Notes to the Financial Statements

June 30, 2012

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 twelve 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, 2012, 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 $20,261 $20,261 $-
Federal Agency Securities 1,788,811 1,758,814 29,997
US Gov. Guaranteed Securities 141,768 141,768 -
Government Money Market Funds 16,608 16,608 -
Repurchase Agreements 1,544,493 1,544,493 -
Money Market Funds 1 1 -
Total Investments $3,511,942 $3,481,945 $29,997

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, 2012, the weighted average maturity of the STIF was 33 days. Additionally, STIF is allowed by policy to invest in floating-rate securities, and investments in such securities with maturities up to two years are 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, 2012, the amount of STIF's investments in variable-rate securities was $974 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, 2012, 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 Unrated
Floating Rate Notes $20,261 $- $- $- $20,261
Federal Agency Securities 1,788,811 - 1,788,811 - -
U.S. Government Guaranteed & Insured Securities 141,768 - 111,768 - 30,000
Government Money Market Funds 16,608 16,608 - - -
Repurchase Agreements 1,544,493 - - 1,544,493 -
Bank Commercial Paper 1 - - 1 -
Total Investments $3,511,942 $16,608 $1,900,579 $1,544,494 $50,261


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, 2012, 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
Merrill Lynch $900,000
RBS Securities Inc. $644,493
Federal Home Loan Bank $630,586
Federal Farm Credit $448,493
Fannie Mae $402,290
Freddie Mac $307,441


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, 2012, $1,379,250 of the bank balance of STIF's deposits of $1,380,000 was exposed to custodial credit risk as follows:

Uninsured and uncollateralized $1,291,300
Uninsured and collateral held by trust department of either the pledging bank or another bank not in the name of the State 87,950
Total $1,379,250

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's 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, 2012, 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
Asset Backed Securities $3,319 $2,815 $504
Money Market Government Fund 1 1 -
Total Investments $3,320 $2,816 $504

Interest Rate Risk
STIF Plus's 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, 2012, the weighted average maturity of STIF Plus was 86 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, 2012, STIF Plus's investment in variable-rate securities was $2.8 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, 2012, STIF Plus's investments were rated by Standard and Poor's as follows (amounts in thousands):

Short-Term Plus Investment Fund
Quality Rating
Fair
Investment Type Value AAA A CCC
Asset Backed Securities $3,319 $1,568 $1,064 $687
Money Market Government Fund 1 - 1 -
Total $3,320 $1,568 $1,065 $687

Concentration of Credit Risk
STIF Plus's policy for managing this risk is to limit the amount it may invest in any single corporate entity or federal agency to 5 percent and 15 percent, respectively, at the time of purchase. As of June 30, 2012, 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
ARSI 2004 $1,064
GRANM 2007 $1,063
RAMC 2005 $504
INDB 2006 $300
CITI MORT LOAN TR $284

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, 2012, 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 $100,659 $664 $23,875,440
Other Investments 12,428 51,966 853,747
Total Investments-Current $113,087 $52,630 $24,729,187

As of June 30, 2012, 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 $744,557 $461,915 $2,467 $20,657 $259,518
Asset Backed Securities 110,750 3,708 86,170 18,649 2,223
Government Securities 2,818,433 117,734 1,208,487 676,882 815,330
Government Agency Securities 893,470 3,883 39,971 36,210 813,406
Mortgage Backed Securities 206,448 1,745 31,536 10,485 162,682
Corporate Debt 1,745,459 74,877 668,053 736,793 265,736
Convertible Debt 32,495 491 12,221 8,686 11,097
Mutual Fund 336,487 - - - 336,487
Total Debt Investments 6,888,099 $664,353 $2,048,905 $1,508,362 $2,666,479
Common Stock 11,138,851
Preferred Stock 55,941
Real Estate Investment Trust 208,774
Mutual Fund 1,317,906
Limited Liability Corporation 1,115
Trusts 992
Limited Partnerships 4,465,662
Total Investments $24,077,340

