HomeMy WebLinkAbout22 INVESTMENT OPT'S 09-15-97 "?NDA
NO.. 22
9'15-97
DATE'
September 10, 1997
inter-Com
TO: Willi_~m A. Huston, city Manager
FROM: G.W. Jeffries, City Treasurer
SUBJECT: INVESTMENT OPTIONS
RECOMMENDATION:
Authorize the Mayor to request the Orange County Board of Supervisors
to open the Treasurer's Investment Pool to outside local agencies.
FISCAL IMPACT:
Cost effective operationally and competitive return.
DiscussION:'.
.
.
·
You will recall my May. 7 letter concerning Investment Options. In
response to the Mayor's inquiry, I.suggested that the Orange County
Investment Pool. (OCIP) offered a safe, high quality, competitive
return option for modest deposits of Tustin City funds.
OCIP, thoroughly restructured and well-run,, is whOlly different as
both the Mayor and I (as members of the Orange County Treasurer's
Advis~y/Comm~tee) ~an attest.
G. W. Jef~i¢ ~'
city TreaSurer
.
Attachments
Gl./J :Agenda1. Sep
DATE:
May 7, 199?
inter-Com
..
TO:
FROM:
SUBJECT:
Honorable Mayor and Members of the City Council
G. W. Jeffries, Treasurer
INVESTMENT OPTION AND CONCERNS
As you may recall during the April 7 meeting, then Mayor Pro Tem
Thomas raised the question of the Orange County Treasurer's
Investment Pool (OCIP)as a possible investment vehicle. .
MY response was that on a business basis;-it Offered an appropriate-
highly rated depository and provided a good money market return.
I certainly would recommend its use, subject to certain operational
and policy considerations both here and at the County.
As members of the Treasurers' Advisory Committee, Mayor Thomas and
I both know that OCIP bears, no relation to its former self, now
performing as a high quality money market fund.
Before proceeding further with any.discussion, however, I wanted to
hear your individual questions and possible concerns regarding the
idea.
- _
In order to give you a comparative flavor, I have included for your
review a chart of questions typically raised concerning this kind
of investment, listing characteristics of four well-known funds.
(See Attached Chart)
Assume numbers are relatively comparable. Count one point for each
"yes" response and sums are as follow:
A = 7, B = 4, O = 3, D =-5.
A, which is OCIP, is at least competitive, if not the best, perhaps
more so than the others. The question then becomes why not'A or
why not OCIP. ''
The others, respectively, are L.A. County, California Pooled Money
Fund, and Institutional Liquid Asset Fund, managed by Goldman
Sachs.. I know all three of them, having run one, advised another,
and sold the third.
If you have questions or comments, please let me know.
· .
Page I of :~
COMPARATIVE ITEMS
Total Assets ($BIL)
Treasurer's Protection
Diversification
Securities all legal
Management Longevity (yrs).
History of Operation (yrs)
Voluntary Members
Weighted Average Maturity
(WAM/days) '
Rating
Outside Credit Bkgd
Mark-to-Market (NAV)
Expense Ratio (BP)
COmpetitive Return
A
yes
yes
yes
2O+
3O+
<5%
60-90
Yes
yes
yes
yes
yes
yes
yes
20+
30+
25%
120
no
no
no
yes
C
30
no
yes
yes
20+
20+
100%
200
no
no
no
yes
1-50
no
yes
no
,5 est
25
100%
45-60
no
yes
yes
15-40
yes
GI4J: I nvOpt 1; Hay
Page 2 of 2
DATE:
July' 21, 1997
Inter-Com
TO:
FROM'
SUBJECT:
Honorable Mayor and Members of the City Council
Donnie L. Smith, Audit Committee Chairman
AUDIT COMMITTEE RECOMMENDATION REGARDING THE
OP~NGE COUNTY INVESTMENT POOL (OCIP)
Reference: Maureen F. Gallogly and John Garner Joint Memorandum
Dated July 17, 1991
As you are no doUbt aware, the ~udit Committee foe some 'week~ has
been reviewing the possibility of recommending that the City begin
investing funds into the Orange County Investment Pool (OCIP), when
and if the BOard of Supervisors opens it to outside participants.
Two Audit Committee Members and the City Treasurer met With John
Moorlach's staff on June 16, 1997, for the purpose of reviewing the
current Pool structure. They were very impressed with the quality
of the Pool. Please refer to the attached referenced memorandum for
additional details.
Based upon this reView of the Orange County Investment Pool',.-the
high quality of the Pool and of its managing staff, the Audit
Committee unanimously recommends an allocation of uP to five percent
(5'%) to the pool at the discretion .of the City Treasurer when
voluntary participants are accepted.
The Audit Committee has recommended only five percent (5%) as an
initial allocation. However, downstream after the City Treasurer
has experienced satisfactory working relationships with OCIP, and
the rates remain competitive, the Audit Committee will again review
the possibility of recommending to the City Council an additional
five percent allocation to OCiP. The maximum allocation is ten
percent (10%).
The Audit Committee believes such a five percent (5%) allocation is
in the best cash management interests of our City, while at. the same
time aiding in the County's recovery effort through the Orange
County Investment Pool ' s acceptance by outside voluntary
participants.
Should you have any further questions or would like to discuss this
Audit Committee recommendation, please do not hesitate to contaCt me
at 714-838-3237.
Donnie L. Smith
Au4it Committee Chairman
DLS:ts
Attachment
cc:
William A. Huston, City Manager
G.' W..Jeffries, City Treasurer
Ronald'A.' NaUlt,~-Finance'Director .............
Lois.E. Jeffrey, City Attorney
Maureen F. Gallogly, Audit Committee Member
John Garner, Audit committee Member
Walter Sullens, Audit Committee Member
Sheldon Weiner, AUdit. Committee Member
Gt~J :OC[ P1 ~DLS
SE~T BY:
.7-97 ; 11'51 ;
U.S.
8384603;# 2/ 2
MEMOt~ANDLIM
to:
from:
re:
date:
Donnle Smith
Chairman - Tustin Audit Committee
Maureen F. Gallogly & John Garner
Orange County Pool
July 17, 1997
We, along with George Jeffrles, met with John Moorlach's staff on June 16th for the
purpose of reviewing the pool for possible investment 'by the City. We met with Daniel
Hempel, Assistant Treasurer, William Eberhardt Jr., Assistant Investment Officer and
Judith Jacobson, Investment Officer. Mr. Hempel indicated that several groups have been
in to ~'kick the tires" but no action has been taken regarding new investment in the pool.
We were quite impressed with the quality of the pool, the investment process the staff
goes through and the monthly report produced. We reviewed the May 1997 report and
their business plan dated February 25, t 997.
Highlights:
83% of the portfolio is invested in CD'S, Commercial Paper & Banker's Acceptances
which are highly liquid. The remainder is in U,S. Treasuries, Agencies and Medium term
notes. Money market funds represent 1% of the portfolio.
The monthly report includes a six month cash. availability report to insure the County can
pay it's bills and the portfolio is compared to it's Investment Policy guidelines.
The TreaSury Oversight Committee & Treasurer's Advisory Committee have
established. The latter is chaired by deft Thomas and Mr. d~fries is a member.
·
been
The rating firm Fitch Investors Service, L.P. has been retained to rate the Investment pools
and perform [he annual invesflnent policy compliance audit. The service is performed
quarterly.
CleaHy John Moorlach has done a terrific job of turning around and upgrading the
Treasurer's office. We believe that with the scrutiny of the two oversight committees, the
Board of Supervisors, Fitch Investors Service and the public, the City of Tusfin should
consider utilizing the fund. The returns on the P0ol have been good and the expense ratio
Iow. We recommend an allocation of no[ more than 10% of our funds be available for
investment in the fund should the Board of Supervisors permit.
·
Finance Department
City of Tustin
300 Centennial Way
Tustin, CA 92780
CITY OF ' TUSTIN
ST/~TEMENT OF INVESTMENT POLICY
Director
(714) 573-3061
Secretary
(714) 573-3060
Water Billing
(7~14) 573-3075
I · GENERAL.
FAX (714) 832-0825
PURPOSE-
This statement is intended to provide guidelines-for the investment
of the City's'temporary idle cash, and to outline the policies for
maximizing the efficiency of the city's Cash Management System.
The ultimate goal is to enhance the economic status of the City
while protecting its pooled cash. It is the intent of the City
Council that all deposit and investment activities authorized by
· this policy shall be at the sole discretion of the city Treasurer
as to selection and appropriateness.
SCOPE
It is intended that this policy cover all funds and investment
activities under the direct authority of the City.
OBJECTIVE
The city's Cash Management System is designed to monitor and
forecast expenditures and revenues, thus 'enabling the City to
invest funds to the fullest extent possible. The City investments
meet the criteria established for safety 'and availability. The
investment portfolio will be diversified to avoid· incurring
unreasonable risks regarding specific security types or individual
financial institutions.
POLICY
The city of Tustin operates its temporary pooled idle cash
investments under the prudent'man rule (civil Code Sec. 2261, et
seq. and Government Code Section 53600.3). The prudent man rule
states, in essence, that "in investing .... property for the benefit
of another, a trustee shall exercise the judgment and care, under
the circumstances then prevailing, which men of prudence,
discretion and intelligence exercise in the management of their own
affairs .... " This affords the City a broad spectrum of investment
opportunities so long as the investment is deemed prudent and
allowable under current legislation of the State of California
(Government Code Section 53600 et seq.) and the guidelines
established by the following prioritized criteria for selecting
investments:
1. Safety. It is the primary duty and responsibility of the
City, City Council, City Treasurer and Director of Finance'at all
times to protect, preserve and maintain intact the principal placed
in trust with the City on behalf of the citizens of the community.
z. Availability. An adequate percentage of the portfolio shall
be maintained in liquid, short-term securities which can be
converted to cash as necessary to meet disbursement requirements.
3.. Yield. Yield is to be a consideration only after the basic
requirements.._ ~ ..... of adequate safety and availability have been met.
-
Legal Investment Authority. Temporarily idle monies shall be
invested in accordance with State and local laws and regulations
and.this Statement of Investment Policy.
Statement of InVestment Policy. Each year after review and report
by the Audit Committee, the Treasurer shall, submit to the City
Council a proposed Statement of Investment Policy for Council
consideration and adoption as submitted or as revised by the City
Council. '
Cash Purchase Only. Ail securities shall be purchased on a
delivery vs payment (DVP) basis only. Securities shall not-be
purchased on margin, credit or for other than full cash payment-and
shall not be pledged as collateral.
