State of Connecticut

Notes to the Financial Statements

June 30, 2008

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 eleven Combined Investment Funds.

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 accompanying financial statements. Instead, investments in the internal portion of STIF by participant funds are reported as cash equivalents in the government-wide and fund financial statements.

As of June 30, 2008, 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
Floating Rate Notes $ 708,204 $ 636,607 $ 71,597
Secured Liquidity Notes 47,019 47,019 -
Federal Agency Securities 922,160 922,160 -
Repurchase Agreements 820,912 820,912 -
Money Market Funds 450,000 450,000 -
Total Investments $ 2,948,295 $ 2,876,698 $ 71,597

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, 2008, the weighted average maturity of the STIF was 19 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, 2008, the amount of STIF's investments in variable-rate securities was $855 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, 2008, 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 D
Floating Rate Notes $ 708,204 $ 330,165 $ 200,789 $ 119,918 $ 57,332
Secured Liquidity Notes 47,019 - - 47,019 -
Federal Agency Securities 922,160 922,160 - - -
Repurchase Agreements 820,912 - - 820,912 -
Money Market Funds 450,000 450,000 - - -
Total Investments $ 2,948,295 $ 1,702,325 $ 200,789 $ 987,849 $ 57,332

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 any one issuer, except for overnight or two-business day repurchase agreements and U.S. government and agency securities. As of June 30, 2008, STIF's investments in any one issuer that represents more than 5 percent of total investments were as follows (amounts in thousands):

Amortized
Investment Issuer Cost
Bank of America $ 849,096
FHLB $ 174,421
FHLMC $ 398,679
FNMA $ 299,253

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, 2008, $2,099,600 of the bank balance of STIF's deposits of $2,100,000 was exposed to custodial credit risk as follows:

Uninsured and uncollateralized $ 1,889,600
Uninsured and collateral held by trust department of
either the pledging bank or another bank not in the
name of the State 210,000
Total $ 2,099,600

Short-Term Plus Investment Fund (STIF Plus)
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. The State Treasurer is authorized to invest monies of STIF Plus in U.S. government and agency obligations, certificates of deposit, commercial paper, corporate bonds, saving accounts, bankers' acceptance, repurchase agreements, and asset-backed securities. 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 and is not reported in the accompanying financial statements. Instead, investments in STIF Plus by participant funds are reported as other investments in the government-wide and fund financial statements.

As of June 30, 2008, 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 $ 88,065 $ 5,036 $ 83,029
Corporate Notes 77,674 4,135 73,539
Asset Backed Securities 21,746 9,160 12,586
Repurchase Agreements 12,069 12,069 -
Total Investments $ 199,554 $ 30,400 $ 169,154

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, 2008, the weighted average maturity of STIF Plus was 303 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 reprise frequently to prevailing market rates, interest rate risk is substantially reduced. As of June 30, 2008, STIF Plus's investment in variable-rate securities was $94.9 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, 2008, 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
Federal Agency Securities $ 88,065 $ 88,065 $ - $ -
Corporate Notes 77,674 14,913 53,889 8,872
Asset Backed Securities 21,746 20,718 728 300
Repurchase Agreements 12,069 - - 12,069
Total $ 199,554 $ 123,696 $ 54,617 $ 21,241

Concentration of Credit Risk
STIF 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, 2008, STIF Plus' investments in any one issuer that represents more than 5 percent of total investments were as follows (amounts in thousands):

Fair
Investment Issuer Value
Bank of America $ 21,981
Citigroup $ 14,620
FHLB $ 37,678
FHLMC $ 30,270
FNMA $ 15,090
General Electric $ 14,913
Wells Fargo $ 14,857

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, 2008, $109,600 of the bank balance of STIF Plus' deposits of $110,000 was exposed to custodial credit risk as follows:

Uninsured and uncollateralized $ 98,600
Uninsured and collateral held by trust department of
either the pledging bank or another bank not in the
name of the State 11,000
Total $ 109,600

