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' City of Saint Anthony Investment Portfolio Review Report ' of the underlying instrument, in this case, mortgages. M.S. 118A.04 allows local governments to invest in mortgage back securities if they are not high risk. The determination of what is a high-risk mortgage security is codified in the law. This ' test is commonly known as the FFIEC test and must be performed before an instrument is purchased.There is no requirement in law for the test to be performed periodically after purchase. The City holds$200,475 in asset-backed securities. Recommendation#5: Review whether such long-term investment vehicles fit into projected cash flow needs. Use extreme caution when contemplating any future purchases of asset backed securities. Perform the FFIEC test periodically to determine if an investment has fallen into the `fail' category. 1 • Government agencies. These securities are debt instruments issued by an agency of the U.S. government. The agencies include FNMA, "Fannie Mae", GNMA, "Ginnie Mae" and Federal Home Loan Bank, "Freddie Mac". These instruments can be short or long term, may be sold at a premium or a discount, and periodically pay a stated rate of interest. These securities are subject to interest rate and market risks. While principal and interest is not guaranteed by the U.S.Treasury, the credit worthiness of the underlying organizations is considered extremely sound.The City ' holds 53% of its portfolio in agency securities. Maturity dates range from 2002 to 2018. ' Recommendation#6: Review whether very long term investments fit into the City's near and short-term cash operating needs. 3. What are the risk categories that the St Anthony investment portfolio falls under? Governmental accounting standards require that investments be categorized according to credit risk. The three risk categories are: 1 a.Insured or registered or securities held by the City or its agent in the City's name- category 1. b.Uninsured and unregistered, with securities held by the counter party's trust department or agent in the City's name-category 2. ' c.Uninsured and unregistered, with securities held by the counter party's, or its trust department or agent but not in the City's name-category 3. ' •Credit Risk 2. According to the City's 1999 financial statements, St Anthony's investment portfolio has been categorized as credit risk 2. Safekeeping and custody of investments can be either through physical delivery or book entry systems. Book entry systems reduce the opportunity of theft or misuse of the security. The City's brokers belong to the Securities Investor Protection Corporation, SIPC. SIPC is a non-profit corporation that provides up to$500,000 per client. Brokers commonly purchase additional insurance through a contract with an insurance company. The City's brokers are insured up to: a. John G. Kinnard, total of$50,000,000 b. Morgan Stanley Dean Witter, coverage to total net equity balance c. Dain Rauscher, $150,500,000 ' Prepared by Ehlers and Associates 4 February 5,2001