Reverse Repurchase Aqreements. Funds shall not be invested
directly in reverse repurchase agreements,
Selling securities Prior to Maturity. Generally, losses will be
acceptable on a sale before maturity if the reinvested proceeds
will earn income with a present value greater than the present
value of the income that would have been 'generated by the old
investment, considering any capital loss or foregone interest on
the original investment.
Performance Standards. The investment portfolio will be designed
to obtain a market-average rate of return during budgetary and
economic cycles, .taking into .account the City's investment risk
constraints and cash flow needs. The market-average rate of return
is defined as the U.S. Treasury note yield- which most closeIy
matches the average portfolio LIFE as stated on the monthly
inVestment report, using a 12-month moving average.
Quarterly Reports. The Treasurer shall render a quarterly report
to the .' City Council, City .Manager and internal and external.
auditors, which states its relationship to the Statement of
Investment Policy. Sample attached, Exhibit I.
Required elements of the quarterly report, are as follows:
a. Type of investment.
b. Institution.
c Date of maturity.
d. Amount of deposit or cost of the security.
e. Rate of interest.
f. Statement relating the report to the Statement of
Investment Policy.
g. Statement that there are..sufficient funds to meet the
next 6 months' obligations.
h. The current book value.
i. The current market value.
j.''-AVerage portfolio' life. '
k. Average portfolio yield.
1. Current treasury yield that most .closely matches
average portfolio life.
Reports of the State Treasurer's Local Agency Investment Fund
(LAIF) or other qualified funds shall be accepted in lieu of
subparagraphs a. through 1. to support City deposit's in the funds.
The Treasurer also shall render a monthly report of investment
transactions. Sample attached, Exhibit II.
II. GUIDELINES. The' following directions and. limitations are
established hereby to direct and control investment activities in
such a manner that above-stated goals~ are achieved.
Delegation of Authority. California Government code, section
53607 provides the authority for the legislative body of the local
agency to invest funds of the local agency or to delegate, that full
responsibility to the Treasurer of the local agency. Under City of
Tustin Ordinance No. 832, the.City Council has authorized the City
Treasurer to invest city funds in accordance with. California
Government. Code Section 53600, et. seq.
Ethics and Conflicts of Interest. The City Treasurer shall refrain
from personal business activity that could conflictwith proper
'execution of the investment program or which could impair the
· ability to makeimpartial investment deGisions. The City Treasurer
is governed by Government Code Section 1090 et.seq.; the Political
Reform Act of 1974 regarding disclosure of material financial'
interestS; ~disqualification requirements and the City's gift
regulation.
Investment .Transactions. Every investment transaction shall be
reviewed, authorized and documented by the Treasurer.
.,
Pooled Cash. Wherever practical, the City's cash shall be
consolidated into one bank account and invested on a pooled basis.
Interest earnings shall be allocated according to each fund's cash
balance as required.
Competitive Bids. Purchase and sale of securities shall be made on
the basis of documented competitive offers and 'bids whenever
practical. Documented opinions of reasonableness are acCeptable
substitutes if necessary.
Cash Forecast. The cash flow for the City shall be analyzed with
the receipt'of revenues and maturity of investments scheduled so
that adequate, cash will be available to meet disbursement
requirements.
In~estment-Limitati°ns.- Security pUrchaSes~"depO'sits and holdings
s-~al~e ~ ~-~h statutory limits imposed by ~he California
Government-Code and shall-include Only the following:
ao
Certificates of Deposit (or time deposits) of less than
$100,000 may be placed with commercial banks, savings and loan
institutions and federally insured industrial loan companies
(with a percentage of equity to assets of not less than three
(3) percent to the extent they are fully insured by. the
Federal Deposit Insurance Corporation or the Federal Savings
and Loan Insurance Corporation as required by the Government
Code). Deposits in excess of $100,0'00 may be made based on a
full evaluation of financial soundness of the depository and
approved collateral at the required percentage of market value
in accordance with California Government Code Section 53651
and 53652. Evaluation of financial soundness shall be based
on a minimum equity.to asset ratio of three (3) percent; $100
million, of assets minimum; continued profitability with a
minimum rating.service rating of A or better. The maximum
deposit per institution shall not exceed the lesser of $1
million, or ten (10) percent of the bank's capital (or equity
account as measured by Findley's Bank-A-Lert Report). Total
non-insured deposits shall not exceed ten (10) percent of
invested funds and limited to a maximum maturity of one year.
be
Prime quality'Commercial Paper, highest letter and'numerical
short term debt ratings by Moody's or Standard and Poors, A1
or P1 or equivalent; but not to exceed twenty-five (25)
percent of invested funds at the time of purchase and limited
to a maximum maturity of ninety (90) days. Average weighted
maturity shall not exceed 31 days if Commercial Paper exceeds
fifteen (15) percent of total portfolio assets.
Ce
Government-sponsored pools, such as California· State
Treasurer's Local Agency Investment FUnd (LAIF), and Mutual
FUnds, as authorized by California Government Code section
53601 et' seq. if in the judgment of the Treasurer, they meet
MTA of US&C suggested due diligence standards, or are rated in
the highest category by a nationally recognized rating
service.
d.
Commercial Bank Time Drafts (Bankers AcCeptances), highest
letter and numerical short'term debt ratings by Moody's or
Standard andPoors, A1 or P1 or equivalent; but not in excess
of twenty-fly. (25) percent of invested funds at the time Of
purchase with a maximum maturity of one hundred and eighty
(180) days.
e.
Corporate notes of a maximum maturity of five (5) years
remaining to stated final maturity~ issued by corporations
organized'and operating within the U.S. Or by depository
institutions licensed by the U.S. or any State, and.operating
within the 'U.S. ~ Notes eligible for investment under this
subdivision shall have a' long term debt rating of AA or its
equivalent by Moody's or Standard and Poors. Purchases may
not exceed ten (10) percent of invested funds at the time of
purchase.
fe
Federal Agency bonds or notes, but not in excess of fifty (50)
percent of invested funds.at time of purchase with a maximum
maturity of five (5) years remaining to stated final maturity.
ge
U.S, Treasury securities'not exceeding five (5) years to final
maturity.
h..
Investment Contracts. Bond 'proceeds may be placed in
investment contracts, if authorized by borrowing documents.
Guarantors.of such contracts shall have at.least an AA rating
by two major investment services. Contracts shall contain'
market value protection in case of downgrading by including
delivery of cash or Treasury securities, at the election of
the City.
ie
Mutual Funds. Money market 'mutual funds as permitted by
California Government Code 53601(k) are authorized if deemed
appropriate by the Treasurer after due diligence similar to
Investment Limitations~(subparagraph c).
LiqUidity. The marketability (salability) of a security shall be
considered at the time of purchase since the security may have to
be sold at a later date to' meet an unanticipated cash demand.
Maturity Limitations. AS a general rule, intermediate_term
maturities shall not represent a significant percentage of. the
total portfolio. Unless previously authorized by City Council, no
investment may have a term final stated maturity-longer than five
(5) years. At the time of purchase, holdings with maturities
greater than one (1) year shall not exceed thirty-five (35) percent
of the total portfolio.
Collateral.' Collateral requirements are addressed in California
Government Code Section 53652. All active and inactive deposits
must be secured at all times with eligible securities in securities
pools pursuant to Sections 53656 and 53657. Eligible securities
held as collateral shall have a market value in excess of the total ·
amount of all deposits of a depoSitory.as follows:
--government securities at least 110 percent.
--mortgage backed securities, at least 150 percent-
Authorized Broker/Dealers. Investments shall be transacted only
through Authorized Broker/Dealers which have been reviewed and
approved by the Treasurer for reliability, credit worthiness and
trustworthiness.
Diversification. The portfolio shall consist of various types of
securities approved by statute and this Statement of Investment
Policy, as well as varied issuers and maturities.
Safekeeping. Securities purchased from broker/dealers shall be
held in third party safekeeping by 'the trust department of' ~he
local agency's bank, or by other third party trustee designate~ by
the Treasurer. Said securities shall be held in the name of the
City with the trustee executing agreements and confirmations .of
investment transactions as directed by the City Treasurer.
III. STRATEGY. Strategy refers to the plan to manage financial
resources in the most advantageous manner.
Economic Forecasts. The Treasurer periodically may obtain economic
forecasts from economists and financial experts through bankers and
broker/dealers in order to assist in the formulation of'inVestment
plans.
Implementinq Investment Strategic;. The Treasurer shall execute
investment transactions which conform to current and anticipated
cash requirements, interest rate trends, and stated investment
strategy.
Relationships. The Treasurer shall maintain, a close working
relationship with the departments of the City to anticipate and
accommodate disbursements of City funds. For liquidity planning
purposes, Department Heads shall apprise the Treasurer when large
expenditures (over $500,000) are anticipated.
Preserve Portfolio Value. The Treasurer shall develop an
investment strategy that maintains earnings near the market and
preserves the value of the City's portfolio.
Internal Controls. The Finance Department shall establish a system
of internal controls which shall be reviewed annually, With the
independent Auditor. The controls shall be designed to prevent
losses of public funds arising from fraud, employee error,
misrepresentation by third parties, unanticipated changes in
financial markets, or imprudent action by employees and officers of
the City of Tustin.
The City.attempts'to invest 100% of all available funds through
daily and projected cash flow determinations and after
consideration of bank requirements for clearings and services.
Management of idle cash and investment transactions is the
responsibility of the City Treasurer. The City's investment
philosophy is to insure that money is always safe and available
when needed.
The city of Tustin Audit Committee shall review the City's
Investment Policy with the City Treasurer .at least annually.
Exceptions to the pOlicy shall receive prior approval of the Audit
Committee. Proposed amendments Will be brought to :the-City
Council for final action upon the recommendation of the Committee.
Adopted by the city Council:
4-7-97
Eml::Op: I nvPo[97. FIN
TREASURY MANAGEMENT
REPORT
FOR THE MONTH- ENDED
July 31, 1997
COUNTY OF ORANGE
STATE OF CALIFORNIA
JOHN M. W. MOORLACH, C.P.A., CFP
TREASURER-TAX COLLECTOR
JOHN M. W. MOORLACH, C.P.A., CFP
ORANGE COUNTY TREASURER-TAX COLLECTOR
III.
IV.
VI
Vii
IX.
