King County Investment Pool: "Weathering the Global Credit Crunch"

The King County investment pool invests cash reserves for all county agencies and approximately 100 special districts and other public entities such as fire, school, sewer and water districts and other public authorities. It is one of the largest investment pools in the State of Washington with an asset balance of about $4.2 billion. On average, County agencies comprise 40 percent of the pool and outside districts are 60 percent, with assets of the County’s General Fund comprising approximately six percent of the balance in the pool.

An Executive Finance Committee (EFC) establishes County investment policies and oversees the investment portfolio to ensure that specific investments comply with both those investment policies and Washington State law. The pool is only allowed to invest in certain types of highly-rated securities including certificates of deposit, US treasury obligations, federal agency obligations, municipal obligations, repurchase agreements and commercial paper. In 2007, the pool distributed nearly $200 million in interest earnings to members and has averaged a 5 percent rate of return over the past 13 years.

Because of unprecedented turmoil and uncertainty in global credit markets surfacing in late August 2007, the County halted all purchases of commercial paper. In early September 2007, the County commissioned an outside financial consultant, Public Financial Management (PFM), to review the pool’s remaining investments in commercial paper and make recommendations going forward. PFM validated the County’s strategy of halting the purchase of any new commercial paper and recommended holding remaining assets to maturity dates, while monitoring new developments in the commercial paper markets.

In early 2008, the County pool ended up having four impaired commercial investments in its portfolio with an outstanding par value of $207 million or about 5 percent of total holdings. For three of the four impaired investments (Cheyne, Rhinebridge and Mainsail) the County has participated in restructuring auctions and has recovered a total of $75.2 million or about 50 percent of the adjusted par value of these securities. The County is waiting for a restructuring auction to occur before the end of this year for its only outstanding commercial paper obligation remaining in the portfolio (Victoria, $53 million par value).

The County has asked PFM to conduct quarterly portfolio reviews of all assets in the pool and has concluded that with the exception of the one remaining impaired investment “…on the whole, the County’s pool is sound.” The most recent portfolio review dated October 2008 can be obtained at the following web site link:

http://www.kingcounty.gov/operations/Finance/news/CommercialPaper.aspx

Due to all the uncertainties in today’s credit markets, the current investment strategy is to keep the average duration on the portfolio under six months when it has typically been in the 1.0 to 1.75 years range. PFM fully supports this short term strategy. In addition, the investment pool has no exposures to Lehman’s, AIG, WaMu, Merrill Lynch or other financial institutions which have recently made the news.

Standard & Poor’s (S&P) first rated the County’s investment pool in 2005 and granted the pool its highest rating of AAAf. The pool has continued to earn this highest rating in 2006 and again in 2007. In mid-January 2008, S&P took the temporary action to suspend their rating of the pool pending the outcome of restructuring events associated with each impaired investment. The County fully expects to see its AAAf rating restored in the near future now that three of the four restructuring auctions are completed and the remaining impaired investment has been segregated into a small “impaired pool” separate from the large “performing pool.” The impaired pool was established by the County to help account for the recovery of funds from the restructuring auctions and post-auction residual cash payments.

It is important to note that Standard & Poor’s “pool rating” discussed above is completely separate and distinct from King County’s “bond rating.” Last week, both Standard & Poor’s and Fitch awarded King County their highest short term ratings and reaffirmed the County’s bond ratings on all previous long term bond issues, including each agency’s highest AAA rating on certain long term bonds. These high ratings were renewed despite stepped up scrutiny by the rating agencies because of the worldwide credit crises.

If you have any questions or need additional information please email or call Ken Guy, Director of Finance, at these contact numbers: Ken.Guy@kingcounty.gov or 206-263-9254.