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HomeMy WebLinkAbout1999 08 31 Financial Report - Local goverment investment cooperative 08/31/1998 Q FITCH IBCA Structured Finance The International Rating Agency Managed Funds Texas Local Government New Issue Investment Cooperative Rating • Summary Texas Local Government Texas Local Government Investment Cooperative's (LOGIC) liquid Investment Cooperative AAAIV1+ asset portfolio is rated `AAAN1+'. Local government investment pools in this rating category meet the highest standards for credit Analysts quality, conservative investment policies, and safety of principal. The Katherine P.Lynch rating also reflects the pool's strong ability to provide participants with 1 212 908-0892 a constant$1.00 per share valuation at all times. The pool invests in a kplynch@fitchibca.com high-quality portfolio on behalf of school districts, cities, counties, Steve M.Lee utility districts, universities, and other local government entities in 1 212 908-1734 Texas. To ensure safety of principal and participant liquidity, LOGIC smlee@fitchibca.com is managed so that the weighted average maturity (WAM) of all securities does not exceed 60 days. Company Contact SW Capital Corp. ■ Rating Considerations Patrick S.Shinkle • Excellent credit quality resulting from the fund's portfolio assets, Vice President investment practices,and management controls. 1 800 895-6442 • Minimal market risk by virtue of conservative investment practices and average maturity limits. Summary Data • High degree of liquidity sufficient to meet anticipated and Inception Date:April 1, 1994 unanticipated withdrawals. Assets:$1.25 billion(as of Nov.26, 1999) • Dividends:Accrued daily;paid monthly Portfolio Manager:Patterson&Associates ■ Investment Practices 1 800 817-2442 The objective of the pool is to invest only in legally permissible Administrator: SW Capital Corp. (subsidiary investments, provide safety of participants' principal, ensure portfolio of Southwest Securities Group,Inc.) liquidity as required to finance participants' operations, and maximize 1 800 895-6442 current income to the degree consistent with legality, safety, and liquidity. LOGIC invests in instruments that are allowed under the Texas Public Funds Investment Act. LOGIC further limits its investments to obligations of the U.S. government or its agencies and instrumentalities, other obligations unconditionally guaranteed by the U.S. government, repurchase agreements collateralized by such obligations, money market funds rated in the highest category by at least one nationally recognized rating agency, and highly rated commercial paper. The pool enters into matched repurchase agreements with highly rated counterparties, usually on an overnight basis.By policy,the pool will not invest in U.S. government securities representing ownership in mortgage pools or collateralized mortgage obligations (see Portfolio Composition chart,page 2). Although the pool doe not currently enter into matched reverse repurchase agreements, it is permitted to do so to generate incremental yield in the portfolio. Reverse repurchase agreements are limited to 25% of portfolio assets and are only on a matched,overnight basis.In a reverse repurchase agreement, an investment portfolio enters into a secured borrowing arrangement for a predetermined period, using portfolio securities as collateral. The securities are returned on an agreed upon repurchase date at the same price plus a financing cost for use of the cash. LOGIC minimizes any market or liquidity risk by offsetting the reverse repurchase agreement with matched,overnight investments.• February 3, 2000 www.fitchibca.com Q FITCH IBCA Structured Finance The International Rating Agency • • Copyright 0 2000 by Fitch IBCA,Inc.,One State Street Plaza,NY,NY 10004 Telephone:New York,1-800-753-4824,(212)908-0500,Fax(212)480-4435;Chicago,IL,1-800-483-4824,(312)214-3434,Fax(312)214-3110; London,011 44 20 7417 4222,Fax 011 44 20 7417 4242;San Francisco,CA,1-800-953-4824,(415)732-5770,Fax(415)732-5610 John Forde,Publisher;Madeline O'Connell,Director,Subscriber Services;Nicholas T.Tresniowski,Senior Managing Editor;Diane Lupi,Managing Editor;Paula Sirard,Production Manager; Jennifer Hickey,Renee Won,Igor Zaslaysky,Editors;Martin E.Guzman,Senior Publishing Specialist;Harvey M.Aronson,Julie Taub,Publishing Specialists;Colin Grubb,Robert Rivadeneira, Publishing Assistants.Printed by American Direct Mail Co.,Inc.NY,NY 10014.Reproduction in whole or in part prohibited except by permission. Fitch IBCA ratings are based on information obtained from fund managers,underwriters,sponsors,investment advisors,and other sources Fitch IBCA believes to be reliable.Fitch IBCA does not audit or verify the truth or accuracy of such information.Ratings may be changed,suspended,placed on Fitch IBCA Alert,or withdrawn as a result of changes in,or the unavailability of, information or for other reasons.Ratings are not a recommendation to buy,sell,or hold any fund.Ratings do not comment on the adequacy of yield levels,the suitability of any fund for a particular investor,or the tax-exempt nature of any fund.Fitch IBCA receives fees from fund managers,sponsors,investment advisors,and underwriters for rating funds.Such fees generally vary from S4,000 to•$150,000 per issue.The