the florida local government investment pool best practices for ...

1. The Florida Local Government Investment Pool Best Practices for Today and Tomorrow Ash Williams Executive Director and CIO Florida SBA Amy Michaliszyn Senior Vice President Federated Securities Corp. June 2, 2009

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5. 5 Stringent Protections at Multiple Levels

6. 6 Investment Policy with Clarity of Objective The Local Government Surplus Funds Trust Fund was created by an Act of the Florida Legislature effective October 1, 1977 (Chapter 218, Part IV, Florida Statutes) The primary investment objectives for the LGIP, in priority order, are safety, liquidity and competitive returns with minimization of risks Federated’s objectives in managing cash are threefold: to preserve principal, the foundation of financial stability, to maintain daily liquidity so that clients can meet their cash flow obligations, and, lastly, to offer investors a competitive yield. We are highly regarded within the financial services industry for our superior credit analysis seeking to optimize performance without compromising liquidity and stability. Federated’s objectives in managing cash are threefold: to preserve principal, the foundation of financial stability, to maintain daily liquidity so that clients can meet their cash flow obligations, and, lastly, to offer investors a competitive yield. We are highly regarded within the financial services industry for our superior credit analysis seeking to optimize performance without compromising liquidity and stability.

7. 7 Stringent Protections at Multiple Levels

8. 8 Money Market Investment Management Team

9. 9 Stringent Credit Review Process

10. 10 Federated Rating System

11. 11 Rule 2a-7: Risk Control Provisions Every security acquired by a money fund must satisfy five general risk control provisions, which are intended to limit any deviation between a money fund’s amortized cost value and its market value: The security must be U.S. dollar denominated The security must have a maturity of 397 days or less, and acquisition of the security cannot cause the dollar weighted average maturity of the money fund’s portfolio to exceed 90 days The security must present minimal credit risks The security must be an “eligible security” Acquisition of the security cannot violate the diversification requirements of Rule 2a-7

12. 12 Minimal Credit Risks The SEC indicates that “minimal credit risk” may not be based solely on the rating assigned to the portfolio security by an NRSRO The SEC indicated that the minimal credit risk determination should be “based upon an analysis of the issuer’s capacity to repay its short-term debt” cash flow analysis assessment of the issuer’s ability to react to future events, including a review of the issuer’s competitive position, cost structure and capital intensiveness assessment of the issuer’s liquidity, including bank lines of credit and alternative sources of liquidity to support its commercial paper “Worst case scenario” evaluation of the issuer’s ability to repay its short-term debt from cash sources or asset liquidations in the event that the issuer’s back-up credit facilities are unavailable

13. 13 Eligible Securities

14. 14 S&P AAAm Rating: Even More Stringent Controls 60 day weighted average maturity At least 50% of portfolio rated A-1+; the remainder no less than A-1 Weekly surveillance What does it mean to have AAAm rating? Standard & Poor’s issued an AAAm rating on LGIP A in late December. This is the highest rating category available for a government pool fund. According to S&P, “The AAAm rating on LGIP A is based on our analysis of the fund’s credit quality, market price exposure, and management. The rating signifies extremely strong capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks.” Further, Pool A stacks up well against other similar funds, with a 30-day yield of 4.76%. What does it mean to have AAAm rating? Standard & Poor’s issued an AAAm rating on LGIP A in late December. This is the highest rating category available for a government pool fund. According to S&P, “The AAAm rating on LGIP A is based on our analysis of the fund’s credit quality, market price exposure, and management. The rating signifies extremely strong capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks.” Further, Pool A stacks up well against other similar funds, with a 30-day yield of 4.76%.

15. 15 LGIP Portfolio Construction Dollar-weighted average maturity not greater than 60 days Final maturity of an individual security not greater than 397 days 5% individual issuer limit 10% limit on illiquid securities/ “limited liquidity securities” At least 50% of the LGIP’s securities must be rated A1+; remainder invested in A-1 Weekly reporting to Standard & Poor’s No derivatives

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18. 18 Fund B Holdings*

19. 19 Fund B: Security Description Axon and Issuer Entity LLC (Ottimo) Each one SIV Collateralized by many other bonds Florida East and Florida West Asset-backed securities held by multiple clients of the SBA Collateral seized from KKR Atlantic/Pacific default East = 33 bonds West = 43 bonds Dreyfus Money Fund Temporary repository for interest and principal payments

20. 20 Fund B: Security Composition by Sector (%)

21. 21 Fund B: Issues Impacting Recovery Values Uncertainty regarding: Potential expansion of TALF to include residential mortgage-backed bonds Further extent of home price declines Success of government and private initiatives to mitigate foreclosure problem (loan modifications) Where will unemployment rate peak? Impact of potential rating agency downgrades of CMBS on CMBS CDO market Can AMBAC and other monoline issuers fulfill obligation to make up any principal losses? Loss modeling assumptions Prepayment speeds Severities Roll rates

