Notes to the Financial Statements
June 30, 2007
Note 4 Cash Deposits and Investments
According to GASB Statement No. 40, "Deposit and Investment Risk Disclosures", the State needs to make certain disclosures about deposit and investment risks that have the potential to result in losses. Thus, the following deposit and investment risks are discussed in this note:
Interest Rate Risk - the risk that changes in interest rates will adversely
affect the fair value of an investment.
Credit Risk - the risk that an issuer or other counterparty to an investment
will not fulfill its obligations.
Concentration of Credit Risk - the risk of loss attributed to the magnitude of
an investment in a single issuer.
Custodial Credit Risk (deposits) - the risk that, in the event of a bank
failure, the State's deposits may not be recovered.
Custodial Credit Risk (investments) - the risk that, in the event of a failure
of the counterparty, the State will not be able to recover the value of
investments or collateral securities that are in the possession of an outside
party.
Foreign Currency Risk - the risk that changes in exchange rates will adversely
affect the fair value of an investment or deposit.
Primary Government
The State Treasurer is the chief fiscal officer of State government and
is responsible for the prudent management and investment of monies of State
funds and agencies as well as monies of pension and other trust funds. The State
Treasurer with the advice of the Investment Advisory Council, whose members
include outside investment professionals and pension beneficiaries, establishes
investment policies and guidelines. Currently, the State Treasurer manages one
Short-Term Investment Fund, one Medium-Term Investment Fund, and seven Combined
Investment Funds, including one international investment fund.
Short-Term Investment Fund (STIF)
STIF is a money market investment pool in which the State, municipal
entities, and political subdivisions of the State are eligible to invest. The
State Treasurer is authorized to invest monies of STIF in United States
government and agency obligations, certificates of deposit, commercial paper,
corporate bonds, savings accounts, bankers' acceptances, repurchase agreements,
asset-backed securities, and student loans. STIF's investments are reported at
amortized cost (which approximates fair value) in the fund's statement of net
assets.
For financial reporting purposes, STIF is considered to be a mixed investment pool – a pool having external and internal portions. The external portion of STIF (i.e. the portion that belongs to participants which are not part of the State's financial reporting entity) is reported as an investment trust fund (External Investment Pool fund) in the fiduciary fund financial statements. The internal portion of STIF (i.e., the portion that belongs to participants that are part of the State's financial reporting entity) is not reported in the financial statements. Instead, each fund's investment in the internal portion of STIF is reported as "cash equivalents" in the government-wide and fund financial statements.
As of June 30, 2007, STIF had the following investments and maturities (amounts in thousands):
Short-Term Investment Fund | |||
---|---|---|---|
Investment Maturities | |||
(in years) | |||
Amortized | Less | ||
Investment Type | Cost | Than 1 | 1-5 |
Corporate Notes | $ 55,000 | $ 55,000 | $ - |
Asset Backed Commercial Paper | 3,032,849 | 3,032,849 | - |
Floating Rate Notes | 748,505 | 80,789 | 667,716 |
Repurchase Agreements | 198,698 | 198,698 | - |
Total Investments | $ 4,035,052 | $ 3,367,336 | $ 667,716 |
Interest Rate Risk
The STIF's policy for managing interest rate risk is to limit investment
to a very short weighted average maturity, not to exceed 90 days, and to comply
with Standard and Poor's requirement that the weighted average maturity not to
exceed 60 days. As of June 30, 2007, the weighted average maturity of the STIF
was 50 days. Additionally, STIF is allowed by policy to invest in floating-rate
securities, and investments in such securities with maturities greater than two
years is limited to no more than 20 percent of the overall portfolio. For
purposes of the fund's weighted average maturity calculation, variable-rate
securities are calculated using their rate reset date. Because these securities
reprice frequently to prevailing market rates, interest rate risk is
substantially reduced. As of June 30, 2007, the amount of STIF's investments in
variable-rate securities was $748.5 million.