assignment,publication,or dissemination of a rating by Fitch IBCA shall not constitute a consent by Fitch IBCA to use its name as an expert in connection with any registration statement filed under the federal securities laws. Fitch IBCA mutual fund volatility ratings are an opinion as to the relative sensitivity of the total return(including price)of a fund's shares to a broad array of assumed changes in(where relevant) interest rates,mortgage prepayment speeds,liquidity of the portfolio,spreads,currency exchange rates,and other market conditions.Volatility ratings are expressed on a scale of'V l+'(least volatile)through`V 10'(most volatile).The`V I+'rating is assigned only to money market funds or local government investment pools that should not experience loss of principal value to shareholders or participants even in severely adverse interest rate environments.Volatility ratings,however,do not predict the direction or magnitude of changes in such market conditions and, therefore,do not predict whether,or the extent to which,any particular bond fund will perform favorably or adversely in the future. Also,the total returns of bond funds with the same volatility ratings but dissimilar portfolio securities may move in different directions and magnitudes under the same market conditions.For example,while both a high-yield bond fund,which is sensitive primarily to changes in credit risk,and an international bond fund,which is sensitive primarily to changes in currency exchange rates,might have`V6'ratings,they are likely to perform differently under the same market conditions.The price of one can increase while that of the other can decrease,or each might increase or decrease in different magnitudes.Moreover,a fund with a'V6'rating might increase in price,while a fund with a`V3'rating might decrease in price.Nevertheless,a fund with a lower risk volatility rating is likely to exhibit less total return sensitivity than a fund with a higher risk volatility rating across a broad and varied range of market conditions. Investors should understand that funds with any volatility rating other than a'V 1+'may experience losses in the event of adverse changes in market conditions.Moreover,these ratings do not constitute a recommendation to purchase,sell,or hold any securities or funds,as they do not comment on the adequacy of the price paid for any security or fund or the suitability of any security or fund for any investor.Fitch IBCA's mutual fund volatility ratings are based on information provided to Fitch IBCA by sources deemed to be reliable.However,Fitch IBCA does not verify the accuracy of this underlying information.Due to the relative efficiency of electronic publishing and distribution,Fitch IBCA Research may be available to electronic subscribers up to three days earlier than print subscribers. Texas Local Government Investment Cooperative 4 KPMG 2500 City Center Tower II 301 Commerce Street Fort Worth,TX 76102 . Independent Auditors' Report P P The Board of Directors Local Government Investment Cooperative: We have audited the accompanying statements of assets and liabilities of Local Government Investment Cooperative(the Fund), including the statements of investments, as of August 31, 1999 and 1998, and the related statements of operations and changes in net assets for the years then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan.and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 1999 and 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Local Government Investment Cooperative as of August 31, 1999 and 1998, and the results of its operations and the changes in its net assets for the years then ended in conformity with generally accepted accounting principles. K`Pw(Cs r1� October 27, 1999 • • • .,.. KPMG LLP.KPMG LLF a US.limited liability partnership,is a member of KPMG International,a Swiss association. LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Assets and Liabilities August 31, 1999 and 1998 Assets 1999 1998 Investments,at amortized cost which approximates fair value(notes 2 and 3) $ 1,143,777,582 985,823,949 Accrued interest receivable 1,381,453 ' 1,931,556 Cash 65,812 — 1,145,224,847 987,755,505 Liabilities Distributions payable 4,962,714 4,785,569 Operating expense payable(note 4) 198,144 227,628 Management fee payable(note 4) 98,384 87,504 Other liabilities — 36,160 _ 5,259,242 5,136,861 Net assets Net assets(equivalent to$1.00 per unit based on 1,139,965,605 and 982,618,644 units outstanding in 1999 and 1998,respectively) $ 1,139,965,605 982,618,644 See accompanying notes to financial statements. J • LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Investments August 31, 1999 and 1998 1999 Average Carrying Fair Investment type yield value value Repurchase Agreements: Fuji Securities 5.59 % $ 154,466,050 154,466,050 NationsBanc 5.57 142,324,749 142,324,749 Paine Webber 5.59 155,454,831 155,454,831 Total repurchase agreements 452,245,630 452,245,630 Money Market Funds: Federated Prime Obligations Fund 5.19 3,798,994 3,798,994 Commercial Paper 5.31 526,255,414 526,042,518 U.S. Government Agency Securities: Federal Home Loan Bank 5.16 48,647,643 48,569,229 Federal Home Loan Mortgage Corporation 5.01 34,731,234 34,708,650 Federal National Mortgage Association 5.21 40,659,826 40,575,432 Federal Agricultural