Surviving the Credit Crunch with LGIP GFOA Conference May 3,

Agenda STO Investment Management Local Government Investment Options Local Government Investment Management Local Government Investment Pool (LGIP) Questions & Answers 2

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 3

Local Government Investment Options 4

Local Government Investment Options Authorized Investments (Section ) 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) 5

Local Government Investment Options Authorized Investments (Section ) 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. 6

Local Government Investment Management 7

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). 8

Identifying Risks to Local Governments Credit Risk Interest Rate Risk Maturity/Extension Risk 9 “For every big wave, there is an undertow” 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. 10 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. 11 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. 12 Local Government Investment Management

Local Government Investment Pool (LGIP) 13

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) 14

Local Government Investment Pool LGIP Authorized Investments (Section ) US Treasury Securities Federal Agency Securities US Corporate Debt Certificates of Deposit Repurchase Agreements 15

Local Government Investment Pool Eligible Participants in LGIP Counties Municipalities School Districts Special Purpose Districts Other Political Subdivisions 16

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 17

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 18

Local Government Investment Pool Average Monthly Rates January4.36%0.73%0.37% February3.39%0.58%0.35% March2.98%0.57%0.32% April2.54%0.53% May2.33%0.57% June2.34%0.69% July2.28%0.73% August2.26%0.65% September2.31%0.55% October1.80%0.46% November1.41%0.49% December0.93%0.68% 19

Local Government Investment Pool LGIP Rates vs. Repo Rates (prior 12 Months) 20

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 21

Local Government Investment Pool Credit Quality STATEMENT OF INVESTED ASSETS as of June 30, 2009 Quality Ratings (in 000's) Investment Type Fair ValueAAAAAABBBA-1+ U.S. Government U.S. Treasury $ 124,953,225 U.S. Government Agency $ 205,254,065 Corporate Corporate Bonds $ 626,671,656 $ 90,477 $ 54,597 $ 451,240 $ 30,357 Corporate Asset Backed $ 49,027,630 $ 5,910 $ 43,118 Private Placement $ 50,814,553 $ 562 $ 30,018 $ 20,235 Short Term Investments Commercial Paper $ 673,380,559 $ 673,381 Repurchase Agreements $ 858,740,830 $ 858,741 Total Invested Assets $ 2,588,842,518 $ 96,949 $ 84,615 $ 471,475 $ 30,357 $ 1,575,240 ** Data from audited financial statements for period ending June 30,

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 23

Local Government Investment Pool More LGIP Information Visit LGIP Consent Form LGIP Application Form LGIP Procedures Manual LGIP Funds Transaction Form 24

Contact Information Portfolio Managers Shakun Tahiliani Sr. Assistant State Treasurer (803) Mike McDermott Program Manager of Investments (803) Administrators Jeanette Barlow Fiscal Analyst (803) Vernon Jones Fiscal Analyst (803) Investment Operations Doris Hoffman Assistant State Treasurer (803) For more information on LGIP participation, please visit the State Treasurer’s website: 25

Questions ? 26