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.