snohomish County Housing (425) 290-8499 Shelley Pearson Kitsap Co Investment Officer (360) 337-7139 Richard Patrick City of Burlington (360) 755-0531 Hugh Simpson Regional Transit Authority (206) 684-1717 Dan Underwood City of Richland (509) 942-5668 Mark Wyman Snohomish County PUD (425) 258-8317

Market Summary

Financial markets continued to focus on data that may give cause for the Federal Reserve to continue its tightening cycle. With a presidential election looming, the level and timing of interest rate hikes, if they occur at all, will most likely be delayed.

Although the possibility of Fed action before the end of the year is low, the jobs report in October was strong. The drop in the unemployment rate back to its cyclical low of 3.90% did not go unnoticed. It adds to the Fed’s concern that the pool of available workers is shrinking and tight labor markets is one of Greenspan’s most closely watched indicators. This report would not warrant the Fed to tighten, but it does keep the “inflation-risks” in the picture.

Since our last update on August 11, the yield curve has remained inverted, though not as dramatic as in past months. Yields have decreased only 1 and 4 basis points (bp) in the 3-month and 6-month sectors, respectively, while they have decreased by 26, 39, 38, and 13 bp in the 1-, 2-, 5-, and 10-year sectors, respectively, as shown in the Historical Yield Curve graph (see Figure 1, below). The relatively unchanged yields in the short end of the curve are partially due to the market feeling the fed is not a factor in the near term, while the large decrease in the one- to five-year sector is due, in part, to technical factors, such as decreased supply.

Throughout this period, the Dow Jones Industrial Average showed weakness, dropping as low as 9,975 on October 18, with its high close on September 6 at 11,311. The Dow closed on October 20 at 10,226. Likewise, the NASDAQ had problems of its own, peaking at 4,234 on September 1 and dropping to a low of 3,075 on October 12.

The net return on the LGIP during the third quarter of 2000 ranged from 6.44% to 6.47%. Currently, there are very few investment opportunities that are providing positive carry (i.e. yields above the fed funds rate of 6.50%). Since the Fed is not expected to ease in the near future and investors are not being paid to extend out the curve, the LGIP is keeping funds short, with an average days to maturity of 31 days. Though the threat is low, the LGIP has maintained a defensive stance due to the continued possibility of a Fed tightening. The LGIP is positioned to re-price quickly in response to a Fed move, provide adequate liquidity to LGIP participants, and take advantage of any cheapness in the yield curve.

Figure 1

Summary of Advisory Committee Meeting

he LGIP Advisory Committee met on September 27, 2000, in the State Treasurer’s Office in Olympia. Treasurer Murphy introduced Tracie Kier, the new LGIP Administrator. Lisa Hennessy has been promoted to treasury/trust portfolio manager, and Cristin Wilson will continue to be the LGIP portfolio manager.

A brief update was given on the net LGIP returns for June through August 2000. The average net return of the LGIP from January through August 2000 was 6.04%. The LGIP has outperformed the benchmark by 50 bp, which is more than normal due to the LGIP responding quickly to the Fed tightenings throughout the year. Though the market does not expect the Fed to raise rates in the coming months, the average life of the LGIP is short at 34 days. Most money market investments are not providing positive carry and, at this time, investors are not being paid to extend out the curve.

The Fiscal Year (FY) 2000 actual and FY 2001 projected expenses were reviewed. The balance of the LGIP during FY 2000 was higher than anticipated, so more fees were collected. Expenses were right on target, so the rebate was larger than anticipated. For FY 2001, expenses are projected to be about $100,000 lower, due primarily to the difference in custody expenses between State Street Bank (SSB) and Bank of New York (BONY) and a reduction in TM$ expenses. The estimated rebate for FY 2001 is $530,000, which is $26,000 higher than FY 2000. It was suggested that some of the rebate money be used for possible training opportunities.

A brief review of WFOA 2000 was given. The investment track was very successful and the speakers were well received. A brief report on the unveiling of the Web-Client was given and the feedback has been very positive. A follow-up letter was mailed to all the entities that viewed the site at WFOA. There are about 375 participants that will be able to access this information on the Web-Client.

