South Carolina State Treasurer’s Office

1. South Carolina State Treasurer’s Office Surviving the Credit Crunch with LGIP GFOA Conference May 3, 2010

2. South Carolina State Treasurer’s Office Agenda • STO Investment Management • Local Government Investment Options • Local Government Investment Management • Local Government Investment Pool (LGIP) • Questions & Answers

3. South Carolina State Treasurer’s Office STO Investment Management • Portfolio Management • Manages 16 distinct investment portfolio’s for the state of South Carolina • Total funds managed over $ 9 billion • Custodial services for over $32 billion • Established relationships with broker/dealers

4. South Carolina State Treasurer’s Office Local Government Investment Options

5. South Carolina State Treasurer’s Office Local Government Investment Options • Authorized Investments (Section 6-5-10) • US Treasury Securities • Direct obligations of the federal government of the U.S. • Regarded as having the lowest credit risk • Federal Agency Securities • Explicit full faith & credit of the U.S. government: • Government National Mortgage Association (GNMA) • Small Business Administration (SBA) • Implicit guarantee of the U.S. government; issued or guaranteed by a federal agency or other government sponsored entity (GSE) acting under federal authority: • Fannie Mae (FNMA) • Freddie Mac (FHLMC) • Federal Home Loan Banks (FHLB) • Federal Farm Credit System (FFCB)

6. South Carolina State Treasurer’s Office Local Government Investment Options • Authorized Investments (Section 6-5-10) cont. • Municipal Securities • Issued by states, counties, cities and other political subdivisions and authorities. Most are tax exempt from federal income tax, but not all. • Certificates of Deposit • Must be fully collateralized or insured by the FDIC. • Repurchase Agreements • Buying a security from a dealer/bank with an agreement to buy the security back at a mutually agreed upon time and price. The repurchase price typically exceeds the sale price, representing the return on the transaction. • Money Market Mutual Funds • Invested in short term debt obligations (one day to one year in maturity). Must be invested in obligations of the U.S. (guaranteed by the U.S), Agencies (GSE), obligations of the state of South Carolina (or its political units), or collateralized Repurchase Agreements. The Fund must maintain a daily Net Asset Value of $1. No load open-end or closed-end management type investment companies or investment trusts, where investment is made by bank, trust company, savings & loan institution, or other financial institution when acting as trustee or agent for a bond or other debt issue of that local government unit, political subdivision, or county treasurer.

7. South Carolina State Treasurer’s Office Local Government Investment Management

8. South Carolina State Treasurer’s Office Local Government Investment Management • Portfolio Management • Investment Objectives: • Preservation of Capital – Only the highest investment grade securities are purchased. (Governments & Agencies, and securities rated at least investment grade by two or more national ratings services).“The return of principal is just as important as the return on principal” • – Grady Patterson • Maintenance of adequate liquidity – Ability to meet current and future funding needs. Liquidity not only relates to cash and maturity time of investments (laddered maturities), but also to market availability. Undersized, or oddly structured securities are less desirable from an investment standpoint. • Obtaining a reasonable return - finding the best return on investments without breaching portfolio parameters (chasing risk).

9. South Carolina State Treasurer’s Office Local Government Investment Management • Identifying Risks to Local Governments • Credit Risk • Interest Rate Risk • Maturity/Extension Risk “For every big wave, there is an undertow”

10. South Carolina State Treasurer’s Office Local Government Investment Management • Credit Risk = probability of default • Possible to lose principal and interest in case of default. • To avoid high credit risk, invest principally in higher rated credits, Treasuries and Agencies. Chasing yield can lead to poor portfolio quality.

11. South Carolina State Treasurer’s Office Local Government Investment Management • Interest Rate Risk = anticipated changes to the level of interest rates (current market anticipates rising rates in the future). • Rising interest rates hurt fixed rate security market values. • Falling interest rates mean lower income on floating rate securities.

12. South Carolina State Treasurer’s Office Local Government Investment Management • Extension Risk = duration of investment extends more than anticipated • Duration on investments with call options can extend dramatically, and tying up funds longer than expected. A rising rate environment can mean call options will not be exercised, and investments will extend to maturity date. • As investments extend in duration, this also leads to more interest rate risk.