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 Barclays 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, 2012, 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 $1,547,883 $20,400 $76,200 $269,081 $858,154 $126,653 $197,395 $- $-
Aa 262,448 11,000 10,439 112,460 - 14,239 114,310 - -
A 437,705 - 2,220 184,381 - 8,656 242,448 - -
Baa 786,692 - 1,056 332,305 - 1,420 450,803 1,108 -
Ba 251,361 - - 84,120 - 2,429 160,538 4,274 -
B 388,175 - - 51,495 - - 334,686 1,994 -
Caa 115,986 - - 1,568 - 1,397 113,021 - -
Ca 5,224 - - 207 - - 5,017 - -
MIG 9,874 - - 9,874 - - - - -
Prime 1 33,515 33,515 - - - - - - -
Government fixed not rated 1,808,257 - - 1,772,941 35,316 - - - -
Not Rated 1,240,979 679,644 20,836 - - 51,652 127,241 25,119 336,487
$6,888,099 $744,559 $110,751 $2,818,432 $893,470 $206,446 $1,745,459 $32,495 $336,487

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, 2012, CIFS' foreign deposits and investments were as follows (amounts in thousands):

Combined Investment Funds
Fixed Income Securities Equities
Foreign Currency Total Cash Cash Equiv-
alent
Colla-
teral
Government Securities Mutual Funds Corporate Debt Convertible Securities Asset Backed Common Stock Preferred Stock Real Estate Investment Trust
Argentine Peso $1,370,000 $292,639 $- $1,077,361 $- $- $- $- $- $- $-
Australian Dollar 384,964,578 1,566,626 - 13,141,025 - 68,472,795 - - 281,119,688 - 20,664,444
Brazilian Real 209,827,415 2,685,734 - 36,096,864 - 7,261,047 134,728 - 139,993,856 23,655,186 -
Canadian Dollar 77,924,664 467,688 - 3,670,783 - 1,140,976 - - 72,645,217 - -
Chilean Peso 9,053,766 80,255 - 3,476,757 - - - - 5,496,754 - -
China Yuan Renminbi 408,914 31,807 - 377,107 - - - - - - -
Colombian Peso 17,293,591 - - 9,874,878 - 6,029,149 - 1,389,564 - - -
Czech Koruna 9,076,710 105,628 - - - - - - 8,971,082 - -
Danish Krone 48,749,044 640,681 - - - - - - 48,108,363 - -
Egyptian Pound 10,880,831 148,714 - 143,129 - - - - 10,588,988 - -
Euro Currency 1,321,367,204 2,907,214 (28,726) 117,127,305 - 24,865,028 474,675 235,200 1,149,102,303 21,521,733 5,162,472
Ghana Cedi 540,438 - - 540,438 - - - - - - -
Hong Hong Dollar 507,647,091 1,893,249 - - - - - - 504,317,488 - 1,436,354
Hungarian Fornit 31,142,348 3,142,151 - 13,593,502 - - - - 14,406,695 - -
Iceland Krona 1,911 1,911 - - - - - - - - -
Indian Rupee (3,153,551) - - - - 3,468,720 - (6,622,271) - - -
Indonesian Rupiah 91,149,176 358,739 - 6,676,958 - 5,290,991 - - 78,822,488 - -
Israeli Shekel 11,282,977 168,246 - - - - - - 11,114,731 - -
Japanese Yen 1,024,945,134 6,117,217 - 33,419,646 - - - - 980,747,545 - 4,660,726
Malaysian Ringgit 73,244,280 5,146,271 - 21,138,911 - - - - 46,959,098 - -
Mexican Peso 109,252,120 584,429 - 58,040,141 - 467,829 - - 50,159,721 - -
Moroccan Dirham 581,671 50,171 - - - - - - 531,500 - -
New Russian Rubel 10,981,567 111,958 - 4,049,160 - 6,820,449 - - - - -
New Taiwan Dollar 69,126,524 593,672 - - - - - (29,136) 68,561,988 - -
New Zealand Dollar 68,229,826 238,780 - 53,036,856 - 3,497,739 - - 11,361,703 - 94,748
Nigerian Naira 1,349,440 - - 536,313 - 813,127 - - - - -
Norwegian Krone 38,946,535 399,054 - - - - - - 38,547,481 - -
Peruvian Nouveau Sol 5,350,951 248,277 - 5,102,674 - - - - - - -
Philippine Peso 43,388,672 296,239 - 550,749 - - - - 42,541,684 - -
Polish Zloty 68,170,697 92,907 - 45,281,501 - - - - 22,796,289 - -
Pound Sterling 922,305,802 925,907 - 15,534,234 458,772 1,758,223 - - 897,009,962 - 6,618,704
Singapore Dollar 85,145,957 826,306 - - - - - - 81,527,832 - 2,791,819
South African Rand 124,875,292 4,651,039 - 20,960,117 - 851,163 - - 98,412,973 - -
South Korean Won 394,316,407 485,154 - - - - - (16,266) 386,784,962 7,062,557 -
Sri Lanka Rupee 408,987 - - - - - - - 408,987 - -
Swedish Krona 88,046,121 224,373 - - - - - - 87,821,748 - -
Swiss Franc 299,639,011 3,628,421 - - - - - - 296,010,590 - -
Thailand Baht 108,729,540 281,384 - 7,926,632 - - - - 100,521,524 - -
Turkish Lira 98,456,225 323,051 - 17,274,157 - - - - 80,859,017 - -
Ukraine Hryvna 882,476 - - - - 882,476 - - - - -
Uruguayan Peso 6,792,945 - - 6,792,945 - - - - - - -
$6,372,693,287 $39,715,892 $(28,726) $495,440,143 $458,772 $131,619,712 $609,403 $(5,042,909) $5,616,252,257 $52,239,476 $41,429,267