Mortgage Corporation 5.14 16,340,701 16,335,571 Federal Farm Credit Bank 4.82 7,098,140 7,079,481 Student Loan Marketing Association 4.88 14,000,000 13,990,760 Total U.S. government agency securities 161,477,544 161,259,123 Total investments $ 1,143,777,582 1,143,346,265 3 (Continued) LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Investments August 31, 1999 and 1998 1998 Average Carrying Fair Investment type yield value value Repurchase Agreements: Fuji Securities 5.93 % $ 257,235,617 257,235,617 First Chicago 5.91 101,055,652 101,055,652 NationsBanc 5.93 217,367,714 217,367,714 Paine Webber 5.93 268,998,646 268,998,646 Total repurchase agreements 844,657,629 844,657,629 U.S.Government Agency Securities: Federal Home Loan Bank 5.67 57,974,033 58,059,400 Federal Home Loan Mortgage Corporation 5.62 34,967,093 34,995,000 Federal National Mortgage Association 5.69 39,723,945 39,741,565 Federal Agricultural Mortgage yC Corporation 5.52 8,501,249 8,500,374 } Total U.S.government agency securities 141,166,320 141,296,339 Total investments $ 985,823,949 985,953,968 See accompanying notes to financial statements. 4 LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Operations Years ended August 31, 1999 and 1998 `LLl' 1999 1998 Investment income—interest,net $ 59,229,108 62,990,775 Expenses(note 4): Operating expense 117,298 113,221 Management fee 1,664,673 1,599,172 Total expenses • 1,781,971 1,712,393 Net investment income 57,447,137 61,278,382 Net realized gains on investments(note 3) — 93,679 Net increase in net assets resulting from operations $ 57,447,137 61,372,061 See accompanying notes to financial statements. Ji 5 LOCAL GOVERNMENT INVESTMENT COOPERATIVE Statements of Change in Net Assets Years ended August 31, 1999 and 1998 1999 1998 Increase in net assets from operations: Net investment income $ 57,447,137 61,278,382 Net realized gains on investments — 93,679 Net increase in net assets resulting from operations 57,447,137 61,372,061 Distributions to participants: Net investment income (57,447,137) (61,278,382) Net realized gains on investments(note 3) — (93,679) Net increase from participant investments: Participant transactions(units): Units sold 1,614,155,711 1,819,626,311 Units redeemed (1,514,078,743) (1,724,509,420) Distributions reinvested 57,269,993 60,937,960 Total increase 157,346,961 156,054,851 Net assets: Beginning of year 982,618,644 826,563,793 End of year $ 1,139,965,605 982,618,644 See accompanying notes to financial statements. 6 LOCAL GOVERNMENT INVESTMENT COOPERATIVE Notes to Financial Statements August 31, 1999 and 1998 (1) Organization On September 1, 1989, local government investment pools became authorized investments for the majority of public entities in Texas. The Interlocal Cooperation Act was amended by the 7I st Texas Legislature to facilitate the creation of local government investment pools in Texas. This Act - permits the creation of investment pools to which a majority of political subdivisions (local governments) in Texas may delegate, by contract, the authority to make investments purchased with local investment funds and to hold legal title as custodian of the investment securities. Effective March 1, 1999, in accordance with the Revised Participation Agreement,any non-profit corporations acting on behalf of a local government or state agency may also participate in the investment pools. At August 31, 1999,there were no non-profit corporations acting on behalf of a local government or any state agency participating in Local Government Investment Cooperative(the Fund). The Fund was organized on May 6, 1994 to conform with the Interlocal Cooperation Act, Chapter 791 of the Texas Government Code, and the Public Funds Investment Act, Chapter 2256 of the Texas Government Code. The Fund's governing body is a three-member Board of Directors comprised of three government officials or employees. Two advisory board members with expertise in public finance represent the general manager of the Fund. { Day to day administration of the Fund is performed by Southwest Securities Group, Inc. (General Manager). The portfolio is managed by Patterson &Associates, Austin, Texas(Subadvisor)and SW Capital Corporation,(Administrator)a subsidiary of Southwest Securities Group, Inc. (2) Summary of Significant Accounting Policies (a) Basis of Accounting The Fund accounts for its assets and liabilities on the accrual basis of accounting. Investment income is recorded when earned and expenses are recorded when incurred. Net investment income is allocated to participant accounts daily on a pro rata basis based on account balance. All gains from sales of securities are allocated to participants' accounts over a maximum of thirty days based on the straight-line amortization method. (b) Expenses Expenses applicable to all participants, which are paid in the form of a management fee (the —1 Management Fee) to the General Manager and an estimated direct fund expense (the Operating Expense Fee), are allocated between all participants as an adjustment to the daily investment yield so that only net income is credited to participants' accounts. The Board has the responsibility under the provisions of the Fund Participation Agreement to approve any modifications or other amendments of the Management Fee structure. The estimate of direct fund expense is accrued monthly to fund the payment of various program costs such as audit expenses, legal fees, custodial fees, insurance premiums and approved start-up expenditures. 