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 accompanying financial statements. Instead, investments in the CIFS by participant funds are reported as equity in the CIFS in the government-wide and fund financial statements. As of June 30, 2008, the amount of equity in the CIFS reported in the financial statements was as follows (amounts in thousands):

Primary Government
Governmental Business-Type Fiduciary
Activities Activities Funds
Equity in the CIFS $ 92,014 $ 623 $ 25,779,186
Other Investments 646,816 52,738 974,341
Total Investments-Current $ 738,830 $ 53,361 $ 26,753,527

As of June 30, 2008, the CIFS had the following investments and maturities (amounts in thousands):

Combined Investment Funds
Investment Maturities (in Years)
Investment Type Fair Value Less Than 1 1 - 5 6 - 10 More Than 10
Cash Equivalents $ 1,287,507 $ 1,248,429 $ 25,119 $ - $ 13,959
Asset Backed Securities 267,219.0 885 213,715 52,619 -
Government Securities 2,596,352.0 332,630 569,493 453,363 1,240,866
Government Agency Securities 1,646,888.0 529 19,300 47,830 1,579,229
Mortgage Backed Securities 956,383.0 5,640 23,499 47,136 880,108
Corporate Debt 2,108,881.0 179,950 721,380 766,588 440,963
Convertible Debt 28,276.0 2,224 18,599 2,675 4,778
Mutual Fund 387,049.0 - - - 387,049
Total Debt Instruments 9,278,555 $ 1,770,287 $ 1,591,105 $ 1,370,211 $ 4,546,952
Common Stock 13,809,214
Preferred Stock 105,945
Real Estate Investment Trust 102,406
Mutual Fund 186,304
Limited Liability Corporation 4,242
Trusts 5,864
Limited Partnerships 2,636,631
Total Investments $ 26,129,161

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, 2008, CIFS' debt investments were rated by Moody's as follows (amounts in thousands):

Combined Investment Funds
Fair Value Cash
Equivalents
Asset
Backed
Securities
Government
Securities
Government
Agency
Securities
Mortgage
Backed
Securities
Corporate
Debt
Convertible
Debt
Mutual
Fund
Aaa $ 4,329,454 $ - $ 232,479 $ 1,997,087 $ 1,286,118 $ 622,580 $ 191,190 $ - $ -
Aa 527,787 - 513 30,757 - 11,888 484,432 197 -
A 374,100 - 2,625 73,527 - 2,734 294,528 686 -
Baa 535,481 - 4,137 82,828 - 55,721 391,731 1,064 -
Ba 266,007 - - 97,276 - 10,829 157,902 - -
B 457,427 - - 82,813 - 5,291 368,703 620 -
Caa 107,771 - - - - 4,246 98,975 4,550 -
Ca 5,237 - - 3,244 - - 1,993 - -
C 1,082 - - - - 1,082 - - -
Prime 1 642,881 642,881 - - - - - - -
Not Rated 2,031,328 644,626 27,464 228,821 360,771 242,011 119,426 21,160 387,049
Total $ 9,278,555 $ 1,287,507 $ 267,218 $ 2,596,353 $ 1,646,889 $ 956,382 $ 2,108,880 $ 28,277 $387,049

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, 2008, CIFS' foreign deposits and investments were as follows (amounts in thousands):

