LGIP Trust financial statements, 2018 June 30

Office of the State Treasurer
FY 2018
Local Government Investment Pool Trust
LGIP Trust Financial Statements, June 30, 2018

Local Government Investment Pool Trust Table of Contents
SECTION I FINANCIAL Independent Auditor's Report....................................................................................................................... 1 Management's Discussion and Analysis....................................................................................................... 5 BASIC FINANCIAL STATEMENTS Local Government Investment Pool (LGIP) Trust Financial Statements Combined LGIP Trust: Statement of Net Position ........................................................................ 16 Combined LGIP Trust: Statement of Changes in Net Position...................................................... 17 Notes to the Financial Statements .................................................................................................. 19 SUPPLEMENTARY INFORMATION Combining Statement of Net Position ........................................................................................................ 28 Combining Statement of Changes in Net Position...................................................................................... 29 SECTION II INTERNAL CONTROL AND COMPLIANCE Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards................................................................................................................. 33
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SECTION I FINANCIAL

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GREG S. GRIFFIN
STATE AUDITOR
(404) 656-2174

DEPARTMENT OF AUDITS AND ACCOUNTS
270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400
Independent Auditor's Report

The Honorable Nathan Deal, Governor of Georgia Members of the General Assembly of the State of Georgia Members of the State Depository Board
and Mr. Steven N. McCoy, State Treasurer

Report on the Financial Statements
We have audited the accompanying financial statements of the Local Government Investment Pool Trust of the State Treasurer of the State of Georgia (together the Trust), as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the Trust's basic financial statements as listed in the table of contents.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Trust, as of June 30, 2018, and the respective changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 1 to the financial statements, the financial statements present only the Office of the State Treasurer Local Government Investment Pool Trust of the State of Georgia and do not purport to, and do not, present fairly the financial position of the Office of the State Treasurer of the State of Georgia, or the State of Georgia, as of June 30, 2018, or the changes in its financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.
Other Matters
Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during the audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Other Information
Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Trust's basic financial statements. The combining LGIP Trust financial statements are presented for purposes of additional analysis and are not a required part of the basic financial statements.
The combining LGIP Trust financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining LGIP Trust financial statements are fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

The Office of the State Treasurer ("OST") for the State of Georgia provides the Management's Discussion and Analysis of the Local Government Investment Pool ("LGIP") Trust's Financial Statements. The LGIP Trust consists of 3 pools: Georgia Fund 1 ("GF1"), Georgia Extended Asset Pool ("GEAP"), and Georgia Fund 1 Plus ("GF1 Plus"), and the LGIP Trust Reserve. This overview and analysis of the LGIP Trust's financial activity is for the fiscal year ended ("FY") June 30, 2018.

Financial Highlights

GF1

At fiscal year end, GF1 reported a net position in the amount of $14.5 billion. GF1's net position increased by $2.5 billion over the previous fiscal year. Net yield paid to participants ranged from 103 basis points ("bp") to 186 bp for FY18.

GF1 Plus At fiscal year end, GF1 Plus reported a net position in the amount of $1.5 billion. GF1 Plus' net position decreased by $752.9 million over the previous fiscal year. Net yield paid to participants ranged from 103 bp to 186 bp for FY18.

GEAP In FY18, GEAP was liquidated and all assets were distributed to participants.

