Comprehensive Annual Financial Report 2007 - MSD

LOUISVILLE AND JEFFERSON COUNTY METROPOLITAN SEWER DISTRICTNOTES TO THE COMPARATIVE FINANCIAL STATEMENTSFOR THE YEARS ENDED JUNE 30, 2007 AND 2006(Continued)(in thousands)NOTE 2. DEPOSITS AND INVESTMENTS - (CONTINUED)Investments are made based upon prevailing market conditions at thetime of the transaction with the intent to hold the instrument until maturity.With this strategy, investments would be expected to reach maturity withlimited realized gains or losses. If the yield of the portfolio can be improvedupon by the sale of an investment, prior to its maturity, with the reinvestmentof the proceeds, then this provision is also allowed. Chapter 76 of theKentucky Revised Statutes authorizes MSD to invest in obligations of theUnited States and its agencies and instrumentalities; bonds or certificates ofindebtedness of the Commonwealth of Kentucky and of its agencies andmunicipalities; interest bearing deposit accounts in financial institutionschartered in the Commonwealth of Kentucky and insured by an agency ofthe United States up to the amount thus insured and in larger amounts,provided such financial institutions pledge as security obligations of the UnitedStates having such value as may be satisfactory to MSD. MSD bondresolutions and covenants contain similar restrictions.MSD’s investment policy requires that investments be divided toeliminate the risk of loss resulting from over concentration of assets in aspecific maturity, a specific issuer, or a specific class of securities. Section2.0 of the investment policy outlines the permitted investments and identifiesthe limitations placed on the types of investments to minimize the risk. Thepolicy also requires that all investments have the highest category of ratingsby the nationally recognized rating agencies. Where applicable, all of theabove investments have such ratings. Custodial credit risk is the risk that, inthe event of the failure of the counterparty, MSD would be able to recover thevalue of its investments or collateral securities that are in the possession ofan outside party. The collateral provided by financial institutions is consideredadequate to cover all balances in excess of limits set forth by the FederalDeposit Insurance Corporation. All of MSD’s investments are held by MSD orin the name of MSD by a Trustee.31