Derivatives
As of June 30, 2012, the CIFS held the following derivative investments:

Derivative Investments Fair Value
Asset Backed Securities $110,750
Mortgage Backed Securities 63,418
Collateralized Mortgage Obligations 142,967
TBA's 198,353
Interest Only Securities 2,696
Options 148
Adjustable Rate Securities 602,249
Total $1,120,581

The CIFS invest in derivative investments for trading purposes and to enhance investment returns. The credit exposure resulting from these investments is limited to their fair value at year end.

The CIFS also invest in foreign currency contracts. Contracts to buy are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the CIFS' investments against currency fluctuations. Losses may arise from changes in the value of the foreign currency or failure of the counterparties to perform under the contracts' terms. As of June 30, 2012, the fair value of contracts to buy and contracts to sell was $3,820.1 million and $3,790.2 million, respectively.

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, 2012, the CIFS had deposits with a bank balance of $48.5 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, 2012, 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 $2,639 $2,639 $- $- $-
State Bonds 31,455 1,659 300 29,496 -
U.S. Government and Agency Securities 184,477 55,916 49,669 76,809 2,083
Guaranteed Investment Contracts 236,988 4,930 44,157 104,871 83,030
Money Market Funds 8,091 8,091 - - -
Total Debt Investments 463,650 $73,235 $94,126 $211,176 $85,113
Annuity Contracts 137,508
Endowment Pool 10,153
Limited Partnership 150
Total Investments $611,461

Credit Risk
As of June 30, 2012, other debt 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 $2,639 $- $2,639 $- $-
State Bonds 26,060 - 26,060 - -
U.S. Government Securities 75,809 69,925 - 5,884 -
Guaranteed Investment Contracts 236,988 6,529 39,459 191,000 -
Money Market Funds 8,091 - - - 8,091
Total $349,587 $76,454 $68,158 $196,884 $8,091

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, 2012, $3,870 of the bank balance of the Primary Government of $426,155 was exposed to custodial credit risk as follows:

Uninsured and uncollateralized $2,600
Uninsured and collateral held by trust department of
either the pledging bank or another bank not in the
name of the State 1,270
Total $3,870

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 12-31-11 and 6-30-12, respectively (amounts in thousands):

Major Component Units
Investment Maturities (in years)
Fair Less More
Investment Type Value Than 1 1-5 Than 10
Collateralized Mortgage Obligations $958 $- $- $958
Corporate Finance Bonds 5,023 5,023 - -
Federated Funds 741 741 - -
Fidelity Funds 16,103 16,103 - -
GNMA Program Assets 801,909 - - 801,909
Mortgage Backed Securities 1,643 - 152 1,491
Municipal Bonds 14,032 - - 14,032
U.S. Government and Agency Securities 1,938 1,000 - 938
Structured Securities 555 - - 555
Money Market Funds 577,954 577,954 - -
Total $1,420,856 $600,821 $152 $819,883

The CHFA and the CHEFA own 59.3 percent and 40.7 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. The Federated and Fidelity Funds are fully collateralized by obligations issued by the United States Government or its agencies. Mortgage Backed Securities are fully collateralized by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association, and Collateralized Mortgage Obligations are fully collateralized by 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 as follows: obligations issued or guaranteed by the U.S. Government, including the FDIC; qualified money market funds investing in short-term securities as permitted by the Authority's enabling legislation; the State's Short-Term Investment Fund (STIF) provided it maintains a "AAA" rating by Standard and Poor's; and qualified repurchase agreements secured by obligations issued or guaranteed by the U.S. Government.

CHFA's and CHEFA's investments were rated as of 12-31-11 and 6-30-12, respectively, as follows (amounts in thousands):

Component Units
Fair Quality Ratings
Investment Type Value BBB B D Unrated
Collateralized Mortgage Obligations $958 $- $958 $- $-
Corporate Finance Bonds 5,023 5,023 - - -
Federated Funds 741 - - - 741
Fidelity Funds 16,103 - - - 16,103
GNMA Assets 801,909 - - - 801,909
Mortgage Backed Securities 1,643 - - - 1,643
Municipal Bonds 14,032 - - - 14,032
Structured Securities 555 - - 555 -
Money Market Funds 577,954 - - - 577,954
Total $1,418,918 $5,023 $958 $555 $1,412,382

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, 2011, the Authority had no investments in any one issuer that represents 5 percent 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.

Security Lending Transactions
Certain of the Combined Investment Funds are permitted by State Statute to engage in security lending transactions to provide incremental returns to the funds. The funds' master custodian is authorized to lend available securities to authorized broker-dealers and banks subject to a form loan agreement.

During the year, the master custodian lent certain securities and received cash or other collateral as indicated on the Securities Lending Authorization Agreement. The master custodian did not have the ability to pledge or sell collateral securities received absent a borrower default. Borrowers were required to deliver collateral for each loan equal to at least 100 percent of the market value of the loaned securities.

According to the Agreement, the master custodian has an obligation to indemnify the funds in the event any borrower failed to return the loaned securities or pay distributions thereon. There were no such failures during the fiscal year that resulted in a declaration and notice of Default of the Borrower. During the fiscal year, the funds and the borrowers maintained the right to terminate all securities lending transactions upon notice. The cash collateral received on each loan was invested in an individual account known as the State of Connecticut Collateral Investment Trust. At year end, the funds had no credit exposure to borrowers because the value of the collateral held and the market value of securities on loan were $2,855.3 million and $2,817.6 million, respectively.

Under normal circumstances, the average duration of collateral investments is managed so that it will not exceed (a) 120 days or (b) the average duration of the loans by more than 45 days. If any of these limits is exceeded for any 3-day period, the Trustee shall take certain actions. At year end, the average duration of the collateral investments was 32.0 days; the average duration of the loans was unknown, although it is assumed to remain at 1 day.