X.
XI.
XII.
TREASURER'S MANAGEMENT'REPORT
For the month ended July 3 I, 1997
Table of Contents
Cover letter ...........
eeellelleeeelleleeelllellllelll
eeeleeeeeeee I
Investment Pool balances at market value and book cost, average durations,
current and average yields, current net asset values, and investment and cash to
fund accounting reconciliation .......................................... 8
Benchmark comparisons .................. ' ...................... 9
Composition charts and graphs ......................................... I0
Cash availability proiection per California Government Code Section 53646(b)(3) ....
Statement of accountability .....
IIIIIIIIiiiiiiiiiiiii!11111
13
Portfolio investment inventory with market values ............................ 15
Detail Transaction ReporC ............... . ...................... 34
· · · · · · ·
Investment inventory daily report as of month end by maturity dates .............. 45
Noncompliance report. .............................................. 52
A. July 3 I, 1997
B. Frtch Investors Service, L.P. compliance audit report for the quarter
ended June 30, 1997
Distribution Ust.. '
· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·
Investment Policy Interpretations ........................................69
ESTABLISHED 1889
OFFICE OF THE TREASURER-TAX COLLECTOR
JOHN M. W. MOORLACH, C.P.A., CFP
TREASURER-TAX COLLECTOR
TELEPHONE: (714) 834-2911
FAX: (714) 834-2912
TREASURER OFFICE ADDRESS
HALL OF FINANCE & RECORDS
RM. G76, 12 CIVIC CENTER PLAZA
P.O. BOX 4515 .
SANTA ANA, CALIFORNIA 92702
August I I, 1997
IN REPLY PLEASE REFER TO:
TO:
FROM:
SUBJECT:
Board of Supervisors
Jan Mittermeier, Chief Executive Officer
Treasury Oversight Committee
Treasurer's Advisory Committee
ParticiPants
John M. W. Moorlach, C.P.A., CFP~~ ~
Treasurer-Tax Collector
Treasury Management Report for July, 1997
At~ched please find the Treasury Management Report for the County of Orange for the month ended July 31,
1997. This monthly report provides the reader with the portfolio composition of our investment pools and
their activities during the month.
TREASURER'S REPORT
In order to assist you in reading this report, please note that the "current balances" reflect the investments
recorded in the portfolios for each particular fund for the period ending July 3 I, 1997. Each pool has an
average maturity of less than ninety days, with a net asset value (NAV) falling within the range of $0.9950 and
$1.0050. All investments are marked to the market at the end of the reporting period due to the narrow
valuation range prescribed by the Pools' investment policy statement.
The reports reflect the 'par' value (face value), the 'book" value (cost to the County of the investment) and
'market' value (the price of each security at the close of the market on the last trading day of the month). The
difference between the "market" value and "i:x:x:~' value is the unrealized gain or (loss). The "Detail Transaction
Report Section" is provided in compliance with California Government Code Section 53607, which requires
that the Treasurer file such a report with the Board of Supervisors, from whom his investment authority has
been delegated.
Board of Supervisors
Page 2
August I I, 1997
STAFF1NG CHANGE
The Assistant'Treasurer, Mr. Daniel J. Hempel, resigned from his position with the County effective July 22,
1997. Dan wanted to reduce his commute from Pasadena. His new positiOn, Treasurer for the City of
Alhambra, is only seven miles from home. We wish Dan well in his new endeavor. In the meantime, a
recruitment is being pursued to fill this vacancy.
INVESTMENTS
The Treasurer is required by California Government Code to have the Board of Supervisors once a year
approve the Investment Policy Statement (IPS). We went through this approval process in February, 1997.
A new authorized investment to the IPS at that time was Medium Term Notes (MTN). Since then the
Investment Division has become aware of unique distinctions in this investment that were not addressed in the
IPS.
Attached to this report are two interpretations recently reviewed and approved by the Treasurer's Advisory
Committee and signed by myself. These interpretations, the definition of MTN and short-term debt ratings
applying to MTN, will be incorporated into the IPS when it is updated next year.
I would like to point out how fortuitous it was for us to add MTN to our IPS. The Investment Division was able
to invest in longer maturities, capturing the top of the fixed income market with securities yielding as high as
6.3696. Currently the same investmen~ would yield close to 5.80%.
Despite our capitalizing on this opportunity with MTN, interest rates are going down and we anticipate our
overall I:X:~dio yield to follow. For the quarter ending September 30, 1997, I am projecting a portfolio yield
dose to 5.50%. This is a decrease from its current level of 5.75%. For fiscal year end, June 30, 1998, I am
staying with my prior estimate of 4.90%.
ECONOMIC OBSERVATIONS
The ec~ is going strong and there is no inflation. This is the general opinion of Alan Greenspan, Chairman
of the Federal Open Market Committee (FOMC), and the rest of the investment community. As evidenced
by the current rally in the bond market and the record levels achieved in the stock market, an optimistic attitude
tdward the ec~ is pervasive throughout the counto,. The attached charts described below are indications
of this unprecedented economic era.
The 20-year Iow for unemployment has not impacted the employment cost index or personal income
(EXH Brr
Board of Supervisors
Page 3.
August II, 1997
[] The National Assodation of Purchasing Managers survey remains high (anything over 50), hoWever the
price component stayed below 50 for the third month in a row (EXHIBIT 2)
·
[] Consumer confidence has soared to an all time high. New home sales are on the rise as consumers
take advantage of the lower mortgage rates (EXHIBIT 3).
Wr~z~t any significant change in the economic data, a FOMC tightening in interest rates remains unlikely. We
remain confident in our investment strategy. As you can see (EXNIBIT 4), the current yield in the portfolio,
5.7596, compares favorably with the 30-year Treasury Bond and with much less risk. If you have any questions,
please do not hesitate to contact us.
Board of Supervisors
Page 4
August I I, 1997
RATE GRAPH for US UNEMPLOY RTS TOTAL
R.~GE ~ TO ~ PERIOD ~ (D-U-M-Q-Y)'
:0 · e,~
707
4.1
· · . ! , , .' ...... , . . ·
·
·
·
RATE GRAPH for EM'PLOYMENT COST SA ~o CHNG
RANGE ~ TO ~ PERIOD ~] (D-U-M-Q-Y)
2.00
l.lO
1.4~
..l.O
SEPmS SEl~& SEPi7 SEllS& SEPI'9 SEPgO SEPSI SEP92 SEPt3 '¢El~4 S.E~o9 SEI"9~ .40
RATE GRAPH for PERSONAL INC:T6T n-0-n ~ cH
RANGE~ TO I~]~PERZOD E (D-U-n-Q-y)
.
#lg*, .I.LI 12/31/12
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EXHIBIT 1
'.
Board of Super~sors
Page 5
August II, 1997
RATE GRAPH for 'NATL ASs. PRCH MG NAPM PMT
RANGE m~ TO ~ PERIOD j (D-U-H-Q-Y)
~LOSE/~XD
Last 55.7 on 06/J0/97/~
High 57.i on ~/3Z/97 /
~ 44.7 on 01/31/9G ,
/ ,
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54
52
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SEPg5 NOV91 .TAN96 . ft~R96f~Y96 ~I'UL96 SEPg6 Hovg6 2'ANg7 1~4d~ 97
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RATE GRAPH for NATL ASS. PRCH MG PRTCES
RANGE ~ TO ~ PERIOD ~ (D-U-H-Q-Y)
6O
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40
30
APRS& ~ANS9 OCTSg .TUL90 AP~gl ~ANgZ 0CT92 .TUL93 APR94 3,idfgS OCTgS 2*IJL~;~ a,P'R97
80 :
EXHYBIT 2
Board of Supervisors
Page 6
August II, 1997
RATE GRAPH for CONSUMER CONFTD CONFIDENCE
RANGE ~ TO ~ PERIOD ~ (D-U-M-Q-y)
i ,
CLOS F.,qiZD
-
Last ~2G.5 o~ 07/31/97
High I2'~J.g on O&/JO/4J7
Ave
Lo~, 47.3 on 02.,/29/92
AU~9
120
100
;0
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AUG83 AUGS! AUG87 AUG89 AUG91 AUG93 AUGC~.
VALUE GRAPH for NEI,J HOME SALE
RANGE ~ TO ~ PERIOD ~ (D-U-M-O-Y)
TOT SOLD
900
800
700
&O0
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.,"U L8 S ~UL86 ,TULS~ 7UL88 .?UL89 7ULDO ,TUL9.TULO2 TULg3 11JI ~4. Till
EXHIBIT 3
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X
ill
ORANGE 'COUNTY TREASURER-TAX COLLECTOR
INVESTMENT BALANCES
FOR THE MONTH ENDED: JULY 31, 1997
STATISTICS-~~ ~
;!;!Averagei~ i
O.C. Treasurer's Money MA~KETVa~ue $1,522,741,557.20 5 72% ] ~ .... ]
Market Commingled BOOK Va,u° (Corn i;ilii ;!i! :i ~iiii! !ilii!!~!!i!~;~':~['~='~!380 62:'i: ' ' ' e,.uuu '
Inves~ent Pool AV~ aala~ $1, 507, 262, 672. 97 5. 75%
Fund #694
O.C. Treasurer's Money
Market Educational
Investment Pool
MARKET Va~,, $759,430,538.70
BOOK va~uo (co,t)iiiii!~i~i!!~ii!ii
Av~ ~a~ $759,820, 673.29
74/74 5.78%
5. 77%
$1.001
SPecific Investment
Funds:
112,116,118,132,139,148,
149,161,488,496,498,503,
505,506,515,528,553,556,
557,558 & 755
NON POOLED INVESTMENTS ** '
¥ , :':
__ ...... I u.s. Treasuries ~00.-~
MARKETVa~ $82,473,334.27 Interest Bearing ACcoun~
................. 6,149,872.98
BOOKValue (C°'t)iiii!ii!!i!i~iiiiiiiiil;iiiiii!iii~~ii~):52';i~ Guaranteed Investment Contracts 27,795,629.62
Ave Ba~an~ $77,487, 764.94 Money Market Funds 33,033,748.71
RePurchase Agreements 15,391,489.21
$82,470,740.52
COUNTY POOLED INVESTMENTS I~ COST
COUNTY CASH
SCHOOL POOLED INVESTMENTS l~ COST
SCHOOL CASH
NON POOLED INVESTMENTS. ~ COST
$1,51 9,455,380.62
16,956,282.95
756,394,304.34
(2,809,723.19)
82,470,740.52
MONTH END TOTALS
$2,372,466,985.24
COUNTY FUNDS
SCHOOL FUNDS
SPECIFIC INVESTMENTS
$1,536,411,663.57
753,584,58i.15
82,470,740.52
$2,372,466,985.24
* Net Book Value is computed as Book Value reduced by purchased interest plus the amortization of premium and increased by the accretion
of discount of the Investment Portfolio.
