Sept. 3, 2007

King County takes steps to protect bond rating and assets for investment pool members

Due to increased volatility in the commercial paper investment market, King County has taken steps to maintain its investment pool's "AAAf" designation from rating agency Standard and Poor's Rating Services and protect the assets the county manages for its agencies, and dozens of special districts and governments.

Currently, the King County Investment Pool invests cash reserves for all King County agencies and approximately 100 special districts and other government entities such as school, fire, 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 over $4.1 billion.

Last week, the county took protective steps after learning of downgrades for Mainsail and Cheyne, two commercial paper investments in King County's investment pool portfolio, which had the potential to impact the pool's high rating. The two investments make up about 2.5 percent of the investment pool's assets or $103 million out of the $4.1 billion investment portfolio.

While the Cheyne downgrade does not impact the pool rating because it still meets the rating agency standard of "investment grade," the downgrade to Mainsail makes it "below investment grade" and could affect the pool's overall rating.

In response, the County Executive Finance Committee halted the purchase of all forms of commercial paper, is actively researching any other potential exposures in its portfolio, and segregated Mainsail from the rest of the pool's investments. This means the county assumes full responsibility for recovering the principal and interest on this single investment and thereby protects pool members and the county's overall pool rating.

"Experts tell us these are the most severe price and rating changes in this financial sector since 9/11, so these downgrades of once-highly rated investments were very sudden and unprecedented," said County Executive Ron Sims. "However, given the trust placed in us by our pool members and the taxpayers who fund these investments, we moved as quickly as possible to sustain confidence in the pool."

If any other "below investment grade" ratings impact the remaining commercial paper holdings, or if there are other unforeseen circumstances that dictate a different course of action, the county will return Mainsail to the investment pool and accept the possibility of a downgrade to the pool.

King County's investment pool rating indicates an extremely strong level of protection against losses from credit defaults as measured on a seven category credit quality rating scale from "AAAf" (highest level) to "CCCf" (lowest level).

Over the long run, the pool has achieved a competitive investment return, while being invested in prudent and liquid securities. These desirable qualities have substantially increased participation in the pool, with 100 local governments joining the pool between 1993 and 2005. In 2006, the pool distributed nearly $166 million in investment earnings to its participants.

King County's Finance and Business Operations Division is responsible for the day to day management of the pool. Investment policies are established by King County's Executive Finance Committee. The guidelines established by the Executive Finance Committee direct that the pool be managed so that it attains a market rate of return throughout budgetary and economic cycles, while preserving and protecting capital.

The members of the Executive Finance Committee include: Councilmember Bob Ferguson, Chair; Jim Buck, County Administrative Officer, Designee; Bob Cowan, Director, Office of Management and Budget; and; Ken Guy, Director, Finance and Business Operations Division.