7 (Continued) LOCAL GOVERNMENT INVESTMENT COOPERATIVE Notes to Financial Statements August 31, 1999 and 1998 (c) Investments Investments are stated at amortized cost(carrying value), which does not vary materially from fair value due to the short term nature of the investments, unless there is permanent impairment of value in which case the investments are valued at market. Securities transactions are recorded on a settlement date basis which does not vary materially from the trade date basis which is required by generally accepted accounting principles. (d) Federal Income Taxes The Fund is an entity that is treated as an association taxable as a corporation. However, all of the income of the Fund accrues to the benefit of the state, municipalities and subdivisions thereof and, therefore is excluded from the income of the Fund under Internal Revenue Code Section 115. Accordingly,the Fund does not incur any income tax liability. (e) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. CO Fair Value of Financial Instruments Due to the short term nature of the Fund's assets and liabilities,the carrying value as recorded in the statements of assets and liabilities approximates fair value. (3) Investments Investments of the Fund are to be only those authorized by the Texas Public Funds Investment Act governing pools for local governments. The Fund's Board of Directors has further restricted the authorized investments. As stated in the Fund's Information Statement and Investment Policy, the portfolio may include the following: 1. Obligations of the United States or its agencies and instrumentalities; 2. Other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the United States; 3. Fully collateralized repurchase agreements having a defined termination date, — secured by obligations described in (1)or(2)above; 4. Money market funds, authorized by the Public Funds Investment Act, which invest only in obligations described in (1),(2)or(3)above; and 5. Commercial paper that has a stated maturity and that is rated A-1 or P-1 or equivalent by nationally recognized rating agencies. 8 (Continued) LOCAL GOVERNMENT INVESTMENT COOPERATIVE - Notes to Financial Statements August 31, 1999 and 1998 The Fund is designated to be highly liquid in order to give participants immediate access to their account balance. Therefore, the weighted average maturity of the investments of the Fund cannot exceed 60 days. At August 31, 1999 and 1998, the Fund's investments' weighted average maturity was 51 and 25 days,respectively. The net interest income of the portfolio, as defined in the Fund's Information Statement and Investment Policy, is determined each business day, and consists of the sum of(a) interest accrued, (b) discount earned (including both original issue and market discount), and (c) realized capital gains (amortized over a 30-day period) less the sum of (a) amortization of premium, (b) the estimated expenses of the portfolio applicable to that distribution period, and (c) realized capital losses(amortized over a 30-day period). All net interest income of the portfolio is accrued daily and declared as earnings to participants each day. Earnings accrue throughout the month and are distributed on the first business day of the following month, at which time they are reinvested as additional units at the current net asset value, unless the participant has elected to have them paid out. As of August 31, 1999 and 1998, there were no undistributed gains on the sale of investments and total realized gains of$0 and$93,679,respectively. Securities purchased under agreements to resell (Repurchase Agreements), which are treated as investments, are collateralized by negotiable and eligible government securities and are carried at the amounts at which the securities were purchased as specified in the respective agreements. The Fund takes possession of collateral on Repurchase Agreements upon entering into the Repurchase Agreements. The collateral is marked to market daily to ensure its market value as being at least equal to 102% of the resale price of the Repurchase Agreement. Agreements for one business day or less require collateral equal to at least 100% of the resale price of the Repurchase Agreement. As of August 31, 1999 and 1998, the Fund's weighted average collateral percentages were 102%. All Repurchase Agreements were made withprimarydealers as required bystatute and investment q policy. (4) Management Fee and Operating Expenses The Fund pays a Management Fee to the General Manager for day-to-day administrative services under an administration agreement that provides for fees to be computed at a variable rate ranging from .15% to .16% of the Fund's average daily net assets depending on total average daily net assets. At August 31, 1999 and 1998, the management fee was computed based on .15% of the Fund's average daily net assets. The General Manager pays fees for investment management and advisory services under investment advisory and subadvisor agreements. The Operating Expense Fee was revised from .020%to .010% of the Fund's average daily net assets as of September 8, 1997. f 9