  Combined Investment Funds
Fixed Income Securities Equities
Foreign Currency Total Cash Government
 Securities
Mutual
 Funds
Corporate
 Debt
Convertible
 Securities
Common
 Stock
Preferred
 Stock
Real Estate
Investment
 Trust
Argentine Peso $ 735 $ 130 $ 438 $ - $ - $ - $ 167 $ - $ -
Australian Dollar 245,789 1,403 - - 910 - 243,466 - 10
Brazilian Real 136,048 305 34,298 - 5,903 - 38,429 57,113 -
Canadian Dollar 52,800 1,763 - - 130 - 50,907 - -
Chilean Peso 1,357 19 - - - - 1,338 - -
Colombian Peso 7,368 - 5,872 - 1,496 - - - -
Czech Koruna 21,998 2 6,084 - - - 15,912 - -
Danish Krone 61,586 268 - - 203 - 61,115 - -
Egyptian Pound 23,362 5,790 12,051 - - - 5,521 - -
Euro Currency 1,788,381 457 46,801 19,941 3,101 - 1,688,490 29,591 -
Hong Hong Dollar 202,702 612 - 58 - - 199,755 - 2,277
Hungarian Fornit 35,205 7 9,944 - - - 25,254 - -
Iceland Krona 84 - - - - - 84 - -
Indian Rupee 4,316 - - - 4,316 - - - -
Indonesian Rupiah 26,689 94 6,139 - 3,513 - 16,943 - -
Israeli Shekel 10,827 8 - - - - 10,819 - -
Japanese Yen 1,049,339 5,965 9,146 5,719 - 1,287 1,025,344 - 1,878
Kazakhstan Tenge 772 - - - 772 - - - -
Malaysian Ringgit 63,190 409 23,891 - 9,567 - 29,207 116 -
Mexican Peso 47,473 876 29,258 - - - 17,339 - -
Moroccan Dirham 1,210 (24) - - - - 1,234 - -
New Russian Rubel 4,522 19 - - 4,503 - - - -
New Taiwan Dollar 66,466 6 - - - - 66,460 - -
New Turkish Lira 52,953 83 13,263 - 1,843 - 37,764 - -
New Zealand Dollar 7,659 633 - - 2,143 - 4,883 - -
Norwegian Krone 43,798 290 - - - - 43,508 - -
Pakistan Rupee 9,634 18 - - - - 9,616 - -
Peruvian Nouveau Sol 1,017 - 238 - 706 - 73 - -
Philippine Peso 6,571 10 - - - - 6,561 - -
Polish Zloty 43,538 81 20,245 - - - 23,212 - -
Pound Sterling 908,081 4,531 14,786 - 11,693 - 874,355 - 2,716
Singapore Dollar 89,018 126 5,898 - 8,822 - 69,320 - 4,852
South African Rand 71,545 825 6,091 - 2,385 - 62,244 - -
South Korean Won 317,075 164 - - - - 306,830 10,081 -
Swedish Krona 74,969 180 - - - - 74,789 - -
Swiss Franc 367,204 3,033 - - - - 364,171 - -
Thailand Baht 52,224 222 2,796 - 1,023 - 48,183 - -
Uruguayan Peso 709 - 709 - - - - - -
Yuan Renminbi 304 (34) - - - - 338 - -
Total $ 5,898,518 $ 28,271 $ 247,948 $ 25,718 $ 63,029 $ 1,287 $ 5,423,631 $ 96,901 $ 11,733

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 Liquidity Account which is a cash management pool investing in highly liquid money market securities. As of June 30, 2008, the CIFS had deposits with a bank balance of $29.8 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, 2008, 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 $ 2,873 $ 2,873 $ - $ - $ -
State/Municipal Bonds 55,312 - 10,407 3,489 41,416
U.S. Government Securities 33,971 23,852 8,105 - 2,014
U.S. Agency Securities 159,468 31,084 118,415 9,969 -
Guaranteed Investment Contracts 444,892 - 194,123 80,085 170,684
Tax Exempt Proceeds Fund 46,944 46,944 - - -
Money Market Funds 23,718 23,718 - - -
Mortgage-Backed Securities 21,865 - - 6,015 15,850
Corporate Bonds 2 2 - - -
Total Debt Investments 789,045 $ 128,473 $ 331,050 $ 99,558 $ 229,964
Annuity Contracts 230,014
Endowment Pool 12,308
Total Investments $ 1,031,367