22. 22 Stringent Protections at Multiple Levels

23. 23 Portfolio Compliance in Real Time

24. 24 Compliance Checklist - LGIP The answer is a resounding “no.” Here’s why… New legislation (SB 2422) signed into law by Governor Crist on May 28, 2008 offers fund participants unprecedented protections. It also positions the Florida Local Government Investment Pool to set a new standard among the nation’s LGIPs for superior governance, quality investment management, and thorough, frequent reporting. This legislation enforces transparency and sets standards of engagement for all parties -- the LGIP’s Trustees, the SBA, Federated Investors, and LGIP participants. The answer is a resounding “no.” Here’s why… New legislation (SB 2422) signed into law by Governor Crist on May 28, 2008 offers fund participants unprecedented protections. It also positions the Florida Local Government Investment Pool to set a new standard among the nation’s LGIPs for superior governance, quality investment management, and thorough, frequent reporting. This legislation enforces transparency and sets standards of engagement for all parties -- the LGIP’s Trustees, the SBA, Federated Investors, and LGIP participants.

25. 25 Compliance Checklist – Fund B The answer is a resounding “no.” Here’s why… New legislation (SB 2422) signed into law by Governor Crist on May 28, 2008 offers fund participants unprecedented protections. It also positions the Florida Local Government Investment Pool to set a new standard among the nation’s LGIPs for superior governance, quality investment management, and thorough, frequent reporting. This legislation enforces transparency and sets standards of engagement for all parties -- the LGIP’s Trustees, the SBA, Federated Investors, and LGIP participants. The answer is a resounding “no.” Here’s why… New legislation (SB 2422) signed into law by Governor Crist on May 28, 2008 offers fund participants unprecedented protections. It also positions the Florida Local Government Investment Pool to set a new standard among the nation’s LGIPs for superior governance, quality investment management, and thorough, frequent reporting. This legislation enforces transparency and sets standards of engagement for all parties -- the LGIP’s Trustees, the SBA, Federated Investors, and LGIP participants.

26. 26 Further Protection Through Legislation; SB 2422 Highlights Clarified investment objective Annual best practice certification Participant advisory council Mandatory enrollment materials Written investment policy Ethics commitment Internal controls Comprehensive frequent reporting Annual financial audit Best Practices – gain sharing and penalties The answer is a resounding “no.” Here’s why… New legislation (SB 2422) signed into law by Governor Crist on May 28, 2008 offers fund participants unprecedented protections. It also positions the Florida Local Government Investment Pool to set a new standard among the nation’s LGIPs for superior governance, quality investment management, and thorough, frequent reporting. This legislation enforces transparency and sets standards of engagement for all parties -- the LGIP’s Trustees, the SBA, Federated Investors, and LGIP participants. The answer is a resounding “no.” Here’s why… New legislation (SB 2422) signed into law by Governor Crist on May 28, 2008 offers fund participants unprecedented protections. It also positions the Florida Local Government Investment Pool to set a new standard among the nation’s LGIPs for superior governance, quality investment management, and thorough, frequent reporting. This legislation enforces transparency and sets standards of engagement for all parties -- the LGIP’s Trustees, the SBA, Federated Investors, and LGIP participants.

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30. 30 Participant Local Government Advisory Council   MaryEllen Elia, Chair    Patsy Heffner, Vice Chair    Roger B. Wishner    Karen Nicolai    John Mark Peterson    Daniel Wolfson

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32. 32 Federated Liquidity Management More Than $409 Billion in Total Assets Under Management (as of 3/31/09) Edward Jones Money Market Fund makes up more than 18 billion of the Government Money Market pie pieceEdward Jones Money Market Fund makes up more than 18 billion of the Government Money Market pie piece

33. 33 Florida East/Florida West PROS Primarily 2004-2006 loans Overcollateralization AMBAC guarantee on 9 bonds Declining interest rates lower rate shock for option ARM borrowers CONS Alt-A borrowers Loan concentration in CA and FL Weakening economy and rising unemployment rate Some negative amortization loans

34. 34 Issuer Entity LLC (Ottimo) PROS Declining interest rates lower rate shock for ARM borrowers Current pay, senior bonds CONS Alt-A borrowers Primarily 2006-2007 Loans Weakening economy and rising unemployment rate Loan concentration in CA and FL

35. 35 Axon PROS Most direct commercial mortgage-backed bonds very well protected from losses (9.6%) Small Business Administration Loans/ABS liquidity supported by government TALF program Capital notes provide 10.5% support to senior notes CONS Very illiquid CDOs (31.3%) Subprime mortgage exposure (10.3%) CMBS CDOs at risk for event of default if underlying CMBS downgraded

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