Overview of the Financial Statements
The financial statements report the aggregate activities of GF1, GEAP, GF1 Plus, and the LGIP Trust Reserve. GF1 is managed by OST to maintain a stable NAV of $1.00 and is rated AAAf by Standard & Poor's ("S&P"). The primary objective since the pool's inception is preservation of principal. OST continues to operate and report monthly to participants on an amortized cost basis. Per the Governmental Accounting Standards Board ("GASB") 79, to qualify for the use of amortized cost accounting for financial reporting purposes, an investment pool must meet all the criteria listed in GASB 79. GF1 is managed as a stable NAV pool but does not comply with all the requirements listed in GASB 79; therefore, the investments of the pool are reported at fair market value at fiscal year end.
GF1 Plus was established on July 1, 2016 and is managed to maintain a stable NAV of $1.00. GF1 Plus is primarily managed by OST. For FY18, a portion of the pool was invested by a subadvisor. GF1 Plus is managed to maintain a stable $1.00 NAV and accrues investment income on a daily basis. GF1 Plus distributes income to participants on a monthly basis and reinvests at $1.00 based on the amortized cost of the investments in the pool. Per GASB 79, to qualify for the use of amortized cost accounting for financial reporting purposes, an investment pool must meet all the criteria listed in GASB 79. GF1 Plus is managed as a stable NAV pool but does not comply with all the requirements listed in GASB 79; therefore, the investments of the pool are reported at fair market value at fiscal year end.
During FY18, GEAP was managed by OST as a variable NAV pool, marked-to-market daily, and rated AA+f by S&P.

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

The LGIP Trust's Financial Statements consist of the Statement of Net Position, Statement of Changes in Net Position, and Notes to the Financial Statements. The following is a description of the basic financial statements:

Statement of Net Position The Statement of Net Position presents the assets and liabilities of the LGIP Trust. The difference between the assets and liabilities is reported as net position. The Statement of Net Position provides a breakdown of pool participants.

Statement of Changes in Net Position The Statement of Changes in Net Position presents information on how the net position changed during the fiscal year. Additions consist of contributions from participants and net investment income. Deductions consist of distributions to participants and operating expenses.

Notes to the Financial Statements The Notes to the Financial Statements describe the LGIP Trust as a reporting entity and further clarify financial activity as reported in the financial statements.

Net Position

GF1 GF1 experienced an increase in net position of $2.5 billion in FY18. Total assets and liabilities were higher compared to last fiscal year. Deposits increased by 4%, and withdrawals decreased by 3% in comparison to FY17. GF1's net position is a function of several parameters some of which are independent of the pool's performance. The resulting change in net position is primarily from changes in deposits and withdrawals of the participants in the pool. In June of FY18, approximately $1.6 billion of OPEB funds was transferred to GF1 from GF1 Plus to be available for the investment of the OPEB trust in FY19 (see subsequent event). GF1 is a voluntary investment option for state entities and municipalities.

A summary of GF1's net position is presented below (amounts in thousands):

Cash and Cash Equivalents Investments in Securities Accrued Interest & Other Receivables Less: Accrued Expenses & Other Payables Net Position

2018 $ 13,091,678
1,377,399 3,244 562
$ 14,471,759

2017 $ 8,115,157
3,894,396 894 519
$ 12,009,928

Variance $ 4,976,521
(2,516,997) 2,350 43
$ 2,461,831

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)
Below are charts reflecting the assets of GF1, the maturity distribution of holdings, and account holder information at June 30, 2018. Historical information can be found on the website at www.ost.ga.gov.
GF1 Asset Detail

FFCB FHLMC 1% FHLB 2% 11%

Supranationals 9% CD 1%

CP 2%

Overnight Repo 36%

Bank Deposits 30%

Term Repo 8%

GF1 Maturity Distribution

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

66.18% Overnight

8.66% 2 - 7 days

9.60%

15.08%

0.48%

8 - 30 days 31 - 90 days 91 - 180 days

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

Counties 19%

GF1 Account Holder Distribution

College Special State General

& Univ. Dist.

Funds

3%

3%

6%

State Agency Funds 40%

Cities 8%

Boards of Ed. 21%
GF1 Plus GF1 Plus was established as an additional LGIP investment option in FY17 for the state, state agencies, and eligible municipalities looking to benefit from higher yields available by adding credit exposure. In FY18, OST implemented a pilot program to include an eligible municipality. As of the close of FY18, GF1 Plus participants include a municipality as well as the state and state agencies.
GF1 Plus experienced a decrease in net position of $752.9 million in FY18. Total assets were lower compared to last fiscal year. Deposits decreased by 41% and withdrawals increased 546% in comparison to FY17. GF1 Plus' net position is a function of several parameters some of which are independent of the pool's performance. The resulting change in net position is primarily from changes in deposits and withdrawals of the participants in the pool. GF1 Plus was opened in FY17 with significant deposits from the state and state agencies. The increase in withdrawals was primarily from the transfer of approximately $1.6 billion of OPEB funds from GF1 Plus to GF1 to be used for the investment of the OPEB trust in FY19 (see subsequent event).
A summary of GF1 Plus' net position is presented below (amounts in thousands):

