SUBSECTION 2.2.4.2
INVESTMENTS

2.2.4.2.1

General

Effective Date:

Sept. 1, 1998

Investments are made as authorized by law and/or contractual agreement. Investment purchase and sale transactions are to be reported for GAAP reporting purposes on a trade date basis. For purchases, at trade date the investment is recorded in the appropriate investment accounts and the amount due on settlement is recorded as a credit to GL Code 5123 "Investment Trades Pending Payable - Short-Term." For sales, at trade date the investment is removed from the accounting records and the amount of the proceeds due at settlement are recorded in GL Code 1323 "Investment Trades Pending Receivable - Short-Term."

Recognition of earnings on investments is to follow the revenue recognition criteria pertinent to the fund type in which the investment is recorded. Costs associated with investing activities that are readily separable from investment income are to be recorded to Revenue Source Code 0705 "Costs of Investment Activities." (Refer to Section 2.2.4.7.6)

2.2.4.2.2

Short-Term Investments

Effective Date:

Sept. 1, 1998

Short-term investments in money market investments and participating interest-earning investment contracts are to be recorded at amortized cost which approximates fair value for these investments. An investment is considered short-term if, at the time of acquisition, it has a remaining maturity of one year or less. Short-term investments are recorded in GL Codes 1205 "Temporary and/or Pooled Cash Investments," 1206 "Investment with Local Government Investment Pool" and 1209 "Short-Term Portion of Long-Term Investments."

2.2.4.2.3

Non-current Investments

Effective Date:

Sept. 1, 1998

Non-current investments in short-term securities are to be recorded at amortized cost which approximates fair value for these investments (refer to 2.2.4.2.2). With the exception of the deferred compensation plan, if non-current investments are held in governmental or expendable trust fund type accounts and they are not offset by deferred revenue or a liability, then fund balance should be appropriately reserved. (Refer to Section 2.2.4.7.5.e.)

Except as noted below at 2.2.4.2.4, 2.2.4.2.5 and 2.2.4.2.6, the acquisition, valuation, and sale or liquidation of non-current investments are to be accounted for as follows:

2.2.4.2.3.a

Acquisition--The cost of non-current investments is to be recorded in the accounting records in GL Code 1210 "Investments." Purchased accrued interest, if any, is to be recorded as a debit to GL Code 1316 "Interest Receivable on Investments - Short-Term." (Refer to Section 2.2.4.7.5.a through d for illustrative entries.)

2.2.4.2.3.b

Valuation--Investments in non-participating interest-earning investments are to be reported at cost. Non-participating contracts include nonnegotiable certificates of deposit with redemption terms that do not consider market rates. Such contracts however, should be reported at fair value if their value is significantly affected by the impairment of the credit standing of the issuer or other factors.

All other non-current investments are to be recorded for GAAP reporting purposes at fair value. For publicly traded investments, gains or losses are to be calculated based on current fair values. For non-publicly traded investments, gains or losses are to be calculated based on periodic valuations adjusted for subsequent cash flows to or from the private investment.

Gains are to be recorded by debiting GL Code 1280 "Valuation Allowance - Investments" and crediting GL Code 3220 "Non-cash Revenues," Revenue Source Code 0703. Losses are to be recorded by debiting GL Code 3220 "Non-cash Revenues," Revenue Source Code 0704 and crediting GL Code 1280 "Valuation Allowance - Investments." (Refer to Section 2.2.4.7.7 for an illustrative entry.)

2.2.4.2.3.c

Sale or Exchange--Sales or exchanges of non-current investments (refer to Sections 2.2.4.7.8 for illustrative entries) are to be recognized using the completed transaction method. Gains and losses are to be recorded at the time of the sale using GL Code 3205 or 3210, Revenue Source Code 0703 for gains and Revenue Source Code 0704 for losses.

2.2.4.2.4

Investment Pools

Effective Date:

Sept. 1, 1998

2.2.4.2.4.a

Internal Investment Pools-- Internal investment pools are to follow the guidance for Short-Term and Non-current Investments as presented at Sections 2.2.4.2.2 and 2.2.4.2.3, respectively. The equity position of each account participating in the investment pool should be reported as an asset in the participating account. Income and costs associated with internally pooled investments are to be accounted for in the accounts that report the investments unless legal or contractual provisions require transfer of amounts to another account.

