Page Three The smaller M&O Reserve, representing approximately 11% of long-term investments, is benchmarked to a composite of 1–13-year Treasury Strip indices that approximates effective duration of a laddered portfolio of 6-month to 15-year securities. The 7.5-year average maturity structure has an associated Effective Duration of approximately 7.0. The strategies for the General account and M&O Reserve have remained consistent for many years. Debt Service Reserves With the issuance of Series 2026 bonds, two new Debt Service Reserves will be funded at a combined $38 million on September 1. The funding requirements will last for life of the debt series or approximately 30-years. The new Debt Service Reserves have unique investment considerations relative to Matched Funding or Duration Targeted reserves. Considerations for long term debt service reserves include the normal tradeoffs associated with duration volatility and multiyear returns, as well as more complex issues as a function of IRS rules for tax- exempt bond proceeds, final maturity, probable refinancings, declining funding requirements with amortization, and annual present value cost comparisons to surety policies. The Strategy recommendation for the debt service reserves is initial purchases of ten-year maturities with yields exceeding the financing cost, resulting in no net carrying cost. This effectively immunizes the portfolio against interest rate risk for the first ten years corresponding to the call date of the Series 2026 bonds. The proposed strategy represents a reasonable tradeoff between return and volatility. Prospectively, the Investment Committee will report on cumulative total return relative to the financing costs of the two Debt Service Reserves. Management will also annually test for sufficiency and remove excess earnings or add funding as necessary per IRS rules and Trust Agreement requirements. The reserve funding requirements will decline with amortization of principal. Periodic present value relative cost analysis will be performed on the economics of the cash funded reserves versus surety premiums. RECOMMENDATION Approve the new strategy for the Debt Service Reserves, as well as a continuation of the legacy investment strategies and benchmarks for the current quarter.
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