Cash and Cash Equivalents Investments in Securities Accrued Interest & Other Receivables Less: Accrued Expenses & Other Payables Net Position

2018 $ 1,128,450
336,265 1,641 139
$ 1,466,217

2017 $ 1,358,566
858,929 1,762 122
$ 2,219,135

Variance $ (230,116)
(522,664) (121) 17
$ (752,918)

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)
Below are charts reflecting the assets of GF1 Plus, the maturity distribution of holdings, and account holder information at June 30, 2018.
GF1 Plus Asset Detail
Bank Deposits 68.76%

FHLMC 1.71%
CP 8.12%
Corporates 1.22%
Overnight Repo 4.10% Term Repo 5.81%

SBAs 0.21%

U.S. Treasuries

3.13%

Sovereign Credit

Georgia Fund 1

Commercial

Mortgage-

0.17% Asset-Backed

Backed Securities

Securities

0.20%

1.03%

0.68%
Supranationals 4.86%

GF1 Plus Maturity Distribution

100%

90%

80% 75%

70%

60%

50%

40%

30%

20%

10%

9%

8%

6%

0%

2%

0%

Overnight 2 - 7 days 8 - 30 days 31 - 90 days 91 - 180 181+ days

days

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

GF1 Plus Account Holder Distribution

State Agency 18%

Lottery for

Education Reserve

10%

County

2%

Revenue Shortfall Reserve
23%

State General Funds 47%
GEAP In FY18, GEAP was liquidated and all assets were distributed to participants. Comparable statements for a change in net position between FY18 and FY17 are not presented.
LGIP Trust Reserve The LGIP Trust Reserve retains all unexpended administrative fees and interest earned on the reserve balance. According to O.C.G.A 36-83-8(l), "payments of amounts for administrative expenses shall be deemed contractually obligated funds held in trust for the benefit of the local government investment pool and shall not lapse" and will be held in trust for the benefit of the LGIP. The LGIP Trust Reserve is to be maintained for the benefit of all LGIP participants, whether pooled participants or separately managed accounts, and may be utilized at the discretion of the State Treasurer in the interest of the LGIP.
As of June 30, 2018, the LGIP Trust Reserve's net position was $17.8 million reflecting an increase in net position of $5.2 million in FY18. The LGIP Trust Reserve's net position is primarily a function of the administrative fees collected from the three pools in the LGIP Trust less operating expenses related to the pools. During FY18, the administrative fees were 5 bp for GF1, 5 bp for GEAP, and lowered from 7.5 bp to 5 bp for GF1 Plus.
Change in Net Position
GF1 Net investment income (i.e. total investment income plus miscellaneous income less administrative expenses) increased 143% compared to FY17. This rise was primarily due to an increase of 83 bp in GF1's portfolio yield from FY17.
Deposits increased by 4%, and withdrawals decreased by 3% in comparison to FY17. Deposits from OPEB's investment position in GF1 Plus were transferred to GF1 prior to fiscal year end.
The Fed Funds target started FY18 at a range of 1.00% - 1.25% and ended the fiscal year at a range of 1.75% - 2.00%. The Fed raised interest rates three times in FY18 as inflation fears escalated and a strong
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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

jobs market pushed the unemployment rate down to 4.00% by the end of FY18. This move in the Fed Funds target led to higher yields for GF1 as well as higher overall investment income and distribution of earnings to participants. GF1 distributes income to participants monthly, based on their average daily balance. Distributions include interest income based on stated rates (both received and accrued), amortization of discounts and premiums on a straight-line basis, realized investment gains and losses calculated on an amortized cost basis, and are net of investment expenses and administrative fees.