2.2.4.2.4.b

External Investment Pools-- External investment pools commingle the moneys of more than one legally separate entity and invest, on behalf of the participants, in an investment portfolio. Investment positions in external investment pools that are not SEC-registered are to be determined by the fair value per share of the pool’s underlying portfolio, unless the pool is a 2a7-like pool.

A 2a7-like pool is an external investment pool that has a policy that it will, and does, operate in a manner consistent with the SEC’s Rule 2a7 of the Investment Company Act of 1940. Investment positions in a 2a7-like pool should use amortized cost to compute share prices.

2.2.4.2.5

Permanent Funds

Effective Date:

Sept. 1, 1998

Accounting for losses incurred in permanent irreducible funds requires unique treatment in order to satisfy legal requirements. This is due to a condition where losses incurred in permanent funds can result in the loss of permanent fund principal.

To preclude losses from eroding principal balances of permanent funds, it is necessary to reduce distributions to beneficiary funds by the amount of these losses. However, if distributions to beneficiary funds are directly reduced by losses, an adverse impact on the current programs supported by these distributions could result.

To alleviate this impact, it is necessary to utilize a method of allocating losses to beneficiary funds over a period of time. Therefore, when on an annual basis investments are sold at a loss (i.e., GL Code 3210, Revenue Source Code 0704 exceeds Revenue Source Code 0703 for the year), this loss is to be closed out at the end of the year to GL Code 9530 "Reserved for Endowments." Following close-out to GL Code 9530, the loss is reclassified to GL Code 9532 "Reserved for Endowments - Investment Losses." This GL code is used to segregate the accumulated losses in permanent funds.

On an annual basis when investments are sold at a net loss exceeding one month’s deferred loss amortization, the balance of these accumulated losses is to be deferred and amortized on a straight-line basis over the weighted average life of the portfolio in the permanent fund (debit GL Code 9530 and credit GL Code 9532).

For income distribution purposes, operating transfers to beneficiary funds are to include:

• the earnings from sale or exchange of the permanent fund investments for the period (GL 3205 or 3210, Revenue Source Codes 0703 and 0704), and

• the amortization of premiums and discounts on permanent fund fixed income investments for the period (GL Code 3220, Revenue Source Code 0706 "Amortization"),

• less the amount of the accumulated loss amortization for the period.

For distribution purposes, earnings do not include non-cash fair value adjustments (GL Code 3220, Revenue Source Codes 0703 and 0704).

(Refer to Sections 2.2.4.7.9 for illustrative entries.)

2.2.4.2.6

Deferred Compensation Plans (IRC Section 457)

Effective Date:

Sept. 1, 1998

In accordance with Statement No. 32 of the Governmental Accounting Standards Board, the state’s Internal Revenue Code Section 457 deferred compensation plan is reported for GAAP reporting purposes as an expendable trust fund. Plan investments should be valued in accordance with Section 2.2.4.2.3.b.

2.2.4.2.7

Securities Lending

Effective Date:

Sept. 1, 1998

Investments in securities lending agreements where the state has the ability to pledge or sell the collateral without borrower default are to be recorded in the accounting records in GL Codes 1216 "Collateral held under Securities Lending Agreements" and 5197 "Obligations under Securities Lending Agreements." For recording purposes, the investment in securities lending agreements may be recorded in the general ledger at the summary level based on a detail report from the securities lending agent. No subsidiary records are required.

For GAAP reporting purposes, if these investments are acquired with resources pooled from multiple accounts, the investments and obligations resulting from the securities lending agreements are to be allocated on a pro rata basis to the accounts that have the risk of loss for the collateral investments. Income and costs associated with securities lending agreements are to be recorded in the accounts that report the investments and obligations unless legal or contractual provisions require transfer of the amounts to another account.

2.2.4.2.8

Reverse Purchase Agreements

Effective Date:

Sept. 1, 1998

Investments in reverse repurchase agreements are to be recorded in the accounting records in GL Codes 1215 "Investments under Reverse Repurchase Agreements" and 5196 "Obligations under Reverse Repurchase Agreements." No subsidiary records are required. For GAAP reporting purposes, if these investments are acquired with resources pooled from multiple accounts, the assets and liabilities arising from the reverse repurchase agreements are to be reported in the accounts that have the risk of loss for the investments. Income and costs associated with pooled reverse repurchase agreements are to be recorded in the accounts that report the assets and liabilities unless legal or contractual provisions require transfer of the amounts to another account.