Credit Risk
As of June 30, 2008, 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 $ 2,873 $ 2,873 $ - $ - $ -
State/Municipal Bonds 55,312 - 55,312 - -
U.S. Agency Securities 159,468 128,384 - 31,084 -
Guaranteed Investment Contracts 444,892 266,922 177,970 - -
Tax Exempt Proceeds Fund 46,944 - - - 46,944
Money Market Funds 23,718 20,033 - - 3,685
Mortgage-Backed Securities 21,865 21,865 - - -
Corporate Bonds 2 - - - 2
Total $ 755,074 $ 440,077 $ 233,282 $ 31,084 $ 50,631

Custodial Credit Risk-Bank Deposits (amounts in thousands):
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, 2008, $235,562 of the bank balance of the Primary Government of $238,435 was exposed to custodial credit risk as follows:

Uninsured and uncollateralized $ 212,427
Uninsured and collateral held by trust department of
either the pledging bank or another bank not in the
name of the State 23,135
Total $ 235,562

Component Units
The Connecticut Housing Finance Authority (CHFA) and the Connecticut Health and Education Facilities Authority (CHEFA) reported the following investments and maturities as of 12-31-07 and 6-30-08, respectively (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 $ 2,030 $ - $ - $ - $ 2,030
Corporate Finance Bonds 7,810 2,157 5,653 - -
Corporate Notes 4,104 2,755 - - 1,349
Federated Funds 14,962 14,962 - - -
Fidelity Tax Exempt Fund 9,164 9,164 - - -
GNMA Program Assets 950,612 - - - 950,612
Guaranteed Investment Contracts 434,350 177,413 256,937 - -
Investment Agreements 1,148 - 1,148 - -
Mortgage Backed Securities 3,250 - 219 746 2,285
Repurchase Agreements 2,872 - - - 2,872
U.S. Government Securities 789 - - - 789
Structured Securities 516 - - - 516
Money Market Funds 696,633 696,633 - - -
Municipal Bonds 1,868 - - - 1,868
Certificate of Deposits 3,000 3,000 - - -
Total $2,133,108 $ 906,084 $ 263,957 $ 746 $ 962,321

The CHFA and the CHEFA own 47.1 percent and 52.9 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 Statutes 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.

CHFA's and CHEFA's investments were rated as of 12-31-07 and 6-30-08, respectively, as follows (amounts in thousands):

Component Units
Fair Quality Ratings
Investment Type Value AAA AA A BBB D Unrated
Collateralized Mortgage Obligations $ 2,030 $ 368 $ 1,662 $ - $ - $ - $ -
Corporate Finance Bonds 7,810 - - 2,157 5,653 - -
Corporate Notes 4,104 - - 2,755 1,349 - -
Federated Funds 14,962 - - - - - 14,962
Fidelity Tax Exempt Fund 9,164 - - - - - 9,164
GNMA Assets 950,612 - - - - - 950,612
Guaranteed Investment Contracts 434,350 532 256,405 177,413 - - -
Investment Agreements 1,148 - - - - - 1,148
Mortgage Backed Securities 3,250 388 - - - - 2,862
Repurchase Agreements 2,872 - - - - - 2,872
Structured Securities 516 - - - - 516 -
Money Market Funds 696,633 696,633 - - - - -
Municipal Bonds 1,868 1,868 - - - - -
Certificate of Deposits 3,000 - - - - - 3,000
Total $ 2,132,319 $ 699,789 $ 258,067 $ 182,325 $ 7,002 $ 516 $ 984,620

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, 2007, 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 Morgan Stanley and Trinity 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 borrows failed to return the loaned securities or pay distributions thereon. As of June 30, 2008, the funds had no credit exposure to the borrowers, because the value of collateral held and the market value securities on loan were $3,380.7 million and $3,276.2 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 42.9 days; the average duration of the loans was unknown, although it is assumed to remain at one day.