** Spedfic non pooled investments are reported in compliance with Government Code Section 53646 (b)(1). Detailed descriptions are included
in the inventory listing in Section VII.
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ORANGE COUNTY TREASURER-TAX COLLECTOR
CASH AVAILABILITY PROJECTION
FOR THE SlX MONTHS ENDING JANUARY 31, 1998
Government Code Section 53646 (b) (3), effective on January 1, 1996, requires the Treasurer-Tax
Collector to include a statement in the investment repo.rt, denoting the ability of the Orange County
Treasurer's Money Market Commingled Investment Pool (OCTMMCIP) to meet its expenditure
requirements for the next six months.
The OCTMMCIP consists of funds in its treasury deposited by various entities required to do so by
statute, as well as those entities voluntarily depositing monies in accordance with Government Code
Section 53684.
The Treasurer-Tax Collector is required to disburse monies placed in the treasury as directed by the
'Auditor-Controller, except for the making of legal investments, to the extent funds are transferred to
one or more clearing funds in accordance with Government Code Section 29808.
The Treasurer-Tax Collector, in his projection of cash availability to disburse funds as directed by the
Auditor-Controller, is relying exclusively on historical activity involving OCTMMCIP deposits and
disbursements and future cash flow projections. No representation is made as to an individual
depositor's ability to meet their anticipated expenditures with anticipated revenues.
The Cash Availability Projection for the six months ending January 31, 1998 indicates the ability of the
pool to meet projected cash flow requirements. However, there will usually be differences between
projected and actual results because events and circumstanCes frequently do not occur as expected,
and those differences may be material.
_.._.._.__ SIX MONTH CASH AVAILABILITY PROJECTION
~:.L'"-i ':??tilil .' :;::';i.:''. :'. :i::;;:::'?.;:.!;.:. i~*~'St~:~'t; ' ~i::~ .' '. :i!ii :~ject~a:.::;':- ;;:i: :-ProjeCted
'::~::~;~::... i;::ii~ii~:~'0sit~'?i!;::.. :::i':!i::~. Di§burSement
JJ. uly 1997--~ ~ash ......
IIAugust
C~Li.mulatiV'-"7-
A~i'~iable G'ash
September.
October
November
December
JanuarY 1998
$16,956,283
$734,848,353 $164,479,225 $186,720,579 729,563,282
254,710,677 148,420,114 228,043,918 904,650,155
123,133,656 225,118,895 202,151,835 1,050,750,871
63,734,083 287,082,030 320,121,877 1,081,445,107
61,340,000 972,267,520 789,007,452 1,326,045,175
0 190,539,385 271,246,543 1,245,338,017
ORANGE COUNTY TREASURER-TAX COLLECTOR
STATEMENT OF ACCOUNTABILITY
FOR THE MONTH ENDED: JULY 31, 1997
Treasurer's Accountability at the Beginning of the Month
Cash Receipts:
County
Schools
Charge backs
Total Cash Receipts
$229,378,164.96
122,112,725.90
7,064.00
$2,438,946,616.38
351,497,954.86
Cash Disbursements:
County
Schools
Checks returned for non sufficient funds
Investments (net of maturities)
Total Cash Disbursements
Net Change in Book Value of Pooled Assets
Net Increase in Specific Investments
Treasurer's Accountability at the End of the Month"
217,067,104.09
200,649,759.83
253,798.89
5,814,621.00
423,785,283.81
(72,287,328.95)
5,807,697.81
$2,372,466,985.24
Assets in the Treasury at JUly 31, 1997
O.C. Treasurer's Money Market Commingled Investment Pool
Specific investments
Cash' in banks (including Schools)
Cash in vault
O.C. Treasurer's Money Market Educational Investment Pool
$1,519,455,380.62
82,470,740.52
14,080,101.85
66,457.91
756,394,304.34
$2,372,466,985.24
Califomia Govemment Code Section 27063 requires the Treasury to file with the Board of Supervisors on a monthly basis a detail~
report of money received and disbursed. This report is filed with the Board of Supervisors in compliance with Section 27063.
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52
.~range County ~rreasurer-Tax Col~. _.or
Noncompliance Report Summary
July 31, 1997
During July there were four noncompliance incidents in the Educational Investment Pool and
three in the County Investment Pool. Although certain Investment Policy Statement guidel!nes
w;ere temporarily exceeded, the Treasurer believes there was no material impact of a negative
nature to the County or Educational Pools' investment portfolios. The incidents for the
respective investment pools are reported as follows:
Educational Investment Pool
-
7-03 The percentage of Commercial Paper held from one issuer exceeded 5 percent of the
market value of the portfolio. The percentage of overall portfolio holdings for a single
issuer exceeded 5 percent of the market value of the' portfolio.
Due to an error made while determining the current holdings of Block Financial, an
additional investment was made increasing the total holdings to 5.87 percent. The
acquisition matured on July 7 (the next business day), bringing the total holdings of any
- - single issuer back in{o c°mpliancel
7-18
The percentage of Commercial Paper held from one issuer exceeded 5 percent of the
market value of the portfolio.. The percentage Of overall portfolio holdings for a single
issuer exceeded 5 percent of the market value of the portfolio.
Due to confusion about the appropriate name for Block Financial, an additional
investment was made increasing the total holdings to 6.93 percent. The issuer of the
commercial paper program is Block Financial however the broker referred to and listed
the issuer as H&K Block on the trade confirmation. The new investment was recorded in
the Treasurer's inventory as H&K Block. Previous purchases for this issuer were liste_d as
Block Financial. The inconsistent treatment of the issuer's name was discovered and-
changed on August 3. 'The final maturity for this investment was August 8, bringing the
total holdings of any single issuer back into compliance on that date.
County Investment Pool
7-10
The percentage of Commercial Paper held from one issuer exceeded 5 percent of the
market value of the portfolio. The percentage.of overall portfolio holdings for a single
issuer exceeded 5 percent of the market value of the portfolio.
Due to an error made while determining the current holdings oflohnson Controls, an
additional investment was made increasing the total holdings to 5.56 percent. The
acquisition matured on luly 11 (the following business day), bringing the total holdings of
any single issuer back into compliance.
7' 15 The percentage of Commercial Paper holdings exceeded 30 percent of'the market value of
the portfolio.
DUe'to a miscalculation while determining the current holdings of Commercial Paper, an'
additional investment was made increasing the total holdings to 30.02 percent.
Maturities on the following business day brought the total holdings of Commercial Paper
into compliance. -
53
NoncomplianCe Report SUmmary
July 31, 1997
Page 2
Certain issues regarding technical incidents for each pool (other than those related to fluctuations
in total pool balances) are separately reported as follows:
County Investment Pool / Educational Investment Pool
As reported in our Noncompliance Report Summary for June 30, 1997, for Hercules Inc.,
Moody's downgraded their long-term debt and commercial Paper ratings on June 13, thus
exceeding the 3 percent limit for split-rated comuercial paper. Holdings of Hercules Inc.
commercial paper matured on July 1 bringing the split-rated commercial paper holdings below the
3 percent limit.
54
FITCI-I
ESTABLISHED 1913
Fitch Investors Service, L.R
One State Street Plaza
New York, NY 10004
1212J 908-0500
August 6, 1997
Mr. John M. W. Moorlach
Treasurer- Tax Collector
of Orange County
12 Civic Center Plaza
Room G-76
Santa Ana, CA 92701
Dear Mr. Moorlach:
Based upon Fitch's conducting of the following agreed upon procedures' (as attached
hereto), this compliance letter shall serve as an indication of Orange County's portfolio
holdings' substantial Conformity with its investment policy statement, as revised 2/25/97,
and California Government Code Section 53601, Section 53635, and all other relevant
Government Code provisions with regard to both the Commingled and Educational Pools
at June 30th, 1997.
Fitch Investors Service, L.P. conducted its compliance review in accordance with a series
of agreed upon procedures which required that we review, on a test basis, evidence of the-
portfolio holdings, perform certain mathematical calculations and review the results with
respect to Orange County's investment policy statement. The agreed upon procedures
have been revised to reflect 'changes to the investment policy statement. In conducting
this review Fitch examined the portfolio holdings on the following dates: April 9th, April
14th, June 20th, and June 30th, 1997; and relied upon the investment policy statement
and agreed upon procedures in effect at that time. The scope of Fitch's review was
limited to the attached agreed upon procedures.
With regard to the attached agreed upon procedures, Fitch finds no notable exceptions
and is of the opinion that in all regards the Orange County Commingled and Educational
poOl portfolio holdings are in compliance with the County's investment policy statement
and California Government Code Section 53601,. Section 53635, and all other relevant
Government Code provisions as of the sampled dates.
55
Fitch Investors Service, L.P. has relied, withOut independent verification, upon
documents delivered to us by Orange County and/or Orange County's custodial bank.
Fitch relied solely on the County, its staff and its custodial bank as to the accuracy of
such information.
This compliance review is rendered solely for your benefit and may not be relied upon by
any other person without our prior written consent.
Very truly yours,
·
Jbhn Schiavetta, CFA - '
Senior Director, Managed Funds
[~ang~_uO~o~mtn,~gp~dUn×es.m~. ~nt~o~o;I
Date of Client Po~olio
Portfolio Number.
Portfolio
·
Wei§h'ted Avg. Maturity (Days)
Minimum NAV
Maximum NAV
Guideline
90
0.9950
1.0050
6~30~97
692
Actual
76
1.0009
1.0009
Comply
Yes/No
Yes
Yes
Yes
GOVT
AGENCY
cP -
CP SPLIT
CD
REPO
BA
MMF
MTN
OTHER
Sector
% Market
Value
0.0%
12.0%
26.6%
2.9%
22.5%
0.0%
26.2%
0.1%
9.8%
0.0%
Maximum
Limits
'100%
100%
30%
3%
30%
50%
40%
20%
30%
0%
Minimum
Limits
0%
0%
'0%
0%
0%
0%
0%
0%
0%
0%
100.0%
Comply
Yes/No
Yes
Yes
Yes '
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Individual Security
Final Maturity
Percentage per Security
Credit Quality
Barbell (25% > 6 Months)
Repo Counterparty Rating
Single US Agency Limit
.