A letter was mailed out to LGIP participants regarding the logon procedures along with an authorization form which is to be completed and returned for users to access the LGIP Web-Client. In addition, a revised transaction authorization form was enclosed. When the logon authorization forms are returned to OST, they will be forwarded to Data Security. A confidential letter will be sent to each authorized user, which will include a logon-ID and a temporary password. About 70 responses have been received so far. Each entity will be able to access only their own account information. A brief report on Phase III of the Treasury Management System (TM$) project was given. TM$ will include LGIP administration, LGIP transactions and investment accounting. The systems will be integrated and participants will be able to do transactions over the Web next year. There will be more information available at the next advisory committee meeting in December, including a discussion by Information Systems staff about security issues.

A brief overview of the OST custody and securities lending conversion to BONY was given. The transfer of securities from SSB to BONY occurred on October 2. The conversion thus far has proceeded smoothly. BONY is providing lower custody fees and anticipates higher securities lending income than what OST experienced in its previous contract.

Update on the LGIP Web-Client

he LGIP Web-Client, which allows participants to access monthly statements, withdrawal and deposit history, and historical rates, was unveiled at WFOA 2000 in Ocean Shores. Reaction was very positive from participants who accessed the Web Client. To access your LGIP account information, you will need a logon ID and a password. On September 18, LGIP participants were ent an LGIP Web Client authorization form for use in requesting their logon IDs and passwords. Once OST receives the completed authorization form, confidential IDs and passwords, along with the Web site address and information, will be mailed to individuals listed on the form. In compliance with OST policies, security information will accompany the logon IDs and passwords.

In addition, transaction authorization forms were mailed to participants because many of the forms currently on file are extremely outdated. This request was not only to update the LGIP files but also to protect the participants; maintaining a current list of authorized personnel is very important for control and audit purposes.

If you have any questions about these forms, please contact Tracie Kier, LGIP Administrator, at 800-331-3284or tracie@tre.wa.gov.

Furthermore, the next phase of the Treasury Management System (TM$) project has begun. It will incorporate the administration of the LGIP and will allow participants to initiate transactions over the web. This next phase should be available by the end of calendar year 2001. This is exciting stuff! Look for future updates in the LGIP newsletter.

Update On Statewide Securities Custody Program

As mentioned in previous newsletters, the Bank of New York was awarded the statewide custody contract in January 2000. This program has provided cost savings and efficiency to securities custody for local governments of Washington. Since the program began in April, 10 local governments and institutions of higher education have chosen to participate in the statewide custody program, with several others indicating an interest in doing so.

If you have any questions, please contact Douglas Extine at (360) 902-9012 or at doug@tre.wa.gov.

OST Custody and Securities Lending Conversion to Bank of New York

he Office of the State Treasurer (OST) custody and securities lending conversion to Bank of New York (BONY) is complete. Last June, BONY was notified it was the winning institution for the custody and securities lending contracts for OST. The conversion was completed on October 2. OST is happy with the personnel and systems support it received throughout this process and looks forward to having BONY as its custody and securities lending provider.

If you have any questions, please contact Lisa Hennessy at (800) 331-3284 or Lisa@tre.wa.gov.

Data as of September 30, 2000

Figure 2

Figure 3

Figure 4

Figure 5

Figure 6

Figure 7

Washington State Local Government Investment Pool
Position and Compliance Report
as of September 30, 2000
(Settlement Date Basis)

LGIP Portfolio Holdings
			Cost			Percentage of Portfolio
	Repurchase Agreements		$	692,138,000		18.73%
	U.S. Treasury Securities			59,656,313		1.61%
	U.S. Agency Bullets			49,982,351		1.35%
	U.S. Agency Generic Floaters			------		0.00%
	U.S. Agency Discount Notes			1,195,516,979		59.40%
	Certificates of Deposit			124,450,000		3.37%
	Banker’s Acceptances			------		0.00%
	Commercial Paper			574,264,650		15.54%
	Reverse Repos			------		0.00%
	*Total Excluding Security Lending		$	3,696,008,293		100.00%
Security Lending Holdings
			Cost
	Repurchase Agreements		$	------
	Banker’ Acceptances			------
	Commercial Paper			------
	Total Securities Lending		$	------
Total Investments & Certificates of deposit			$	3,696,008,293

