King County Investment Pool: "Weathering the Global Credit Crunch"
Dec. 20, 2007The 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 $4.8 billion as of November 30, 2007. County agencies comprise 40 percent of the pool and other special districts make up the remaining 60 percent.
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 low risk, highly-rated securities including certificates of deposit, US treasury obligations, federal agency obligations, municipal obligations, repurchase agreements and commercial paper.
Since August 2007, there has been unprecedented volatility in the commercial paper market, especially for asset-backed commercial paper. Commercial paper is a security that is traditionally short term and issued by corporations and/or financial firms to fund their operations. The pool currently holds limited amounts of asset backed commercial paper issued by global financial programs. The underlying assets in these type of programs include highly rated securities involving mortgages (residential and commercial), home equity loans, auto loans, student loans, and credit card receivables.
General fears about exposure to sub-prime mortgages caused investors to avoid all forms of commercial paper. This situation contributed to the credit rating agencies suddenly and severely downgrading three of the pool’s holdings in asset backed commercial paper: Mainsail, Cheyne and Rhinebridge. These three distressed investments are now part of “enforcement events” in which a third-party receiver takes over the administration of the programs and determines the best way to liquidate assets or refinance the portfolio. Enforcement events are specifically designed to protect the interests of senior creditors, such as the County. There are no financial impacts to report at this time because the impacts cannot be determined until the final outcome of each enforcement event.
In early September 2007, the EFC commissioned an outside financial consultant, Public Financial Management (PFM), to review the pool’s investments in commercial paper and to make recommendations going forward. The PFM report is available on the County’s web site at the link below. The report concluded that it was reasonable for the pool to make investments in asset backed commercial paper. The report also validates the County’s actions to date, which include halting the purchase of commercial paper in August and holding remaining assets to maturity dates, while continuing to monitor any new developments in the commercial paper markets. Using this strategy, the pool has reduced its holdings in commercial paper from 25 percent in August to about 5 percent in December. Since August, the pool has received full payments of principal and interest for 22 holdings in commercial paper totaling $781 million.