Credit Risk
The STIF's policy for managing credit risk is to invest in debt
securities that fall within the highest short-term or long-term rating
categories by nationally recognized rating organizations. As of June 30, 2007,
STIF's investments were rated by Standard and Poor's as follows (amounts in
thousands):
Short-Term Investment Fund | ||||
---|---|---|---|---|
Quality Ratings | ||||
Amortized | ||||
Investment Type | Cost | AAA | AA | A-1 |
Corporate Notes | $ 55,000 | $ 30,000 | $ 25,000 | $ - |
Asset Backed Commercial Paper | 3,032,849 | - | - | 3,032,849 |
Floating Rate Notes | 748,505 | 406,190 | 292,326 | 49,989 |
Repurchase Agreements | 198,698 | - | - | 198,698 |
Total | $ 4,035,052 | $ 436,190 | $ 317,326 | $ 3,281,536 |
Concentration of Credit Risk
STIF reduces its exposure to this risk by requiring that not more than 10
percent of its portfolio be invested in securities of a single bank or
corporation. Policy limits are also set for industry concentration, floating
rate investment concentration and sector concentration. As of June 30, 2007,
STIF's investments in any one single issuer that represents more than 5 percent
of total investments were as follows (amounts in thousands):
Amortized | |
---|---|
Investment Issuer | Cost |
Albis Capital Corporation | $ 263,162 |
Catapult PMX Funding | $ 341,118 |
Ebury Finance | $ 321,999 |
Fenway Funding | $ 224,598 |
Freedom Park | $ 294,568 |
North Lake Funding | $ 216,023 |
Custodial Credit Risk-Bank Deposits-Nonnegotiable Certificate of
Deposits (amounts in thousands):
The STIF follows policy parameters that limit deposits in any one entity to a
maximum of ten percent of assets. Further, the certificate of deposits must be
issued from commercial banks whose short-term debt is rated at least A-1 by
Standard and Poor's and F-1 by Fitch and whose long-term debt is rated at least
A and its issuer rating is at least "C". As of June 30, 2007, $980,500 of the
bank balance of STIF's deposits of $980,900 was exposed to custodial credit risk
as follows
Uninsured and uncollateralized | $885,500 |
Uninsured and collateral held by trust department of either the pledging bank or another bank not in the name of the State | 95,000 |
Total | $980,500 |
Short-Term Plus Investment Fund (STIF Plus)
In 2007, the State created STIF Plus, a medium-term investment fund.
STIF Plus is a money market and short-term bond investment pool in which the
State, municipal entities, and political subdivisions of the State are eligible
to invest. STIF Plus' investments are reported at fair value on the fund's
statement of net assets.
For financial reporting purposes, STIF Plus is considered to be an internal investment pool because it had only one participant fund at year end (General fund), and, thus, it is not reported on the financial statements. Instead, the fund's investment in STIF Plus is reported as investments in the government-wide and fund financial statements.
As of June 30, 2007, STIF Plus had the following investments and maturities (amount in thousands):
Short-Term Plus Investment Fund | |||
---|---|---|---|
Investment Maturities | |||
(in years) | |||
Fair | Less | ||
Investment Type | Value | Than 1 | 1-5 |
Federal Agency Securities | $ 49,965 | $ - | $ 49,965 |
Corporate Notes | 9,992 | 9,992 | - |
Asset Baked Securities | 64,990 | 62,008 | 2,982 |
Asset Backed Commercial Paper | 88,145 | 88,145 | - |
Floating Rate Notes | 45,001 | 45,001 | - |
Total Investments | $ 258,093 | $ 205,146 | $ 52,947 |
Interest Rate Risk
STIF Plus' policy for managing this risk is to perform, on a quarterly basis, an
interest rate sensitivity analysis on the duration and the market value of the
portfolio to determine the potential effect of a 200 basis point movement in
interest rates. As of June 30, 2007, the weighted average maturity of STIF Plus
was 226 days. In addition, STIF Plus is allowed to invest in floating-rate debt
securities. For purposes of the fund's weighted average maturity calculation,
variable-rate securities are calculated using their rate reset date. Because
these securities reprice frequently to prevailing market rates, interest rate
risk is substantially reduced. As of June 30, 2007, STIF Plus's investments in
variable-rate securities were $76.6 million.