2.2.4.2.9

Subsidiary Ledgers

Effective Date:

Sept. 1, 1998

2.2.4.2.9.a

In addition to the required general ledger accounts, subsidiary ledgers are to be maintained to record the details of each investment with the exception of investments in securities lending agreements and reverse repurchase agreements.

2.2.4.2.9.b

Subsidiary ledgers are to be balanced against the associated general ledger control accounts at least monthly and at fiscal year end.

2.2.4.2.9.c

Subsidiary ledgers are to contain, at a minimum, the following specific information for each investment held:

• Description of the item

• Identification number

• Location of security or collateral

• Date purchased (trade date)

• Interest rate (fixed income only)

• Interest dates (fixed income only)

• Issue date (fixed income only)

• Maturity date (fixed income only)

• Par or face value

• Cost

• Unamortized premium or discount (updated at least quarterly) (fixed income only, if applicable)

• Carrying value

• Fair value (updated at least quarterly)

• Date of sale (trade date) and sales amount

2.2.4.2.10

Definitions

Effective Date:

Sept. 1, 1998

2.2.4.2.10.a

Amortized Cost - The par value of the investment increased or decreased by any unamortized premium or discount.

2.2.4.2.10.b

Asset-backed Securities - Assets that are composed of, or collateralized by, loans or receivables. Collateralization can consist of liens on real property, leases, or credit card debt.

2.2.4.2.10.c

Cost - The historical cost at the time of acquisition, including any ancillary costs (e.g., legal fees and commissions) but excluding any purchased accrued interest, unless a new cost has been assigned based upon a permanent decline in value.

2.2.4.2.10.d

Derivatives - Generally, contracts whose value depends on, or derives from, the value of an underlying asset, reference rate or index.

2.2.4.2.10.e

Equity Investments - Equity investments include, but are not limited to, any instrument representing ownership shares (e.g., common, preferred, partnership shares and other capital stock) in an enterprise.

2.2.4.2.10.f

Fair Value - The amount that could reasonably be expected to be received for an investment in a current transaction between a willing buyer and a willing seller. For publicly traded securities, this is the price at which the security is currently being traded on a national market. For investment instruments that are not publicly traded, this is the appraised value adjusted for cash flows to or from the investment.

2.2.4.2.10.g

Fair Value - Adjustment - Investments are adjusted at the end of each period to reflect the current fair value of securities held. The difference between the fair value and investment cost is accounted for in a valuation allowance account.

2.2.4.2.10.h

Fixed Income Investments - Fixed income investments consist of those nonequity assets (e.g., bonds) where earnings are derived from interest which is a percentage of the asset's par value. These may include investments purchased at a discount that do not have coupon payments.

2.2.4.2.10.i

Interest-earning Investment Contracts - A contract, other than a mortgage or other loan, that a government enters into as a creditor of a financial institution, broker-dealer, investment company, insurance company or other financial services company and for which it receives, either directly or indirectly, interest payments, for example time deposits, repurchase agreements, and guaranteed and bank investment contracts (GICs and BICs).

2.2.4.2.10.j

Investment - A security or other asset acquired primarily for the purpose of earning income or profit.

2.2.4.2.10.k

Money Market Investment - A short-term, highly liquid debt security, including commercial paper, banker’s acceptances, and U.S. Treasury and agency obligations. Asset-backed securities, derivatives, and structured notes are not included in this term.

2.2.4.2.10.l

Non-participating Interest-earning Investment Contracts - Nonnegotiable or nontransferable investments or investments with redemption terms that do not consider market rates, for example certificates of deposit.

2.2.4.2.10.m

Participating Interest-earning Investment Contracts - Negotiable or transferable investments or investments whose redemption value are affected by market (interest rate) changes.

2.2.4.2.10.n

Scientific Amortization Method - Under the scientific amortization method, the total discount or premium is prorated to interim periods on the basis of a constant rate (as opposed to constant dollar) to produce a level rate of yield.

2.2.4.2.10.o

Short-term Investments - Money market investments and participating interest-earning investment contracts that have a remaining maturity at the time of purchase of one year or less.

2.2.4.2.10.p

Structured Notes - Debt securities whose cash flow characteristics (coupon, redemption amount or stated maturity) depend on one or more indexes, or that have embedded forwards or options.