Single Bank BA Limit
Single Issuer CP Limit
Single Issuer Limit
CP Total
Dollar WAM for all CP
All US Dollar Denominated
Compliance
13 months
AAA
(25% > 6 months)
< 31 Days
A1
25%
5%
5%
5%
30%
Actual
16%
29.52%
11.52
Comply
Yes/No
Yes
Yes
Yes
Yes
Yes
Yes ·
Yes
Yes
Yes
Yes
Yes
Yes
57
Date of Client Portfolio 6/30/97
Portfolio Number 694
Portfolio Guideline Actual
Weighted Avg. Maturity (Days)
Minimum NAV
Maximum NAV
Comply
Yes/No
90 43.58 Yes
0.9950 1.0014 Yes
1.0050 1.0014 Yes
GOVT
AGENCY
CP -
CP SPLIT
CD
REPO
BA
MMF
MTN
OTHER
Sector
% Market Maximum Minimum Comply
Value Limits Limits Yes/No
0.0% 100% .0% Yes
13.7% 100% 0% Yes
26.7% -' 30% 0% Yes
2.8% 3% 0% Yes
23.6% 30% 0% Yes
0.0% 50% 0% Yes
24.4% 40% 0% Yes
0.6% 20% 0% Yes
8.3% 30% 0% Yes
0.0% 0% 0% .Yes
100.0% Yes
Individual Security
Final Maturity
Percentage per Security
Credit Quality
Barbell (25% > 6 Months)
Repo Counterparty Rating
Single US Agency Limit
Single Bank BA Limit
Single Issuer CP Limit
Single Issuer Limit
CP Total
Dollar WAM for ali CP
All US Dollar Denominated
Compliance
13 months
Actual
(25%>6 Months)
A1
25%
5%
5%
5%
30%
<31 Days
15%
29.45%
13.56
Comply
Yes/No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
·
Yes
Yes
Yes
Yes
Yes
58
Date of Client Portfolio 4/9/97
Portfolio Number 692
Portfolio ' Guideline
Weigl~ted Avg. Mat.udty (Days)
Minimum NAY
Maximum NAV
Actual
Comply
Yes/No
90 61 Yes
0.9950 1.0025 Yes
1.0050 1.0025 Yes
GOVT
AGENCY
CP - -
CPSPLIT
:CD
REPO
BA
MMF
MTN
OTHER
Sector
% Market Maximum
Value Limits
0.72% 100%
9.20% 100%
27.04% ..... 30%
2.70% 3%
24.85% 30%
8.62% 50%
26.38% 40%
0.03% 2O%
0.46% 30%
0.00% 0%
100.00%
Minimum
Limits
O%
O%
O%
O%
O%
O%
O%
O%
O%
O%
Comply
Yes/No
Yes
Yes
Yes
Yes
Yes ·
Yes
Yes
Yes
Yes
Yes
Yes
Individual security
Final Maturity
Percentage per Security
Credit Quality
Barbell (25% > 6 Months)
Repo Counterparty Rating
Single US Agency Limit
Single Bank BA Limit
Single Issuer CP Limit
Single Issuer Limit
CP Total
Dollar WAM for all CP
All US Dollar Denominated
Compliance Actual
13 months
(25% > 6 months) 6%
A1
25%
5%
5%
5%
30% 29.74%
< 31 Days 26.75
Comply
Yes/No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Date of Client Portfolio 4/g/g7
Portfolio Number· 694
Portfolio
Weighted Avg. Maturity (Days)
MinimUm NAV
Maximum NAV
Guideline
Actual
90 57.66
0.9950 1.0031
1.0050 1.0031
Comply
Yes/No
Yes
Yes
Yes
GOVT
AGENCY
CP
CP SPLIT
CD
REPO
BA
MMF
OTHER
Sector
% Market Maximum
Value Limits
0.00% 100%
17.00% 100%
26.14% 30%
3.02% 3%
22.82% 30%
3.12% 50%
27.90% 40%
0.00% 20%
0.00% 30%
Minimum Comply
Limits Yes/No
0% Yes
0% Yes
0% Yes
0% Yes*
0% Yes
0% Yes
0% Yes
0% Yes
0% Yes
100.0%
Yes
* At the time of the CP purchase the %
of Market Value was in compliance.
Individual Security
Final Maturity
Percentage per Security
Credit Quality
Barbell
Repo Counterparty Rating
Single US Agency Limit
Single Bank BA Limit
Single Issuer CP Limit
Single Issuer Limit
'CP Total
Dollar WAM for all CP
Ali US Dollar Denominated~
Comply
Compliance Actual Yes/No
13 months Yes
Yes
AAA Yes
(25% > 6 Months) 1% Yes
A1 Yes
25% Yes
5% Yes
5% Yes
5% Yes
30% 29% Yes
< 31 Days 26.17391 Yes
Yes
Date of Client Portfolio 4/14/97
Portfolio Number 692
Portfolio Guideline
Weighted Avg. Maturity (Days)
Minimum NAV
Maximum NAV
Comply
Actual Yes/No
90 49 Yes
0.9950 1.0033 Yes
1.0050 1.0o33 Yes
GOVT
AGENCY
cP
CP SPLIT
CD
REPO
BA
MMF
MTN
OTHER
Sector
Maximum' Minimum Comply
Limits Limits Yes/No
6.01% 100% 0% Yes
7.61% 100% 0% Yes
25.96% 30% .... 0% Yes
2.51% 3% 0% Yes
20.55% 30% 0% Yes
9.63% 50% 0% Yes
20.73% 40% 0% Yes
6.61% 20% 0% Yes
0.38% 30%'. 0% Yes
0.00% 0% 0% Yes
100,00% Yes
% Market
Value
ndividual Security
Final Maturity
Percentage per Security
Credit Quality
Barbell (25% > 6 Months)
Repo Counterparty Rating
Single US Agency Limit
Single Bank BA Limit
Single Issuer CP Limit
Single Issuer Limit
CP Total
Dollar WAM for all CP
All US Dollar Denominated
Comply
Compliance Actual Yes/No
13 months Yes
Yes
AAA Yes
(25% > 6 months) 5% Yes
A1 Yes
25% Yes
5% Yes
5% Yes
5% Yes
30% 28.47% Yes
< 31 Days 24.11 Yes
Yes
61
Date of Client Portfolio 4/14/97
Portfolio Number 694
Comply
Portfolio Guideline Actual Yes/No
Weighted Avg. Maturity (Days)
Minimum NAV
Maximum NAV
90 55.00 Yes
0.9950 1.0033 Yes
1.0050 1.0033 Yes
GOVT
AGENCY
CP ....
CP SPLIT
CD'
REPO
BA
MMF
OTHER
Sector
% Market Maximum Minimum
Value Limits Limits
0.0% 100% 0%
17.4% 100% 0%
26:8% -' 30% 0%
3.1% 3% 0%
23.4% 30% 0%
0.0% 50% 0%
27.1% 40% 0%
2.3% 20% 0%
0.0% 30% 0%
100.0%
* At the time of the CP purchase the %
of Market Value was in compliance.
Individual Security
Final Maturity
Percentage per Security
Credit Quality
Barbell (25% > 6 Months)
Repo Counterparty Rating
Single US Agency Limit
Single Bank BA Limit
Single Issuer CP Limit
Single Issuer Limit
CP Total
Dollar WAM for all CP
Al! US Dollar Denominated
Compliance Actual
13 months
AAA
25%
A1
25%
5%
5%
5%
3O%
< 31 Days
1.01%
29.9%
26
· Comply
Yes/No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Comply
Yes/No
Yes
Yes
Yes
Yes*
Yes
Yes
Yes
Yes
Yes
Yes
6?-
Portfolio Dated
Portfolio Number
6/20/97
692
PortfoliO Guideline
Neighted Avg. Maturity (Days)
Minimum NAV
Maximum NAV
90
0.9950
1.0050
Comply
Actual Yes/No
80.18 Yes
1.0009 Yes
1.0009 Yes
Sector
GOVT
AGENCY
CP.
CP SPLIT
CD
REPO
BA
MMF
MTN
OTHER
% Market
Value
0.0%
7.3%
29.0%
0.5%
24.7%
O.O%
28.6%
2.0%
8.0%
O.0%
Maximum- Minimum Comply
Limits Limits Yes/No
100% 0% Yes
100% 0% Yes
30% ' - 0%' ~Yes
3% 0% Yes
30% 0% Yes
50% 0% Yes
40% 0% Yes
20% 0% Yes
30% 0% Yes
0% 0% Yes
100.0%
Yes
Individual Secudty
Final Maturity
Percentage per Security
Credit Quality
Barbell (25% > 6 Months)
RePo Counterparty Rating
Single US Agency Limit
Single Bank BA Limit
Single Issuer CP Limit
Single IsSuer Limit
CP Total
Dollar WAM for all CP
All US Dollar Denominated
Compliance
months
(25% >6 Months)
A1
25%
5%
5%
5%
30%
<31 Days
Actual
15%
29.5%
17.62
Comply
Yes/No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
63
Date of Client Portfolio 6/20/97
Portfolio Number 694
Pod'folio Guideline
Weighted Avg. Maturity (Days)
Minimum NAV
Maximum NAV
Comply
Actual Yes/No
90 ' 79.32 Yes
0.9950 1.0014 Yes
1.0050 1.0014 Yes
GOVT
AGENCY
CP
CP SPLIT
CD
REPO
BA
MMF
MTN
OTHER
Sector
% Market Maximum Minimum
Value Limits Limits
0.00% 100% . 0%
13.60% 100% 0%
' 22~;0% .... ~0% -' '0%'
0.30% 3% 0%
27.82% 30% 0%
0.00% 50% 0%
25.62% 40% 0%
3.44% 20% 0%
7.01% 30% 0%
0.00% 0% 0%
100.00%
Comply
Yes/No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Individual Security
Final Maturity
Percentage per Secudty
Credit Quality
Barbell (25% > 6 Months)
Repo Counterparty Rating
Single US Agency Limit
Single Bank BA Limit
Single Issuer CP Limit
Single Issuer Limit
CP Total
Dollar WAM for all CP
All US Dollar Denominated
Compliance Actual
13 months
(25%>6Months) 10%
A1
25%
'5%
5%
5%
30% 22.50%
<31 Days 15.4375
Comply
Yes/No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Attachment II
Portfolio Compliance Monitoring Agreed Upon Procedures (effective 2~25~97)
Fitch will provide an ongoing quarterly compliance report of the Orange County's
investment portfolio based on the following agreed upon procedures. The scope of the
work to be performed will be limited to these agreed upon procedures and the
procedures will be included as an appendix to all compliance reports issued by Fitch.