Credit Risk
The STIF Plus manages its credit risk by investing only in debt securities that
fall within the highest short-term or long-term rating categories by nationally
recognized rating organizations. As of June 30, 2007, STIF Plus' investments
were rated by Standard and Poor's as follows (amounts in thousands):
Short-Term Plus Investment Fund | ||||
---|---|---|---|---|
Quality Ratings | ||||
Fair | ||||
Investment Type | Value | AAA | AA | A-1 |
Federal Agency Securities | $ 49,965 | $ 49,965 | $ - | $ - |
Corporate Notes | 9,992 | 4,995 | 4,997 | - |
Asset Baked Securities | 64,990 | 64,990 | - | - |
Asset Backed Commercial Paper | 88,145 | - | - | 88,145 |
Floating Rate Notes | 45,001 | 9,995 | 35,006 | - |
Total | $ 258,093 | $ 129,945 | $ 40,003 | $ 88,145 |
Concentration of Credit Risk
SITF Plus' policy for managing this risk is to limit the amount it may invest in
any single federal agency to an amount not to exceed 15 percent. As of June 30,
2007, STIF Plus' investments in any one single issuer that represents more than
5 percent of total investments were as follows (amounts in thousands):
Fair | |
---|---|
Investment Issuer | Value |
FNMA | $ 14,987 |
FHLB | $ 34,979 |
Freedom Park | $ 14,968 |
Custodial Credit Risk-Bank Deposits-Nonnegotiable
Certificate of Deposits (amounts in thousands)
The STIF Plus follows policy parameters that limit deposits in any one entity to
a maximum of five percent of total assets. Further, the certificates of deposits
must be issued from commercial banks whose short-term debt is rated at least A-1
by Standard and Poor's and F-1 by Fitch and whose long-term debt is rated at
least AA- or which carry an unconditional letter of guarantee from such a bank
that meets the short-term debt rating requirements. As of June 30, 2007, $44,599
of the bank balance of STIF Plus' deposits of $44,999 was exposed to custodial
credit risk as follows:
Uninsured and uncollateralized | $ 42,099 |
Uninsured and collateral held by trust department of either the pledging bank or another bank not in the name of the State | 2,500 |
Total | $ 44,599 |
Combined Investment Funds (CIFS)
The CIFS are open-ended, unitized portfolios in which the State pension trust
and permanent funds are eligible to invest. The State pension trust and
permanent funds own the units of the CIFS. The State Treasurer is also
authorized to invest monies of the CIFS in a broad range of fixed income and
equity securities, as well as real estate properties, mortgages, and private
equity. CIFS' investments are reported at fair value in each fund's statement of
net assets.
