Feature Articles and Resources

• Investment Strategies for the Current Economy
  
• S&P's Government Investment Pool Ratings
  
• The Work Behind a GIP Rating
  
• A Guide to Investment Pool Ratings
  
• Recent Changes at the FDIC Impact Public Investors
  

• Panel of Economists: Economic Outlook
  
• Interest Rate Outlook
  
• Snapshot of Economy and Interest Rates

• Performance Benchmarks
  • 10-Bill Index
  • Money Market Fund Index
  • LGIP Index
  • Key Rates: Cash Markets
  • Relative Value Yield Chart

Investment Strategies for the Current Economy

Current Environment. The Federal Reserve paused its tightening of the Federal Funds Rate in August and has cautioned that inflation appears to be elevated. However, they also noted that the moderation of recent growth – paired with the cooling off of the housing market and the easing of energy price pressures – is expected to keep inflation contained. This scenario has played out in recent months as oil has plummeted from levels as high as $80/barrel to the $57-60/barrel range. With the economy continuing to add jobs (more than 800,000 jobs expect to be added by the BLS in their revision to their 2006 jobs releases), housing should be shielded against buckling under as homeowners continue to earn a paycheck, make their mortgage payments, and maintain a pool of potential homebuyers.

• The Fed is concerned about the most recent (September) 2.9 percent increase in the core CPI.
  
• Growth for the second quarter settled in at 2.9 percent – slightly lower than consensus expectations. Growth is expected to continue to moderate as consensus third quarter GDP expectations are currently at 2.1 percent.

Prudent Investment Strategies. While the Federal Reserve has currently paused from moving its key Federal Funds rate, it did not necessarily take the option of hiking, pausing, or easing off the table in their statement. How does one attack this challenging scenario? Here are a couple of strategies to keep in mind for the remainder of 2006:

• Because the Fed remains in a data dependant stance, it makes it difficult to extend portfolios. A mix of callable paper, some minor extension trades in the three- to six-month area of the curve, and some prime-based floaters are a potential way to maximize portfolio returns at this time.
  
• Keeping some powder dry with some significant cash rolling inside of a month is advisable as well. This current period calls for some portfolio flexibility to take advantage of the many options available to the Fed and equally also act as a hedge upon the multiple scenarios.

S&P's Government Investment Pool Ratings

Standard & Poors (S&P) has been rating government investment pools (GIPs) since 1992. S&P now maintains ratings for 71 GIPs in 24 states. S&P’s GIP ratings show the level of protection these pools provide from credit risk and market risk.

States with Standard and Poor's Rated Government Investment Pools
Puerto Rico has a Rated GIP which is Sub-Advised (BLUE)	Legend
	No Pool Ratings
	Rated & Run by State/County/City
	Rated & Run by Sub-Advisor/Private
	Rated & Run by State/County/City and Sub-Advisor

Types of GIP Ratings. S&P uses separate rating scales for stable NAV and variable NAV investment pools. We rate 45 stable value pools on our Principal Stability Rating scale, which is identified by “m” subscript for “money market fund.” Principal stability ratings express S&P’s opinion of a pool’s ability to maintain a stable principal value and limit exposure to losses due to credit, market and liquidity risks.

S&P also rates 26 variable NAV pools on our “f” scale as these funds’ NAVs (share price) fluctuate daily based on market pricing of their portfolio holdings. Longer-term pools (with average maturities greater than 90 days) are assigned ratings on two scales: Fund Credit Quality and Fund Volatility Ratings.

GIP Indexes. S&P provides GIP indexes on stable NAV pools, allowing GIP managers and oversight boards to benchmark the relative performance of their pools. The S&P Rated GIP Indices are performance indicators of rated GIPs that are managed to 60 days or less and maintain a stable NAV of $1.00 per share. There are three GIP indices:

• S&P Rated GIP Index/All
• S&P Rated GIP Index/Government
• S&P Rated GIP Index/General PurposeTaxable

These indices provide a simple average of seven-day and 30-day net and gross yields, average days to maturity, as well as the total assets. S&P Rated GIP benchmark data is reported monthly in Public Investor.

A Guide to Investment Pool Ratings

Source: Joel Friedman, Standard & Poor's

Recent Changes at the FDIC Impact Public Investors

This article provides an overview of some recent changes in Federal Deposit Insurance Corporation (FDIC) regulation. Keeping abreast of these changes at the FDIC is important to investors who are responsible for safeguarding public funds.

Background. The United States federal government created the FDIC in 1933 in response to the numerous bank failures of the 1920s and 1930s. Since that time, the FDIC has insured public deposits in banks and thrift institutions, monitored and assessed risks for deposit insurance funds, and limited the public effect of bank or thrift failures. The work of the FDIC has resulted in increased public confidence in the banking system, more standardization across banks, and increased bank security.

Regulation of banks and savings institutions in the United States occurs at the state and federal level and on various other levels depending on an entity's charter. The FDIC currently administers and examines approximately 5,250 banks, and acts as the primary regulator of state-chartered banks that do not join the Federal Reserve System.

A common consensus emerged that the FDIC needed both to promote economic recovery and respond to the complex changes taking place in the banking industry. This view led to the recently enacted Federal Deposit Insurance Act of 2005, which became public law on February 8, 2006. A landmark piece of banking legislation, the act directly responded to the modernization of the banking industry and created provisions for future developments.

What follows is an outline of the major changes that affect state and local governments.

Merge the BIF and SAIF. Prior to the new legislation, the FDIC monitored the financial services industry through two main insurance funds. The Bank Insurance Fund (BIF) insured commercial banks. The thrift sector, created primarily to facilitate the housing industry, was covered by the Savings Insurance Fund (SAIF). Over time, the distinction between banks and thrifts blurred, with commercial banks becoming more active in mortgage lending and thrifts offering checking accounts and extending credit to businesses and consumers in addition to mortgages. As thrifts evolved, the reason for separation became outdated. Currently, government investors can choose to deal with either a bank or a thrift depending on their specific needs. With the abilities to offer government investors similar services, operating under separate insurance funds results in the possibility of greater investment disparities.

As a result of these developments and in order to insure accountability, the Federal Deposit Insurance Act of 2005 created a risk-based assessment system by merging the BIF and the SAIF into the new Deposit Insurance Fund (DIF). The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount the FDIC assesses each institution is based both on the balance of insured deposits as well as on the degree of risk the institution poses to the insurance fund. By creating a risk-based system for assessing premiums, the FDIC imposes higher rates on those institutions that pose a higher risk to the insurance fund. A combined fund strengthens the FDIC's position and prevents the destabilizing effects that result from co-mingled BIF and SAIF insured deposits, and disparities in premium requirements. By merging the funds, the Act simplifies reporting and accounting responsibilities for both the banking institutions and the FDIC.

Insurance Limit. The Reform Act overhauled a variety of insurance limits, mostly affecting commercial and personal investments. However, for the government investor, the Act stipulates that insurance limits on municipal deposits must include inflation adjustments, beginning April 1, 2010 and every five years thereafter. The FDIC will use a set index (specifically, the Personal Consumption Expenditures Index) to guide the insurance level for inflation. Beyond inflation adjustments, the law requires a variety of annual reports to study the appropriateness of the changes as well as the need for future amendments. It allows for specific studies to consider the need to raise the coverage level for municipal investments.

Conclusion. The Federal Deposit Insurance Reform Act of 2005 developed out of a need to keep pace with an ever growing and more complex banking industry. Through the various provisions, the Reform Act contributes to the FDIC's goal of financial stability, risk protection, and depositor security.