Fitch will evaluate the County's Commingled and Educational pools as of the last day of
each quarter in order to determine whether the County's pools are in compliance as of
that date.with the following 'guidelines.
A) Maturity
1)
2)
3)
4)
5)
6)
7)
No individual security has a final maturity date greater than 13
months.
The weighted average maturity (WAM) of the each pool ~ -
is less than 90 days.
No more than 25% of each pool's portfolio can be invested in
securities maturing in a period greater than 6 months.
No commercial paper has a final maturity of greater than 180
days.
Dollar weighted average maturity of all commercial paper must be
less than 31 days.
No. Bankers' Acceptance has a final matudty of greater than 180
days.
No receivable-backed security greater than 90 day maturity.
Fitch will rely on the final maturity dates provided by Orange County when
performing the calculations. Fitch will not independently veri~ the accuracy of
such information..
B) Credit Risk
Commercial Paper
Negotiable Certificates
Bankers' Acceptances
Receivable-Backed Securities
Medium Term Notes
State and Local Agency
at least F-l, A-l, or P-1
at least F-l, A-l, or P-1
at least F-l, A-l, or P-1
at least AA
at least A
at least A
c)
D)
Collateral Counterparty Risk- All counterparties to repurchase agreements are
rated at least F-1 / A-1.
Net Asset Value (NAV) - Maintained within a range of 99.5 - 1.005. Fitch will
rely on the NAV provided from Orange County or the custodial bank.
65
E)
Diversification Guidelines - Maximum percentage concentration of the portfolio
at the time of purchase ,
U.S. Treasury
U.S. Govemment Agencies
Commercial .Paper (CP)
Split-rated CP
Certificates of Deposit
Repurchase Agreements
Bankers' Acceptances
Money Market Funds
Receivable Backed Securities
Medium Term Notes
State and Local Agency
100%
100%
3O%
3%
3O%
-50%
4O%
2O%
10%
3O%
10%
At the time of purchase, no more than 5% of the total market value may be
invested in securities of one issuer with the exception that up to 10% of the total
market Value may be in~/ested in the Shares of one-money market fund and Up t°
100% of the total market value may be invested in obligations of the U.S.
Government, U.S. Government agencies, or U.S. Government-sponsored
enterprises.
Fitch will rely on the security types and issuers provide by Orange County when
performing these calculations. Fitch will not independently verify the accuracy of
such information and will not "look-through" to the underlying assets of any
money market fund held.
F)
All investments are U.S. dollar denominated.
Fitch does not intend to verify the type or level of over-collateralization associated with '
the pools' repurchase agreements and/or its time deposits exceeding $100,0001
Additionally, Fitch will employ a random sample of not less than 3 observations from
among the daily data received from Orange County to determine whether the County's
pools were in compliance as of the sampled dates with regard to the aforementioned
guidelines.
Fitch, in its normal course of monitoring a rated portfolio's assets, performs additional
surveillance tests based on Fitch's published ratings guidelines. Fitch intends to
continue to perform this surveillance function, however, Fitch does not plan to broaden
the scope of these agreed upon procedures to include additional procedures used in the
surveillance process.
.. 66
Reporting Requirements
In order to perform the above mentioned compliance monitoring, Fitch will need to
receive the following reports on a weekly basis.
A)
B)
c)
D)
Daily Portfolio Holdings in electronic form
Weekly Compliance Reports in electronic form
Daily Investment Transactions Report
Daily Pricing Report in electronic form
Fitch, when performing these agreed upon procedures, intends to rely on documents
and information provided by Orange County and/or its custodian bank. Fitch does not
intend to independently audit or verify the truth or accuracy of such information as it
pertains to the aforementioned agreed upon procedures.
6'/
MONTHLY TREASURY MANAGEMENT REPORT
Distribution List
.Assessor
Hon. Bradley L. Jacobs
Board of Supervisors
Hon. James W. Silva
Hon. Charles V. Smith
Hon. Todd Spitzer'
Hon. William G. Steiner, Chair
Hon. Thomas W. Wilson
CEO's Office
Gary Burton, CFO
Michael Kolodisner
Michael M. Ruane
Tom Beckett
Clerk of the Board Of SUpervisors
Darlene Bloom
Community Services Agency
Hon. William A. Baker, Public Guardian
.County Clerk-Recorder
Hon. Gary L Granville
County Counsel
Laurence M. Watson
District Attorney
Hon. Michael R. Capizzi
Fire Authority
LarryJ. Holms
Health Care Agency
-Tom Uram
Housing and Community Development_
Bob Wilson
Human Resources
Jan Walden, Assistant CEO
I~nte~rated Waste Management
V/cki Wilson
Internal Audit
David E. Sundstrom
John Wayne Airport
O. B. Schooley, Director
Law Library
Maryruth Storer, Director
~Local Agency Formation Commission
Dana.M. Smith, Executive Officer
Marshal
Michael S. Carona
..Municipal Court (Executive Officers)
Robert B. Kuhel - (Central)
'James'R. Peterson (Harbor)
William J. Brennan (North)
Joyce Ziegler (South)
Richard Biggins (West)
Orange County Employees
Retirement System
Ray Fleming
Orange County Cemetery D/strict
Sam Randall
.Orange CoUnty Library
John Adams
Orange County Sanitation District
Steve Kozak
Oran_~e County Transportation Authority
James S. Kenan
Planning'& Development Services
Tom Mathews
Probation
Michael Schumacher
Public Defender
Carl C. Holmes, Chief Deputy
Public Facilities & Resources
John Sibley
_Registration & Elections
Rosalyn Lever
Sheriff-Coroner
Hon. Brad Gates
Social Services
Larry Leaman
Superior Court
Alan Slater, Executive Officer
Superior Court\Victim/Witness Program
Barbara J. Morison, D/rector
Treasury Advisory Committee
Blake Christian ..........
Bruce Hughes
George Jeffries
Clyde Kendzierski
Wendy Margarita, Dept. of Education
John Nelson, Dept. of Education
Hon. Jeffrey Thomas, Chair
Treasury Oversight Committee
Hon. John Dean, Dept. Of Education
Robert Fauteux, Chair.-
Hon. Steve Lewis, Auditor-COntroller
Jan Mittermeier, CEO
Treasurer's Staff
William Eberhardt, Ass't. Invest. Officer
Judith J. Jacobson, Investment Officer
Hon. John M. W. Moorlach, Treasurer
.Complimentary Copies - Public
Hon. Randal Bressette, City of Lag. Hills
Steve Faeth, Great Pacific Securities
Mark Robles, A. G. Edwards & Sons, Inc.
Margaret Rutledge, Mesa Con. Wtr. Dist.
Hon. Christina Shea, City of irvine
Hon. Jan DeBay, Cra/of Newport Beach
Hon. Joe Erickson, City of Costa Mesa
John Sawyer, O.C. Employees Association
Eric Woolery, OCDE Board of Trustees
Fitch Investors Se~ce, L.P.
John Schiavetta
TREASURER
TAX-COLLECTOR
IN'gESTMENT POLxGY STATEMENT
Interpretations / Modifications
June 25, 1997
SUBJECT:
ISSUE:
Medium Term Notes
Definition of Medium Term NOtes
INVESTMENT POLICY STATEMENT:
lVlW. DIIJM-TERM NOTES
Medium-term notes with a maximum remaining maturity of thirteen months, issued
by corporations organized and operating within the United State2s or by depository
institutions licensed by the United States or any state and operating within the
United States. Eligible notes shall be rated "A" or its equivalent or better by a
na_tionally r"eC°gniz~ rating Service.. Purchases .of medium-mmnotes may not
exceed 30 percent of the Money Market Investment Pool market value.
CALIFORNIA GOVERNMENT CODE 53601j/53635j:
(j) Medium-term notes of a maximum of five years maturity issued bY
corp-0rafions organized and operating within the United States or by deposi-
tory institutions licensed by the United States or any state and operating.
within the United States. Notes eligible for investment under this subdbdsion
shall be rated in 'a rating category, of "A" or its equiva!ent or better by a
nationally rec%maized rating service. Purchases' of medium-term notes may
not exceed 30 percent of the agency's surplus money ~vhich may be invested
pursuant to this section.
LOCAL AGENCY INVESTMENT GUIDELINES, California Debt Advisory Commission
.
..
;.
Section 536010) ereaes'eonfusion because 'it does not clearly defi~e what types of
· obligmions fall under the category of"mediUm-term notes". A variety of reasons aex, ount
for this eonfixsion. One i~ that corporate notes are treated slightly differently from
medium-term notes by the SEC' Another is that brokers o/ten refer to eorporat~
obligations that have an original term to m~n-ity longer than 5 years as corporate rather
than medium-term notes, even though the present term to mannity for these note~ may be
less-than 5 years.
-.
Minimum legal requirement: The phrase "medium-term notes" within the context of
Section 53601 (j) only refers to the time it takes for an obligation to mature. Therefore,
investments in any corporate or medium-term note which mamre~ within 5 years fi'om'
time of purchase is legal as long as they meet the minimum quality standa~. If an
agency wants to purchase notes that mann'e in excess of 5 years, it needs to receive
express authority from the legislative body either specifically or as pan of an investment
program approved by the legislative body no less than 3 months prior to the investment.
DISCUSSION: There is e ambiguity in our IPS and Gow ,ent Code regarding xvhich
specific securities fall with, .... ne definition of a MTN. The ke~ ,~estion is whether MTNs
indude only those securities originally issued as a Medium-Term Note, or do MTNs also include
other corporate debt issues whose remaining maturity now falls within the parameters of a
medium term note (generally defined as an issue with 5 years or less to maturity): Both the IPS
and Government Code appear to refer to MTNs as a generic class ("medium-term notes") rather
.than a specific security ("Medium-Term Notes"). The California Debt Advisory Commission
concludes that MTN "only refers to the time it takes for an obligation to mature. Therefore,
investments in any corporate or medium-term note which matures within 5 years from time
of purchase is legal as long as they meet minimum quality standards."