For financial reporting purposes, the CIFS are considered to be internal
investment pools and are not reported in the financial statements. Instead, each
fund's equity in the CIFS is reported as investments in the government-wide and
fund financial statements. As of June 30, 2007, the amount of equity in the CIFS
reported as investments in the financial statements was as follows (amounts in
thousands):
Primary Government | |||
---|---|---|---|
Governmental | Business-Type | Fiduciary | |
Activities | Activities | Funds | |
Equity in CIFS | $ 93,115 | $ 644 | $ 25,834,532 |
Other Investments | 612,617 | 58,542 | 1,060,929 |
Total Investments-Current | $ 705,732 | $ 59,186 | $ 26,895,461 |
As of June 30, 2007, the CIFS had the following investments and maturities (amounts in thousands):
Combined Investment FundsInvestment Maturities (in Years) | |||||
---|---|---|---|---|---|
Investment Type | Fair Value | Less Than 1 | 1 - 5 | 6 - 10 | More Than 10 |
Cash Equivalents | $ 1,590,061 | $ 1,459,507 | $ 125,997 | $ - | $ 4,557 |
Asset Backed Securities | 308,135 | - | 287,190 | 20,377 | 568 |
Government Securities | 1,703,294 | 20,096 | 600,216 | 468,767 | 614,215 |
Government Agency Securities | 2,304,337 | 193 | 24,608 | 58,072 | 2,221,464 |
Mortgage Backed Securities | 1,092,755 | 10,515 | 15,062 | 60,973 | 1,006,205 |
Corporate Debt | 1,919,345 | 214,700 | 725,384 | 532,517 | 446,744 |
Convertible Debt | 29,187 | 3,763 | 19,466 | 3,265 | 2,693 |
Mutual Fund | 262,534 | - | - | - | 262,534 |
Total Debt Instruments | 9,209,648 | $ 1,708,774 | $ 1,797,923 | $ 1,143,971 | $ 4,558,980 |
Common Stock | 15,172,549 | ||||
Preferred Stock | 115,590 | ||||
Real Estate Investment Trust | 164,256 | ||||
Mutual Fund | 171,376 | ||||
Limited Liability Corporation | 4,290 | ||||
Trusts | 7,147 | ||||
Limited Partnerships | 1,929,672 | ||||
Annuities | 1 | ||||
Total Investments | $ 26,774,529 |
Interest Rate Risk
CIFS' investment managers are given full discretion to manage their portion of
CIFS' assets within their respective guidelines and constraints. The guidelines
and constraints require each manager to maintain a diversified portfolio at all
times. In addition, each core manager is required to maintain a target duration
that is similar to its respective benchmark which is typically the Lehman
Brother Aggregate-an intermediate duration index.
Credit Risk
The CIFS minimizes exposure to this risk in accordance with a comprehensive
investment policy statement, as developed by the Office of the Treasurer and the
State's Investment Advisory Council, which provides policy guidelines for the
CIFS and includes an asset allocation plan. The asset allocation plan's main
objective is to maximize investment returns over the long term at an acceptable
level of risk. As of June 30, 2007, CIFS' debt investments were rated by Moody's
as follows (amounts in thousands):
Combined Investment Funds | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Asset | Government | Mortgage | ||||||||||||
Quality | Fair | Cash | Backed | Government | Agency | Baked | Corporate | Convertible | Mutual | |||||
Ratings | Value | Equivalents | Securities | Securities | Securities | Securities | Debt | Debt | Fund | |||||
Aaa | $ 4,200,344 | $ 698 | $ 301,577 | $ 1,512,888 | $ 1,333,417 | $ 841,452 | $ 210,312 | $ - | $ - | |||||
Aa | 518,161 | - | - | 16,085 | - | 1,553 | 500,289 | 234 | - | |||||
A | 248,951 | - | 238 | 11,775 | - | 1,680 | 234,446 | 812 | - | |||||
Baa | 453,795 | - | 2,948 | 50,286 | - | 13,265 | 387,296 | - | - | |||||
Ba | 156,803 | - | - | 44,730 | - | 3,357 | 107,992 | 724 | - | |||||
B | 286,243 | - | - | 25,317 | - | - | 259,693 | 1,233 | - | |||||
Caa | 81,118 | - | - | - | 8,066 | 65,773 | 7,279 | - | ||||||
Ca | 138 | - | - | - | 138 | - | - | - | ||||||
C | 1,127 | - | - | - | - | 1,127 | - | - | - | |||||
Prime-1 | 705,829 | 670,829 | - | - | - | - | 35,000 | - | - | |||||
Not Rated | 2,557,139 | 918,534 | 3,372 | 42,213 | 970,920 | 222,117 | 118,544 | 18,905 | 262,534 | |||||