A summary of the changes in GF1's net position is presented below (amounts in thousands):

Net Investment Income Pool Participant Deposits and Reinvestment of Distributions Less: Distribution of Earnings Less: Pool Participant Withdrawals Change in Net Position

2018

2017

Variance

$ 170,884 $

70,279 $ 100,605

53,648,826 170,685
51,187,194 $ 2,461,831

51,582,323 70,463
52,993,296 $ (1,411,157)

2,066,503 100,222
(1,806,102) $ 3,872,988

GF1 Average Monthly Balances

Billions

$16
FY 2018 $14

$12
FY 2017 $10

$8

$6

$4

$2

$0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2017

FY 2018

GF1 Plus Net investment income (i.e. total investment income plus miscellaneous income less administrative expenses) increased 270% compared to FY17. This rise was primarily due to an increase of 78 bp in GF1 Plus' portfolio yield from FY17.
Deposits decreased by 41%, and withdrawals increased 546% in comparison to FY17. GF1 Plus was opened in FY17 with significant deposits from the state and state agencies. The increase in withdrawals was primarily from the transfer of approximately $1.6 billion of OPEB funds from GF1 Plus to GF1 to be used for the investment of the OPEB trust in FY19 (see subsequent event).

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

A summary of the changes in GF1 Plus' net position is presented below (amounts in thousands):

Net Investment Income Pool Participant Deposits and Reinvestment of Distributions Less: Distribution of Earnings Less: Operating Expense Less: Pool Participant Withdrawals Change in Net Position

2018

2017

Variance

$

38,233 $

10,329 $

27,904

1,506,754

2,570,016

38,111

11,210

151

-

2,259,643

350,000

$ (752,918) $ 2,219,135

(1,063,262) 26,901 151
1,909,643 $ (2,972,053)

GF1 Plus Average Monthly Balances

Billions

$3.5 FY 2018
$3.0

$2.5

$2.0

$1.5

FY 2017

$1.0

$0.5

$0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2017

FY 2018

GEAP Net investment income increased 48% compared to FY17. This rise was primarily due to an increase of 62 basis points in GEAP's portfolio yield from FY17.

Deposits and withdrawals increased by 15% and 215%, respectively, in comparison to FY17. The increase in withdrawals was due to the liquidation of GEAP and the distribution of assets to its participants.

A summary of the changes in GEAP's net position is presented below (amounts in thousands):

Net Investment Income Pool Participant Deposits and Reinvestment of Distributions Less: Distribution of Earnings Less: Pool Participant Withdrawals Change in Net Position

2018

2017

Variance

$

2,155 $

1,455 $

700

20,269 2,169
193,029 $ (172,774) $

17,590 1,490
61,373 (43,818) $

2,679 679
131,656 (128,956)

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

LGIP Trust Reserve The LGIP Trust Reserve retains all unexpended administrative fees and interest earned on the reserve balance. The LGIP Trust Reserve grew $5.2 million from $12.6 million in FY17 to $17.8 million in FY18. This resulted in an 8% Change in Net Position of the LGIP Trust Reserve for FY18. Interest income on the LGIP Trust Reserve increased by 174% due to an increase in the yield on its investments. Administrative fees from the pools in the Trust increased by 3% compared to FY17.
Monthly Yield
GF1 The annualized monthly net yield distributed to participants represents the annualized percent return of GF1 investments based on net investment income distributed to participant's average daily balances in the pool. GF1's yield is closely tied to the Fed Funds target which is a rate to which other money market rates are anchored. These maturities are typically 397 days or less. GF1 invests in high quality investments that are permitted by the OST Investment Policy, as approved by the State Depository Board.
Administrative fees collected from GF1 participants are used to fund expenses related to carrying out the investment functions and operations of OST.
GF1 Monthly Net Yields

2.00%

1.80%

1.60% 1.40%

FY 2018

1.20%

1.00%

0.80%

0.60%

FY 2017

0.40%

0.20%

0.00%

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2017

FY 2018

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Local Government Investment Pool Trust Management's Discussion and Analysis (Unaudited)