John Abbott, Deputy County Counsel, opines "that the remaining maturity of Medium Term
Notes at the time of purchase is a permissable method by which to calculate the 'five years [ 13
months, in our case] maturity limitation under the applicable Code provisions." With regard to
which specific securities may be classified as MTNs, lohn Abbott would prefer to leave this issue to
our judgment. John Schiavetta (Fitch) confirms that street convention is to treat all corporate debt
issues as parri passu with medium,term notes when their maturities fall within 5 years.
when viewed from the standpoint of safety of principal, Medium-Term Notes are a general
-obligation of the corporation, and would rank behind Senior Notes, Senior Debentures and all
secured financings (First Mortgage Bonds, Equipment Trust Certificates, etc.) in a claim on
assets .... even though these senior/secured instruments might have originally been issued for periods
longer than 5 years. The rating agencies recognize this seniority ranking when assigning credit
ratings. The addition of medium-term corporate debt could, therefore, enhance the portfolio's
credit quality vs. the more restrictive definition of a Medium-Term Note.
"Banlc notes" issued by a bank, MTNs issued by a bank holding company, and all other long-term
debt obligations issued by an eligible depository institution Should also be included.within the
definition of "medium term notes". Depository institutions issue "medium-term notes" at the
bank holding company level and "bank notes" at the operating bank level. Reflecting the priority
in the banl<'s capital structure, ratings on "bank notes' are typically one notch higher than the
ratings on MTNs issued at the holding company level (Fabozzi's Handbook of Fixed Income
Securities).
CONCLUSION: The Treasurer and the Investment Division concludes that, .for the purp°se of
identifying eligible securities within the context of the Investment Policy Statement, the definition
of "medium-term notes" means all corporate and depository institution debt securities
with a remaining maturity of I g months or less at the time of purchase, which meets our
minimum quality and domestic-issuer standards.
[-]Interpretation / No Modification Required
[!-;]/Interpretation / Modification Required
ADOPTED:
NOTE: This Interpretation was reviewed and accepted at the Treasurer's Advisory Committee
meeting on lune 25, 1997.
COUNTY OF ORANG
COUNTY COUNSEL
May 2, 1997
T-400
CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED MEMORANDUM'
TO:
FROM:
SUBJECT:
John M.W. Moorlach, Treasurer-Tax Collector
John H. Abbott, Deputy County Counsel
Medium Term Notes
BACKGROUND
California Government Code Sections 536010)and 536350) permit treasury investment
' in the following instruments:
(j) Medium-term corporate notes of a maximum of
five years maturity issued by corporations
organized and operating within the United'
States or by depository institutions licenses
by the United States or any state and operating
within the United States. Notes eligible foi'
investment under this subdivision shall be rated
in a rating category of"A" or its equivalent
or better by a nationally recogniZed rating service.
Purchases of medium-term notes may not exceed 30
percent of the agency's surplus money which may
be invested pursuant to this section.
The Orange County Treasurer Investment Policy Statement Money Market Investment
Pool (the "policy") in Section IV. 10., permits investment in Medium Term Notes "with a
maximum remaining maturity [at purchase] of thirteen months .... "
In your memorandum of April 22, 1997, you advise that the "market" considers Medium
Term Notes to include obligations originally issued with a five year or less maturity and those
corporate obligations which remaining maturity is five years of less. In addition, you advise that
the market for original issue Medium Term Notes is extremely small, whereas the market for
notes which remaining maturity fits. within the five year limitation is much larger. Finally, rating
agencies consider obligations of equal seniority to have equal standing notwithstanding whether
issued originally as a Medium Term Note or currently .with a remaining maturity within the five
year period.
N:CORPNOTE.JHA/va OPINION NO. 97-79
John M.W. Moorlach, Tr,
May 2, 1997
Page 2
rer-Tax Collector
In their Local Agency Investment Guidelines (October 10, 1996), the California Debt and
Investment Advisory Commission states that the Medium Term Notes provision of Code section
53601 (j) creates confusion since 1. corporate notes and medium term notes are treated differently
by the Securities and Exchange Commission and 2. securities brokers typically refer to corporate
obligations which have an original issue maturity in excess of five years as corporate obligations
rather than Medium Term Notes, even thought the obligation has a remaining maturity of five
years of less. The Investment Guidelines conclude that Medium' Term Notes may be purchased
so long as the remaining ..maturity is five years of less (and credit quality requirements are met).
You concur with CDIAC's conclusion.
For the purpose of this Opinion, we have relied, without independent verification, upon
the Assertions containedin.your .April 22, 1997 Memorandum and CDIAC's Investment.
Guidelines.
O_UESTION
You have requested the opinion of County Counsel whether the "five years maturity"
limitation of Medium Term Notes in Code Sections 536010) and 536350) is calculated from the
date of original issuance or the remaining maturity at purchase.
ANSWER
Although not entirely free from doubt, we are of the opinion that the remaining maturity
of Medium Term Notes at the time of purchase is a permissible method by which to calculafe the
"five years maturity" limitation under the applicable Code provisions. However, you may wish
to consider an alternative (and more conservative) approach of calculating maturity from the date
of note issuance..
DISCUSSION
Following a review of the applicable provisions of Califomia law, we are once again
faced with interpreting an overly ambiguous provision of law regulating the investment of public
funds. Although there is no entirely clear legal conclusion which can be garnered from the
information available to us with respect to Code Sections 536010) and 53635(j),'we nevertheless
conclude that ~ maturity may be employed to calculate the "five years maturity"
limitation on the purchase of Medium Term Notes. Although other factors were considered, the
overriding objective of public funds investment of safety of principal (Code Sections 27000,
27000.5, 63600.5 and 53635) is met using remaining maturity. In addition, the secondary goal of
liquidity (Code Section 27000.5 and 53600.5) is suppoi'ted through access to a broader market.
Notwithstanding the foregoing cOnclusion, we suggest that you consider employing the
N:CORPNOTE.JHAJva
OPINION NO. 97°79
John M.W. Moorlach, Trea~
May 2, 1997
Page 3
Tax Collector
conservative "original issue" date approach to the purchase of such obligations.
·
Finally, the opinion expressed herein is based upon the facts presented herein, the
application of those facts to relevant provisions of California law and is solely limited to the
question presented. No opinion, whether express of implied, is rendered with respect to any
other issue. We render no opinion, express or implied with respect to any investment decision,
course of investment or the prudence of any investment decision or course of investment.
If you have any questions, please call the undersig
JHA:va
cc: Daniel J. Hempel, Assistant Treasurer
aed at 834-4379.
N:CORPNOTEJI-IA/va
OPINION NO. 97-79
TREASURER
TAX-COLLECTOR
INVESTMENT POLICY STATEMENT
Interpretations / Modifications
June 25, 1997
SUBJECT:
ISSUE:
Medium Term Notes
Should. Commerdal Paper ratings apply to MTNs? Are "A" rated MTNs
eligible investments if the issuer also has commerdal paper rated less than
A1/I)1 ? Split-rated C/P? A2/P2 rated C/P?
INVESTMENT POLICY STATEMENT:
Mlz. DIIJM-TERM NOTES
Medium-term notes with a maximum remaining maturity of thirteen months, issued
by corporations organ/zed and operating within.the-United SateS 0-r by depository
institutions licensed by the United Sates or any state and operating within the
United States. Eligible notes shall be rated 'A' or its equivalent or better by a
nationally recogni7~ rating service. Purchases of medium-term notes may not
exceed 30 percent of the Money Market Investment Pool market value.
CALIFORNIA GOVERNMENT CODE 5360 l j/53635j-
(j) Mediinu-}erm notes of a maximum of five years mamrky issued by
co~orafions organized and operating Within the United States or by deposi-'
tory institutions licensed by the United States or any state and operating
Within the United States. Notes eli~ible for investment under this subdivision
shall be rated in a rating category of "A" or its equivalent or better bv a
.nationally reco,gnized rating service. Purchases of medium-term notes may
not exceed 30 percent of the agency's surplus money which may be invested
pursuant to this section.
DISCUSSION: The IPS and California Government Code each require that a medium-term
note ("MTN") be rated "A' or better in order to be an eligible investment. They are silent as to
whether the issuer's commercial paper rating is an eligibility limitation for a MTN.
Commerdal paper is an unsecured promissory note issued by a corporation with a maturity not
exceeding 270 days. Commerdal paper ratings address the issuer's ability to repay these short-
term obligations on time. The rating agendes use the following qualifiers in their.rating
definitions:
SHORT-TERM RATING DEFINITIONS
MOODY'S
P 1 '. Superior ability
P2 ' Strong ability
P3 ' Acceptable ability
S&P
A1 · Strong capadty
A2 · Satisfactory capadty
AB -Adequate capacity
LONG-2. ~ RATING DEFINITIONS
MOODY'S
Aaa: Best quality
Aa: High quality
A: Upper-medium grade
Baa: Medium-grade
S&P
AAA: Extremely strong
AA: Very strong
A: Strong
BBB :Adequate
Attached are the rating agencies' definitions for their ratings. There is a predictable
correlation between the rating agencies' short-term and long-term ratings. The single-A long-
term category encompasses bOth Al/P1 and A2/P2 short-term rated issuers. In addition, the
A2/P2 short-term rating category covers/VA to Baa/BBB rated long-term debt issuers. In
general, the middle-to-higher "A' rated issuers will have AI/P 1 short-term debt ratings; while
the lower "A' to higher "Baa/BBB" rated issuers will haVe A2/P2 short-term debt ratings.
Commercial paper issuers with "split ratings" will fall somewhere in-between.
The single-A long term rating criteria for MTNs limits our investments to issuers whose debt
is characterized as being "upper-medium grade; strong", If we were to. allow single-A rated ....
issuers who also have A2/P2 short-term debt ratings (and would be ranked in the upper-tier of
that rating category), those issuers would be further characterized as having a "strong ability;
satisfactory capacity" to meet their short-term obligations.
lohn Schiavetta (Fitch) feels that MTNs should be viewed as an .alternative to commercial
paper; and, as such, the commercial paper rating limitations should apply.' A more liberal
interpretation of this rating criteria would view MTNs as a separate class of securities with its
own rating criteria per Government Code.