Total | $ 9,209,648 | $ 1,590,061 | $ 308,135 | $ 1,703,294 | $ 2,304,337 | $ 1,092,755 | $ 1,919,345 | $ 29,187 | $ 262,534 |
Foreign Currency Risk
The CIFS manage exposure to this risk by utilizing a strategic hedge ratio of 50
percent for the developed market portion of the International Stock Fund (a
Combined Investment Fund). This strategic hedge ratio represents the neutral
stance or desired long-term exposure to currency for the ISF. To implement this
policy, currency specialists actively manage the currency portfolio as an
overlay strategy to the equity investment managers. These specialists may manage
the portfolio passively or actively depending on opportunities in the market
place. While managers within the fixed income portion of the portfolio are
allowed to invest in
non-U.S. denominated securities; managers are required to limit that investment
to a portion of their respective portfolios. As of June 30, 2007, CIFS' foreign
deposits and investments were as follows (amounts in thousands):
Combined Investment Funds | Equities | ||||||||
---|---|---|---|---|---|---|---|---|---|
Fixed Income Securities | |||||||||
Real Estate | |||||||||
Government | Mutual | Corporate | Convertible | Common | Preferred | Investment | |||
Foreign Currency | Total | Cash | Securities | Funds | Debt | Securities | Stock | Stock | Trust |
Argentine Peso | $ 537 | $ 40 | $ - | $ - | $ - | $ - | $ 497 | $ - | $ - |
Australian Dollar | 179,679 | 2,026 | - | - | - | - | 177,653 | - | - |
Brazilian Real | 86,116 | 249 | - | - | 5,433 | - | 23,481 | 56,953 | - |
Canadian Dollar | 24,011 | 41 | - | - | 1,143 | - | 22,827 | - | - |
Chilean Peso | 2,246 | 28 | - | - | - | - | 1,835 | 383 | - |
Czech Koruna | 7,416 | 174 | - | - | - | - | 7,242 | - | - |
Danish Krone | 32,625 | 279 | - | - | - | - | 32,346 | - | - |
Egyptian Pound | 113 | - | - | - | - | - | 113 | - | - |
Euro Currency | 1,677,518 | 3,652 | 22,820 | 1,493 | 500 | 495 | 1,617,297 | 31,261 | - |
Honk Kong Dollar | 192,958 | 1,374 | - | - | - | - | 191,279 | - | 305 |
Hungarian Fornit | 20,372 | 92 | - | - | - | - | 20,280 | - | - |
Indonesian Rupiah | 15,474 | 86 | - | - | 860 | - | 14,528 | - | - |
Israeli Shekel | 10,361 | - | - | - | - | - | 10,361 | - | - |
Japanese Yen | 977,374 | 17,107 | 10,637 | - | 3,207 | 1,243 | 944,251 | - | 929 |
Malaysian Ringgit | 71,677 | (126) | - | - | - | - | 71,803 | - | - |
Mexican Peso | 43,274 | 601 | 13,984 | - | - | - | 28,689 | - | - |
New Taiwan Dollar | 101,581 | 528 | - | - | - | - | 101,053 | - | - |
New Turkish Dollar | 24,367 | - | - | - | - | - | 24,367 | - | - |
New Zealand Dollar | 8,651 | 1,736 | - | - | 3,932 | - | 2,983 | - | - |
Norwegian Krone | 39,192 | 192 | - | - | - | - | 39,000 | ||
Pakistan Rupee | 6 | 6 | - | - | - | - | - | - | - |
Peruvian Nouveau Sol | 513 | - | - | - | - | - | 513 | - | - |
Philippine Peso | 16,130 | 33 | - | - | - | - | 16,097 | - | - |
Polish Zloty | 32,919 | 60 | - | - | - | - | 32,859 | - | - |
Pound Sterling | 879,241 | 5,175 | - | - | 12,389 | - | 849,713 | - | 11,964 |
Singapore Dollar | 81,734 | 3,365 | 5,179 | - | 7,767 | - | 62,075 | - | 3,348 |
South African Rand | 53,260 | 1 | - | - | - | - | 53,259 | - | - |
South Korean Won | 382,900 | 1,827 | - | - | - | - | 356,876 | 24,197 | - |
Swedish Krona | 121,037 | 2,207 | - | - | - | - | 118,830 | - | - |
Swiss Franc | 317,656 | 858 | - | - | - | - | 316,798 | - | - |
Thailand Baht | 40,993 | (26) | - | - | - | - | 41,019 | - | - |
Total | $ 5,441,931 | $ 41,585 | $ 52,620 | $ 1,493 | $ 35,231 | $ 1,738 | $ 5,179,924 | $ 112,794 | $ 16,546 |
Custodial Credit Risk-Bank Deposits
The CIFS minimize this risk by maintaining certain restrictions set forth in the
Investment Policy Statement. The CIFS use a Cash Reserve Account which is a cash
management pool investing in highly liquid money market securities. As of June
30, 2007, the CIFS had deposits with a bank balance of $48.7 million which was
uninsured and uncollateralized.
