Office of Financial Management Overview of Investment Pools

Office of Financial Management The Office of Financial Management is a component of the Office of the Controller within the Finance and Administration Cabinet OFM has three components: Investments: Manages $3 to $4 billion of investments for the state and its agencies with a focus on preservation of principal and adequate liquidity. Debt: Manages all debt issuances for the Commonwealth providing financing for major projects or purchase. Accounting: Provides support and reporting for OFM and portfolio participants.

Who is responsible for investment oversight? The State Investment Commission oversees investments, members are: Governor (Chairman) State Treasurer (Vice Chairman) Secretary, Finance and Administration Cabinet 2 Gubernatorial Appointees:      Fred Brashear, President & CEO, Hyden Citizens Bank, Hyden      William Fallon, President & CEO, The Bankers’ Bank of KY, Frankfort  The Office of Financial Management is staff to the State Investment Commission. The following Statutes and Regulations apply: KRS 42.500, 200 KAR 14.011, 14.081, 14.091, and 14.200 “Investments have a strong supervisory team”

Who are the Investment Staff? Brian Caldwell Portfolio Manager, 18 years investment experience, 3 years with the Commonwealth Kim Bechtel Portfolio Manager, 16 years investment experience with the Commonwealth Dwight Price Cash Manager, 30 years investment experience, 25 years with the Commonwealth “Staff has over 50 years of experience”

What are the Investment Objectives? Preservation of principal Maintenance of adequate liquidity to meet cash needs of 3,000+ accounts across Commonwealth Maximization of return “Objectives focused on safety, liquidity & return”

Different Investment Pools There are three unique investment pools that operate much like mutual funds. Intermediate Term Pool: Accounts with a longer time horizon (about a year) and able to withstand day to day market volatility with the reward of higher income. Limited Term Pool: Accounts that have immediate cash needs and not able to take market risk. Very much like a checking or savings account. Short Term Pool: General Fund and related accounts only. “Each pool is managed for specific needs”

How is the Intermediate Term Pool managed? Managed as a short term bond mutual fund As of January, market value of $2.5 billion, yielding 1.14% Duration of about 1 year with average credit quality of Aaa Daily valuation with monthly distributions of earnings or losses

What investments are permitted (Intermediate)? U.S. Treasuries and Agencies no percentage limit maturity less than seven years Mortgage Backed Securities 25% exposure limit average life of less than four years at time of purchase highest rating by NRSRO Asset Backed Securities 20% limit average life of four years or less Corporate Debt 35% limit or $25 million per issuer including money market instruments maturity not longer than five years rated in one of the three highest categories by NRSRO Money Market Securities Commercial Paper Certificate of Deposit Bankers’ Acceptances Highest short-term rating by NRSRO Maturities limited to 180 days for bankers' acceptance and 270 for all other money market securities Repurchase Agreements Collateralized at a minimum of 102% with Treasuries, Agencies and 105% with Agency Mortgage Backed obligations Maximum maturity of one (1) year Municipal maturity not to exceed five years rated in one of the three highest categories by NRSRO Maturity and credit restriction shall be waived for obligations issued by the Commonwealth of Kentucky Money Market Mutual Fund 10% limit to any individual fund “Options are short duration and high quality”

How has the Intermediate Term Pool performed? Returns as of January 2017 Returns less than a year are unannualized “Solid returns with limited variability”

How do changes in interest rates affect performance? Consider a current 5 year US Treasury Note. Change in Interest Rates (Basis Points) Bond Yield (Percent) Bond Price (USD) Change in Price + 200 3.50 91.14 -8.86 + 100 2.50 95.45 -4.55 1.50 100.00 0.00 100 0.50 104.79 4.79 - 200 -0.50 109.84 9.84 In general, when interest rates rise, the prices of bonds fall. The implication for the portfolio is that rising rates negatively impact short-term performance but increase future income due to higher portfolio yield.

KCTCS Accounts

How do I find out more? Online The website at the link below has a wealth of information including meeting minutes, monthly reports, investment policies and more. Here is the link: http://finance.ky.gov/services/ofm/Pages/StateInvestmentCommission.aspx Directly Feel free to reach out to us with any questions: Ryan Barrow, 502-564-2924, ryan.barrow@ky.gov Kim Bechtel, 502-5654-2924, kim.bechtel@ky.gov Brian Caldwell, 502-564-2924, brian.caldwell@ky.gov