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 Portfolio		Policy Limitations Percentage
Certificates of Deposit		$	124,450,000		3.37%		10%
Banker’s Acceptances (BA)			------		0.00%		20%
Commercial Paper (CP)			574,264,650		15.54%		25%
Securities With Higher Volatility			------		0.00%		10%
Repos Beyond 30 days		-----			0.00%		30%
Aggregate BA & CP Holdings		$	574,264,650		15.54%		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		36 days		90 days
Maximum Maturity		125 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		June 30, 2000			Total Repo Percentage (20% limit)		Term Repo Percentage (10% limit)		Projected Redemptions 07/03/2000			Projected Position 07/03/2000
Bank of America Securities LLC		$	282,138,000		8%		0%		$	282,138,000			------
Bear Stearns & Co.			100,000,000		3%		3%			------			100,000,000
CS First Boston			------		0%		0%			------			------
Chase Manhatten			------		0%		0%			------			------
Donaldson, Lufkin & Jenrette Securities			------		0%		0%			------			------
HSBC Markets			------		0%		0%			------			------
Lehman Brothers Inc.			------		0%		0%			------			------
Merrill Lynch & Co., Inc.			------		0%		0%			------			------
Morgan Stanley			------		0%		0%			------			------
Paine Webber Inc.			------		0%		0%			------			------
Prudential Securities			310,000,000		8%		5%			------			310,000,000
Salomon-Smith Barney			------		0%		0%			------		$	------
State Street Bank			------		0%		0%			------			------
Total		$	692,138,000						$	392,138,000		$	300,000,000

Issuer Limitations

**Commercial Paper		Cost			Percentage (5% limit)		Rating (A1/P1 or Better)
Kitty Hawk		$	29,918,500		0.8%		A1+/P1
Sweetwater Cap			59,837,000		1.6%		A1+/P1
Corporate Receivable Corp.			59,459,167		1.6%		A1+/P1
WCP Funding			59,460,000		1.6%		A1/P1
Park Avenue Rec Corp.			59,664,167		1.6%		A1/P1
Bavaria Universal Funding			59,662,100		1.6%		A1/P1
Variable Funding			59,750,833		1.6%		A1/P1
Monte Rosa Capital Corp.			86,855,516		2.3%		A1+/P1
Ciesco LP			59,794,800		1.6%		A1+/P1
Eureka Securitization Inc.			39,862,567		1.1%		A1+/P1
Total		$	574,264,650		15.5%
Banker’s Acceptances
No Banker’s Acceptance holdings as of 09/30/2000.
Total		$	------		0.0%

**	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, 2000

Assets
	Investments, at amortized cost:
	Repurchase Agreements				$	692,138,000
	U.S. Agency Coupons					49,982,351
	U.S. Agency Discount Notes					2,195,516,979
	U.S. Treasury securities					59,656,313
	Commercial Paper					574,264,650
		Total excluding Securities Lending & Securities Purchased But Not Settled			$	3,571,558,293
			Total Investments (Settlement Date Basis)		$	3,571,558,293
	Due from Brokers - Securities Purchased But Not Settled, at amortized cost:
		U.S. Agency securities				--------
		Total Due from Brokers			$	--------
			Total Investments (Trade Date Basis)			3,571,558,293
	Certificates of Deposit					124,450,000
	Cash					371
	Interest receivable					3,063,145
		Total Assets			$	3,699,071,809
Liabilities
	Accrued expenses				$	68,939
	Due to Brokers					--------
		Total Liabilities			$	68,939
Net Assets					$	3,699,002,870
Participant Net Asset Value, Price per Unit					$	1.00
Total Amortized Cost - Settlement Date Basis					$	3,696,008,293

Figure 8

Average Net Rate of Return of Government Only/Institutional Only Money Market Funds, Money Market Insight, iMoneyNet, Inc., Westborough, 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 iMoneyNet, Inc., 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 46.1 basis points.  This translates into the LGIP earning $69.64 million over what the average comparable private money fund would have generated.

*Formerly IBC Financial Data

About OST |  Contact Us |  News |  LOCAL Program |  LGIP |  Debt Management  Investments |  Revenue Distrib. |  PDPC |  Newsletters |  Links  © 2000 Office of the State Treasurer [Updated:  November 7, 2000]