Complete financial information about the STIF, STIF Plus, and the CIFS can be obtained from financial statements issued by the Office of the State Treasurer.
Other Investments
As of June 30, 2007, the State had other investments and maturities as follows
(amounts in thousands):
Other Investments | |||||
---|---|---|---|---|---|
Investment Maturities (in years) | |||||
Fair | Less | More | |||
Investment Type | Value | Than 1 | 1-5 | 6-10 | Than 10 |
Repurchase Agreements | $ 54,420 | $ 54,420 | $ - | $ - | $ - |
State/Municipal Bonds | 61,465 | 4,123 | 20,875 | 11,861 | 24,606 |
U.S. Government Securities | 39,954 | 25,891 | 12,049 | - | 2,014 |
U.S. Agency Securities | 485,327 | 67,985 | 44,893 | 372,449 | - |
Guaranteed Investment Contracts | 500,095 | 34,047 | 204,421 | 59,554 | 202,073 |
Tax Exempt Proceeds Fund | 53,878 | 53,878 | - | - | - |
Money Market Funds | 321 | 321 | - | - | - |
Mortgage-Backed Securities | 22,216 | - | 3 | 6,220 | 15,993 |
Corporate Bonds | 4 | 2 | 2 | - | - |
Total Debt Investments | 1,217,680 | $ 240,667 | $ 282,243 | $ 450,084 | $ 244,686 |
Annuity Contracts | 263,646 | ||||
Endowment Pool | 13,412 | ||||
Total Investments | $ 1,494,738 |
Credit Risk
As of June 30, 2007, other investments were rated by Standard and Poor's as
follows (amounts in thousands):
Other Investments | |||||
---|---|---|---|---|---|
Fair | Quality Ratings | ||||
Investment Type | Value | AAA | AA | A | Unrated |
Repurchase Agreements | $ 54,420 | $ 54,420 | $ - | $ - | $ - |
State/Municipal Bonds | 61,465 | - | 61,465 | - | - |
U.S. Agency Securities | 485,327 | 452,271 | - | 33,056 | - |
Guaranteed Investment Contracts | 500,095 | 221,618 | 278,477 | - | - |
Tax Exempt Proceeds Fund | 53,878 | - | 53,878 | ||
Money Market Funds | 321 | - | - | - | 321 |
Mortgage-Backed Securities | 22,216 | 22,216 | - | - | - |
Corporate Bonds | 4 | - | - | - | 4 |
Total | $ 1,177,726 | $ 750,525 | $ 339,942 | $ 33,056 | $ 54,203 |
Custodial Credit Risk-Bank Deposits
The State maintains its deposits at qualified financial institutions located in
the state to reduce its exposure to this risk. These institutions are required
to maintain, segregated from its other assets, eligible collateral in an amount
equal to 10 percent, 25 percent, 100 percent, or 120 percent of its public
deposits. The collateral is held in the custody of the trust department of
either the pledging bank or another bank in the name of the pledging bank. As of
June 30, 2007, $230,967 of the bank balance of the Primary Government of
$233,851 was exposed to custodial credit risk as follows:
Uninsured and uncollateralized | $ 208,000 |
Uninsured and collateral held by trust department of either the pledging bank or another bank not in the name of the State | 22,967 |
Total | $ 230,967 |
Component Units
As of June 30, 2007, the major component units had the following investments and
maturities (amounts in thousands):
Major Component Units | |||||
---|---|---|---|---|---|
Investment Maturities (in years) | |||||
Fair | Less | More | |||
Investment Type | Value | Than 1 | 1-5 | 6-10 | Than 10 |
Collateralized Mortgage Obligations | $ 2,948 | $ - | $ - | $ - | $ 2,948 |
Corporate Finance Bonds | 7,655 | - | 2,196 | 5,459 | - |