GF1 Plus The annualized monthly net yield represents the annualized percent return of GF1 Plus investments. For FY18, the administrative fee for GF1 Plus was lowered from 7.5 bp to 5 bp. GF1 Plus performance is measured against the net yield for GF1.
GF1 Plus Monthly Yields

2.00% 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00%
Jul

Aug Sep

Oct Nov Dec FY 2017

FY 2018 FY 2017
Jan Feb Mar Apr May Jun FY2018

FY19 Outlook
At the May 30, 2018 board meeting, the State Depository Board authorized two new LGIP Trust offerings for FY19. The offerings, GEAP and GEAP Plus, will be a series of target maturity portfolios with an emphasis on principal preservation and income. Each portfolio seeks to achieve a return for a given holding period that outperforms the return of a similar maturity U.S. Treasury.

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BASIC FINANCIAL STATEMENTS

Local Government Investment Pool Trust Statement of Net Position As of June 30, 2018

(amounts in thousands)

Assets

Cash and Cash Equivalents

$

Investments in Securities

Accrued Interest and Other Receivables

TOTAL ASSETS

Liabilities

Accrued Expenses and Other Payables

TOTAL LIABILITIES

TOTAL NET POSITION

$

Net Position Consists of

Net Position Held in Trust for Internal Pool Participants

$

Net Position Held in Trust for External Pool Participants

Restricted Reserve Funds

Unrealized Fair Market Value Adjustment

TOTAL NET POSITION

$

14,234,836 1,713,664 4,885
15,953,385
26 26 15,953,359
8,576,117 7,360,300
17,819 (877)
15,953,359

The notes to the financial statements are an integral part of this statement. 16

Local Government Investment Pool Trust Statement of Changes in Net Position
For the Fiscal Year Ended June 30, 2018

(amounts in thousands)

Additions

Interest Income

$

Net Increase (Decrease) in Fair Value of Investments

Net Investment Income

Pool Participant Deposits and Reinvestment of Distributions

TOTAL ADDITIONS

$

Deductions

Distribution of Earnings

$

Operating Expenses

Pool Participant Withdrawals

TOTAL DEDUCTIONS

$

Change in Net Position

Net Position

Beginning of Year

End of Year

$

173,710 45,476
219,186 55,139,204 55,358,390
210,965 2,863
53,595,708 53,809,536
1,548,854
14,404,505 15,953,359