CONCLUSION: Commerical paper ratings add a bit of fine tuning within the single-A long-
term debt rating. The Treasurer and the Investment Division concludes that the combination
of single-A and either AI/P 1 or split-rated (Al/P2 or A2/P 1) commercial paper ratings, if any,
provides a credit that is considered "investment grade" and would meet government code as
well as our high quality standards. No more than 5% of the Money Market Investment Pool
may be invested in medium-term notes with a split rating. This interpretation would'
predude the eligibility of MTNs that have A2/P2 C/P ratings.
I-1Interpretation / No Modification Required
[vi/Interpretation/Modification Required
ADOPTED:
J~t~'~ lxJI~ W.~Moo~, C.P.A.,/CFP
Treasurer-Tax Collector
NOTE: This In{:erpretation was reviewed and accepted at the Treasurer's Advisory Committee
meeting on June 25, 1997.
MOODY'S SHORT-TERM DEBT RATINGS
toody's short-term debt ratings are opinions of the ability of issuers to repay
unctually senior debt obligations which have an original maturity not exceeding one
ear. Obligations relying upon Support mechanisms such as letters..of-craclit and
onds of indemnity are excluded unless explicitly rated,
4oody's employs the following three designations, all judged to be investment
rede, to indicate the relative repayment .ability of rated issuers:
Prime-1
~uers rated Prime-1 (or supporting Institutions) have' a s.uperior' 'ability for
.payment of senior short-term debt obligations. Prime-1 repaYme'nt ability will often
e evidenced by many of the following characteristics:
--Leading market positions, in well-established Industries.
--High rates of return On funds employed.
-Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
· .Broad margins in earnings coverage of fixed financial charges and high internal
cash generation.
-Well-established access to a range of financial markets and assured sources of '
alternate liquidily.
Prime-2
:suers rated Prime-2 (or supporting i~stitutions) have a strong ability, for repayment
f senior short-term debt obligations. This will normally be evidenced by many o! the
· ~aracteristics cited above but to a lesser degree. Eamings trends and coverage
{rios, wh~e sound, may be more subje.ct to variation. Capitalization characteristics,
· hlle still appropriate, may be more affected by external conditions. Ample alternate
:luidity is maintained,
Prime-3
.suers rated Prime-3 (or supporting, institutions) have an acceptable ability for
;payment of senior short-term obliqafions. The effect of industry characteristics
nd market compositions may be more pronounced, Variability in earnings and
.,'ofitability may result in changes in the level of debt protection measurements and
ray require relatively high financial leverage, Adequate alternate r,:luidity is
laintained.
Not Prime
suers rated Not Prime do not fall within any of the Prime rating categ~es.
KEY TO MOODY'S CORPORATE RATINGS
Aaa
· Bonds which are rated Aaa are judged lo be of the best quali~ They carry the
smallest degree of investment risk and are generally ~eferred to as ."gilt edged."
Interest payments am prot~ed by a large or by an exceptionally stable margin and
principal is secure, Whlie the various protective elements are likely to change, such
changes as can be visualized are most unl~ely to impair the fundamentally strong
position of such Issues.
Aa
Bonds which are rated Aa are judged to be of high quality by ali standarc~s. Together
with the Aaa group they comprise what are generally known as high grade~z~onds. They
are rated lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuaUon of protective elements may be of greater amplitude or
there may be other elements present which make the Iong-lerm risk appear somewhat
larger than the Aaa securities. -
A
· Bonds which are raled A possess many favorable Investment attr~utes and are Io be
considered es upper-mecrnJrn-cjrade obligations. Factors giving security Io principal and
interest are considered adequate, but elements may be present which suggest a
susceptibaty to Impairment some time in the future.
Baa
Bonds which are rated Baa are considered as medium-g, fade obligations, (i.e., they
are neither highly protected nor poorly secured}. Intere'~t payments ~d principal
security appear adequate for lhe present but certain protective elements may be
lac~g or may be chamcte~tically unreliable over any great length of lime. Such bonds
lack outstanding Investment characteristics and in fact have spC~culaUve characteristics
as well
aa
Bonds which are rated Ba are judged to .have speculative elemenf.<; their luture
cannot be considered as well-assured. Often the protection of interest-and p~icipal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over Ihe Mure. Uncertainty of position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable investmenL
Assurance of Interest and principal payments or ol maintenance of other terms o1' the
contract over any long period 'of time may be small,
Cae
Bonds which are rated Cae are of poor standincj. Such issues may be. in default or
Iflere may be present elements of danger with reject to principal or interest.
Bonds which are rated Ca represent obligations which are ,speculative in a hicjh
~ Such is,mas are olten in default or have other marked 'shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects ol ever attaining any reel investment
standing,
Note: Moody's applies numerical moa'il'mrs, 1, 2 and 3 in each generic'rating
cta.~sit'~tion from Aa !o B. The mocr~er 1 IncrK:ates that the company ranks in the.
higher end. of its generic ralJn(j catego~, the rnod'~er 2 Indicales a mid-range ranking;,
and the mocraer 3 Ind'~:atas Itat the company ranks in the lower end of its generic rating
category.
/,
ISSUE CREDIT RATING DEFINITIONS A Standard & Poor's issue credit rating is
a current opinion of the creditwor}hiness of an obligor with respect to a
.specific finanCial obligation' a specific class of financial obligations,
or a specific financial program (including ratings on medium term note
programs and commercial paper programs.) It takes into consideration the
creditworthiness of guarantors, insurers, or other forms of credit
enhancement'on the obligation'and takes into account the currencg in which
the obligation is denominated. The issue credit rating is not a
recommendation to. purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitabilitg for a particular
investor.
Issue credit ratings can be'either long-term or short-term. Short-term
ratings are generallg assigned to those obligations considered short-term
in the relevant market. In the U.S., for example, that means obligations
with an Original maturitg of no more than 365 dags including commercial
paper. Short-term ratings are also used to indicate the creditworthiness
of an obligor with 'respect to put features on long-term obligations. The
result is a dual rating, in which the short-term rating.addresses the put
feature, in addition to the usual long-term rating. Medium-term notes are
assigned long-term ratings. ' ............
Long-term issue credit ratings
Issue credit ratings are based, in varging degrees, on the following
cons i derations:
I..Likelihood'of pagment capacitg and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
the ob1 igation;
2. Nature of and provisions of the obligation;
3. Protection afforded bg, and relative position of, the obligation in the-
event of bankruptcg, reorganization, or other arrangement under the laws of
bankr, uP~cg and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, theg pertain to senior obligations of an entitg. Yunior obligations
are tgpicallg rated lower than senior obligations, to reflect the lower
prioritg in bankruptcg, as noted above. (Such differentiation applies when
an entitg has both senior and subordinated obligations, secured and
unsecured obligations, or operating compang and holding compang
obligations.) Accordinglg, in the case of junior debt, the rating mag not
conform exactlg with the categorg definition.
An obligation rated 'AAA' has the highest rating assigned bg Standard &
Poor's. The obligor's capacitg to meet its financial commitment on the
ob1 i gat i on i s extremel~l strong.
'AA'
An obligation rated' 'AA' differs from the highest rated obligations onlg in-
small degree. The obligor's capacitg to meet its financial commitment on
the obligation is ver~ strong.
· .
An obligation rated '~;~ -is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions-than obligations in
higher rated categories. However the obligor's capacitg to meet its
financial commitment .on the obligation is still ~stron~l;
'BBB'
An ob1 igat ion rated ' BBB' exh i bi ts adequate protection parameters. However,
adverse economic conditions or chan~ing circumstances are more l ikelg to
lead to a weakened capacitg of the obligor to meet its financial commitment
on the ob1 i gat i on.
Obligations rated 'BB', 'B', 'CCC' 'CC', and 'C' are regarded as having
significant speculative characteri;tics. 'BB' indicates the least degree of
speculation and 'C' the highest. Uhile such obligations will l ikelg have
some qualitg and protective characteristics, these mag be outueighed bg
large uncertainties or major exposures to adverse conditions.
'BB'
An obligation rated 'BB' is less vulnerable to' nonpagment than other
specuJatjg6'issues. Houev~' it faces major ongoing uncertainties or
exposure, to adverse business,-financial', or economic conditions' which could
lead to the obligor's inadequate capacitg to meet its financial commitment
on the obligation.
'B'
An obligation rated 'B' is more vulnerable to nonpagment than obligations
rated 'BB', but the obligor currentlg has the capacitg to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions wi]l likelg impair the obligor's capacitg or
willingness to meet its financial commitment on the obligation:
'CCC'
An obligation rated 'CCC' is currentlg vulnerable to nonpagment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likelg to have the capacitg to meet its financial commitment on the
obligation.
'CC'
An obligation ra~ed 'CC' iS Currentlg highlg vulnerable to nonpagment.
,C~
The 'C' rating mag be used. to cover a situation where a bankruptcg petition
has been filed or similar action has been taken, but pagments on this
obligation are being continued..
'D'
An obligation rated 'D' is in pagment default' The 'D' rating categorg is
used when pagments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes, that such pagments will be made during such grace period. The 'D'.
rating also will be used upon the filing of a bankruptcg petition or the
taking of a similar action if pagments on an obligation are jeopardized.
Plus'(+) or minus(-): ratings from 'AA' to 'CCC' m~ /e modified bg the
addition of a plus or m-inus sign to show relative standing within the major
rating categories.
Short-term issue credit ratings_
A short-term obligation rated 'A-I' is rated in the highest categorg bg
Standard & Poor's. The obligor's capacitg to meet its financial commitment
on the obligation is strong. ~4ithin this categorg, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacitg.
to meet its financial commitment on these obligations is extremelg strong.
A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor~s capacitg to
meet its financial commitment on the obligation is satisfactorg.
A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more l ikelg to lead to a weakened capacitg of the obligor to meet its
financial commitment on the obligation.
'B'
A short-term obligation rated 'Bi is regarded as having significant
speculative characteristics. The obligor, currentlg has the capacitg to meet
its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacitg to meet'
its financial commitment on the obligation. --
'c'
A short-term obligation rated 'C' is currentlg vulnerable to nonpagment and
is dependent upon favorable business, finan'cial, and economic conditions
f_o.r .th_.e ..o..bl!gor to meet its financial commitment on the.ob.l_!g..a.t].on. . .........
'D'
A short-term obligation rated 'D' is in pagment default. The 'D' rating
categorg is used when pagments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such pagments will be made during such grace period.
The 'D' rating also will be used upon the filing of a bankruptcg petition
or the taking of a similar action if pagments on an obligation are
jeopardized.