Corporate Notes | 7,969 | 2,255 | 4,341 | - | 1,373 |
Federated Funds | 14,672 | 14,672 | - | - | - |
Fidelity Tax Exempt Fund | 7,884 | 7,884 | - | - | - |
GNMA Program Assets | 815,576 | - | - | - | 815,576 |
Guaranteed Investment Contracts | 260,891 | - | 260,891 | - | - |
Investment Agreements | 1,368 | - | - | 1,368 | - |
Mortgage Backed Securities | 3,947 | 25 | - | 1,326 | 2,596 |
Repurchase Agreements | 7,197 | - | - | - | 7,197 |
U.S. Government Securities | 765 | - | - | - | 765 |
Structured Securities | 553 | - | - | - | 553 |
Money Market Funds | 267,880 | 267,880 | - | - | - |
Municipal Bonds | 1,859 | - | - | - | 1,859 |
Certificate of Deposits | 3,000 | 3,000 | - | - | - |
Total | $ 1,404,164 | $ 295,716 | $ 267,428 | $ 8,153 | $ 832,867 |
The Connecticut Housing Finance Authority (CHFA) and the Connecticut Health and Education Facilities Authority (CHEFA) own 62.6 percent and 37.4 percent of the above investments, respectively. GNMA Program Assets represent securitized home mortgage loans of CHFA which are guaranteed by the Government National Mortgage Association.
Interest Rate Risk
CHFA
Exposure to declines in fair value is substantially limited to GNMA Program
Assets. The Authority's investment policy requires diversification of its
investment portfolio to eliminate the risk of loss resulting from, among other
things, an over-concentration of assets in a specific maturity.
CHEFA
The Authority manages its exposure to this risk by designing its portfolio of
unrestricted investments with the objective of
regularly exceeding the average return of 90 day U.S. Treasury Bills. This is
considered to be a benchmark for riskless investment transactions and therefore
represents a minimum standard for the portfolio's rate of return. The
Authority's policy as it relates to restricted investments provides that all
restricted accounts be invested in strict accordance with the bond issue trust indentures, with the above policy and
with applicable Connecticut State Law.
Credit Risk
CHFA
The Authority's investments are limited by state statues to United States
Government obligations, including its agencies or instrumentalities, investments
guaranteed by the state, investments in the CIFS, and other obligations which
are legal investments for savings banks in the state. Repurchase agreements,
investment agreements, certificate of deposits, and the Federated Funds are
fully collateralized by obligations issued by the United States Government or
its agencies. Mortgage Backed Securities and Collateralized Mortgage Obligations
are fully collateralized by the Federal National Mortgage Association or the
United States Department of Housing and Urban Development mortgage pools.
CHEFA
The Authority has an investment policy that would further limit its
investment choices beyond those limited by state statutes for both unrestricted
and restricted investments. For example, investments that may be purchased by
the Authority with the written approval of an officer, provided that the
investment has a maturity of one year or less, are obligations issued or
guaranteed by the U.S. Government, the State's Short-Term Investment Fund (STIF),
etc.