13. South Carolina State Treasurer’s Office Local Government Investment Pool (LGIP)

14. South Carolina State Treasurer’s Office Local Government Investment Pool • LGIP Features • Created in 1983 by General Assembly • Participation units valued at $1.00 • Interest earnings accrued daily and distributed at the end of each month • Account information available in real time basis on secured website (IPAS) • Access to transactions and reports on IPAS • Minimal administrative fee (built into the daily rate)

15. South Carolina State Treasurer’s Office Local Government Investment Pool • LGIP Authorized Investments (Section 11-9-660) • US Treasury Securities • Federal Agency Securities • US Corporate Debt • Certificates of Deposit • Repurchase Agreements

16. South Carolina State Treasurer’s Office Local Government Investment Pool • Eligible Participants in LGIP • Counties • Municipalities • School Districts • Special Purpose Districts • Other Political Subdivisions

17. South Carolina State Treasurer’s Office Local Government Investment Pool • Current LGIP Statistics (as of 3/31/10) • 206 Entities participating • 558 total accounts from the 206 entities • 72 Municipalities • 42 School Districts • 24 Country Treasurers • 68 Special Purpose Districts • $2.74 Billion in pool County Treasurer Participation

18. South Carolina State Treasurer’s Office Local Government Investment Pool • Rate Options • Daily Rate – rate varies and accrues daily with interest credited at the end of the month • Fixed Rate – rate is fixed for a specified term at the option of the local government

19. South Carolina State Treasurer’s Office Local Government Investment Pool • Average Monthly Rates

20. South Carolina State Treasurer’s Office Local Government Investment Pool • LGIP Rates vs. Repo Rates (prior 12 Months)

21. South Carolina State Treasurer’s Office Local Government Investment Pool • Month Ending Balances in LGIP Pool • (prior 12 Months) • March 2010 $2,740,947,242 • February 2010 $3,038,506,786 • January 2010 $2,990,292,570 • December 2009 $2,411,510,116 • November 2009 $2,150,503,420 • October 2009 $2,186,899,943 • September 2009 $2,312,054,008 • August 2009 $2,403,093,356 • July 2009 $2,422,601,499 • June 2009 $2,547,888,185 • May 2009 $2,728,690,902 • April 2009 $2,762,231,642

22. South Carolina State Treasurer’s Office Local Government Investment Pool • Credit Quality

23. South Carolina State Treasurer’s Office Local Government Investment Pool • LGIP Benefits – IPAS System • IPAS = Internet Participant Access System • Allows participants to access their LGIP accounts via a secure website • Enables authorized users to process transactions, view account information, and print statements • Security allows users to have full deposit/withdrawal rights, or view only • Notice banner feature – allows STO to notify entity when monthly statements are available, as well as other pertinent information • If the internet is down, call or fax deposit/withdrawal form to STO for processing

24. South Carolina State Treasurer’s Office Local Government Investment Pool • More LGIP Information • Visit http://www.treasurer.sc.gov/divisions/invest/default.htm • LGIP Consent Form • LGIP Application Form • LGIP Procedures Manual • LGIP Funds Transaction Form

25. South Carolina State Treasurer’s Office Contact Information • Portfolio Managers • Shakun Tahiliani • Sr. Assistant State Treasurer • (803) 734-2641 • Shakun.tahiliani@sto.sc.gov • Mike McDermott • Program Manager of Investments • (803) 734-2106 • Mike.mcdermott@sto.sc.gov • Administrators • Jeanette Barlow • Fiscal Analyst • (803) 734-2661 • Jeanette.barlow@sto.sc.gov • Vernon Jones • Fiscal Analyst • (803) 734-2643 • Vernon.jones@sto.sc.gov • Investment Operations • Doris Hoffman • Assistant State Treasurer • (803) 734-2670 • Doris.hoffman@sto.sc.gov For more information on LGIP participation, please visit the State Treasurer’s website: http://www.treasurer.sc.gov/divisions/invest/

26. South Carolina State Treasurer’s Office Questions ?