As of June 30, 2007, major component units' investments were rated as follows (amounts in thousands):
Component Units | ||||||||
---|---|---|---|---|---|---|---|---|
Fair | Quality Ratings | |||||||
Investment Type | Value | AAA | AA | A | BBB | Baa | C | Unrated |
Collateralized Mortgage Obligations | $ 2,948 | $ 436 | $ 2,512 | $ - | $ - | $ - | $ - | $ - |
Corporate Finance Bonds | 7,655 | - | 2,196 | 5,459 | - | - | - | |
Corporate Notes | 7,969 | - | 2,255 | 2,802 | 1,539 | 1,373 | - | - |
Federated Funds | 14,672 | - | - | - | - | - | - | 14,672 |
Fidelity Tax Exempt Fund | 7,884 | - | - | - | - | - | - | 7,884 |
GNMA Assets | 815,576 | - | - | - | - | - | - | 815,576 |
Guaranteed Investment Contracts | 260,891 | 3,253 | 257,638 | - | - | - | - | - |
Investment Agreements | 1,368 | - | - | - | - | - | - | 1,368 |
Mortgage Backed Securities | 3,947 | 424 | - | - | - | - | - | 3,523 |
Repurchase Agreements | 7,197 | - | - | - | - | - | - | 7,197 |
Structured Securities | 553 | - | - | - | - | - | 553 | - |
Money Market Funds | 267,880 | 267,880 | - | - | - | - | - | - |
Municipal Bonds | 1,859 | 1,859 | - | - | - | - | - | - |
Certificate of Deposits | 3,000 | - | - | - | - | - | - | 3,000 |
Total | $ 1,403,399 | $ 273,852 | $ 262,405 | $ 4,998 | $ 6,998 | $ 1,373 | $ 553 | $ 853,220 |
Concentration of Credit Risk
CHFA
The Authority's investment policy requires diversification of its investment
portfolio to eliminate the risk of loss resulting from, among other things, an
over-concentration of assets with a specific issuer. As of December 31, 2006,
the Authority had no investments in any one issuer that represents 5% or more of
total investments, other than investments guaranteed by the U.S. Government (GNMA
Program Assets).
CHEFA
For unrestricted investments, the Authority places limits on the amount of
investment in any one issuer. No issuer other than the United States Treasury or
the State's Short-Term Investment Fund shall constitute greater than 5 percent
of unrestricted investments, except for qualified money market or mutual bond
funds, none of which shall constitute greater than 50 percent of general fund
investments. At year end, the Authority was in compliance with this policy. The
Authority places no limit on the amount of investments in any one issuer for
restricted investments. At year end, the Authority's guaranteed investment
contracts with AIG, Morgan Stanley, and Rabobank exceeded 5 percent of the
Authority's portfolio.
Security Lending Transactions
Certain of the Combined Investment Funds are permitted by State statute to lend
its securities through a lending agent to authorized broker-dealers and banks
for collateral with a simultaneous agreement to return the collateral for the
same securities in the future.
During the year, the funds' lending agent lent securities similar to the types on loan at year-end and received cash (United States and foreign currency), U.S. Government securities, sovereign debt rated A or better, convertible bonds, and irrevocable bank letters of credit as collateral. The funds' lending agent did not have the ability to pledge or sell collateral securities delivered absent borrower default. Borrowers were required to deliver collateral for each loan equal to: (1) in the case of loaned securities denominated in United States dollars or whose primary trading market was located in the United States or sovereign debt issued by foreign governments, 102 percent of the market value of the loaned securities; and (2) in the case of loaned securities not denominated in United States dollars or whose primary trading market was not located in the United States, 105 percent of the market value of the loaned securities. The funds did not impose any restrictions during the fiscal year on the amount of loans that the lending agent made on their behalf and the lending agent indemnified the funds by agreeing to purchase replacement securities, or return the cash collateral thereof in the event any borrowers failed to return the loaned securities or pay distributions thereon. As of June 30, 2007, the funds had no credit exposure to the borrowers, because the value of collateral held and the market value securities on loan were $3,793.8 million and $3,691.7 million, respectively.
All securities loans can be terminated on demand by either the funds or the borrowers. Cash collateral is invested by the funds' lending agent, and the average duration of the investments can not exceed (a) 120 days or (b) the average duration of the loans by more than 45 days. At year-end, the average duration of the collateral investments was 70 days; the average duration of the loans was unknown, although it is assumed to remain at one day.