The notes to the financial statements are an integral part of this statement. 17

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Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018
(1) Significant Accounting Policies
Reporting Entity
Georgia Fund 1 ("GF1"), Georgia Fund 1 Plus ("GF1 Plus"), and Georgia Extended Asset Pool ("GEAP") are investment pools of the Local Government Investment Pool Trust (the "LGIP Trust" or "Trust") and are investment pools for the State of Georgia (the "State") and local governments, including state agencies, colleges and universities, counties, school districts, special districts, or any department, agency, or board of a political subdivision. The State Depository Board ("Board") prescribes cash management policies and procedures for the State and provides oversight for the pools. The Board meets regularly and is comprised of the Governor, the State Chief Financial Officer, the State Accounting Officer, the Commissioner of Transportation, the Commissioner of Banking and Finance, the State Revenue Commissioner, and the State Treasurer. The pools are managed by the Office of the State Treasurer ("OST"). The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America as issued by the Governmental Accounting Standards Board ("GASB") which require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates. Subsequent events, if any, through the date the financial statements were issued have been evaluated in the preparation of the financial statements. All applicable pronouncements required by GASB are presented in the financial statements. The pools in the Trust are not registered with the SEC.
GF1 is managed as a stable Net Asset Value ("NAV") pool. Investments are restricted to those enumerated in O.C.G.A. 50-5A-7, 50-17-2, and 50-17-63. The primary objectives of the pool are safety of capital, liquidity, investment income, and diversification. GF1 participant deposits are not guaranteed or insured by any bank, the Federal Deposit Insurance Corporation ("FDIC"), the State, or any other government agency. It is possible to lose money investing in GF1.
OST operates GF1 and provides monthly statements of balances and interest income to participants on an amortized cost basis. While GF1 transacts at $1.00 based on the amortized cost of the investments in the pool, GF1 participants should report their investments in GF1 at their respective fiscal year end at fair market value. The fair market valuation factor for GF1 at June 30, 2018, was $1.00.
GF1 Plus is managed as a stable NAV pool. It was established as an alternative to GF1 to provide higher yields by increasing credit exposure. The credit portion of the pool was primarily managed by a subadvisor during the fiscal year ending June 30, 2018. GF1 Plus participant deposits are not guaranteed or insured by any bank, the FDIC, the State, or any other government agency. It is possible to lose money investing in GF1 Plus.
Similar to GF1, GF1 Plus transacts at $1.00 based on the amortized cost of the investments in the pool. Participants should report their investments in GF1 Plus at fair value. The current fair market valuation factor for GF1 Plus at June 30, 2018, was $1.00.
GEAP is managed as a variable NAV pool. It was established as a second investment option for state agencies and municipalities within the state that have longer-term investment needs. The primary objective of GEAP is to provide secondary liquidity and the preservation of principal through the management of minimum NAV fluctuations while providing current income. GEAP participant deposits are not guaranteed or insured by any bank, the FDIC, the State, or any other government agency. The value of an investment in GEAP will fluctuate over time, and it is possible to lose money investing in GEAP. In FY18, GEAP was liquidated and all assets were distributed to participants. In FY19, GEAP will be converted to a series of target maturity funds.
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Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018
(1) Significant Accounting Policies (Continued)
The accompanying financial statements present the financial position of only GF1, GEAP, GF1 Plus, and the LGIP Trust Reserve, and they do not include any other agencies or component units of the State or any other funds of OST. In the State's Comprehensive Annual Financial Report, the Trust is not reported as a separate fund. Instead, the State's portion of the Trust is reported on the balance sheet as "Pooled Investments in State Treasury." The portion of the Trust belonging to external participating institutions is reported as the Investment Trust Fund.
Changes in Financial Accounting and Reporting
In FY18, the Trust did not implement any new GASB Statements.
Basis of Accounting
The accompanying statements are prepared based on the flow of economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized in the accounting period in which they are earned and realized. Expenses are recognized in the period incurred.
Cash and Cash Equivalents
Cash includes bank deposits, which are reported at carrying value. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near the maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, investments with original maturities of three months or less meet this definition.
Investments
All pools generally value investments as follows:
All investments except repurchase agreements, non-negotiable certificates of deposit ("CD"), direct-issued commercial paper, and other such nonparticipating investments are priced at fair value.
Per GASB 31, repurchase agreements, non-negotiable CD's, direct-issued commercial paper, and other such nonparticipating investments are carried at cost because they are nonparticipating contracts that do not capture interest rate changes in their value.
Security transactions are accounted for on a trade date basis which means that the purchases and sales of securities are recorded on the day the trade takes place with a corresponding payable or receivable.
Investment Income, Gains, and Losses, Expenses, and Distributions
GF1 is managed to maintain a stable $1.00 NAV. For purposes of calculating earnings to each participant, all investments are valued at amortized cost. The pool distributes income to participants monthly, based on their average daily balance. Distributions include interest income based on stated rates (both received and accrued), amortization of discounts and premiums on a straight-line basis, realized investment gains and losses calculated on an amortized cost basis, and are net of investment expenses and administrative fees. Unrealized gains (losses) are reported in the equity section of the Statement of Net Position as "Unrealized Fair Market Value Adjustment." Changes in the fair value of marketable securities are recognized at the end of the fiscal year.
GF1 Plus is managed to maintain a stable $1.00 NAV and accrues investment income on a daily basis. GF1 Plus distributes income to participants on a monthly basis and reinvests at $1.00 based on the amortized cost of the investments in the pool.
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Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018
(1) Significant Accounting Policies (Continued)
GEAP accrues investment income on a daily basis and distributes to participants on a monthly basis. Interest income is reinvested at the month ending NAV.
Administrative Fees and LGIP Trust Reserve
According to O.C.G.A. 36-83-8(l), "payments of amounts for administrative expenses shall be deemed contractually obligated funds held in trust for the benefit of the local government investment pool and shall not lapse" and will be held in trust (the "LGIP Trust Reserve") for the benefit of the LGIP. The LGIP Trust Reserve shall retain all unexpended administrative fees and interest earned on the reserve balance. During FY18, OST assessed an administrative fee of 5 basis points on the average daily balances of GF1 participant accounts. For GF1 Plus, OST reduced the administrative fee from 7.5 basis points to 5 basis points assessed on the daily fund balance. For GEAP, OST assessed an administrative fee of 5 basis points on the daily fund balance. The total fees assessed were $7.7 million, of which $6.3 million were GF1 fees, $1.3 million were GF1 Plus fees, and $109 thousand were GEAP fees.
The LGIP Trust Reserve may be utilized at the discretion of the State Treasurer in the interest of the LGIP. According to the Trust Policy, administrative fees collected from LGIP participants are to be used to fund expenses related to carrying out the investment functions and operations of the OST. The total LGIP Trust expenses paid from the administrative fees collected were $2.7 million resulting in a net increase in the LGIP Trust Reserve of $5.2 million from administrative fees and interest, leaving a balance of $17.8 million in the LGIP Trust Reserve.
Investments in Georgia Fund 1
GF1 Plus and the LGIP Trust Reserve invested a portion of their assets in GF1. This portion appears in the Statement of Net Position for GF1 Plus and the LGIP Trust Reserve under the "Cash and Cash Equivalent" account.
(2) Subsequent Event
On July 2, 2018, approximately $1.6 billion of OPEB's investment position was transferred from GF1 to establish GEAP Plus. The transfer was to invest OPEB Trust Funds in accordance with the OPEB Trust Investment Policy approved by the State Depository Board on May 30, 2018. The transfer will have no effect on the total assets in the Trust but will reduce the assets in GF1. This transaction is related to FY19, so it was not recognized in the financial statements.
(3) Investment Disclosures
Interest Rate Risk
Interest rate risk is the risk associated with changes in interest rates that could adversely affect the fair value of an investment. GF1 and GF1 Plus use the weighted average maturity ("WAM") method to analyze interest rate risk. WAM expresses the average time until maturity for the investments in a portfolio weighted to reflect the dollar size of the individual investments within the portfolio. WAM is an acceptable method for reporting interest rate risk according to GASB 40. OST seeks to match investment terms to the cash requirements of the pool.
OST's investment policy allows the Trust to hold bank deposits for investment purposes. These bank deposits held for investment purposes are included in the following disclosures:
21

Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018

(3) Investment Disclosures (Continued)

Georgia Fund 1 At June 30, 2018, GF1's WAM was as follows:
Investment Type Bank Deposits Held for Investment Purposes Commercial Paper Repurchase Agreements Supranational Obligations U.S. Agency Obligations Total
GF1 WAM (Days)

Carrying Value

(amounts in thousands)

$

4,403,335

303,246

6,409,000

1,298,658

1,954,838

$

14,369,077

WAM (Days)
3 3 5 23 39
10

Georgia Fund 1 Plus At June 30, 2018, GF1 Plus' WAM was as follows:

Investment Type Asset-Backed Securities Bank Deposits Held for Investment Purposes Commercial Mortgage-Backed Securities Commercial Paper Corporates Repurchase Agreements Sovereign Credit Supranational Obligations U.S. Agency Obligations U.S. Agency Obligations Guaranteed U.S. Treasury Obligations Total
GF1 Plus WAM (Days)

Carrying Value

(amounts in thousands)

$

15,138

1,006,014

2,918

119,856

18,044

145,000

10,000

71,169

24,997

3,177

45,966

$

1,462,279

WAM (Days)
264 3
227 25
325 10
180 45 47
835 400
31

LGIP Trust Reserve At June 30, 2018, the LGIP Trust Reserve's WAM was as follows:

Investment Type Bank Deposits Held for Investment Purposes
LGIP Trust Reserve WAM (Days)

Carrying Value

(amounts in thousands)

$

17,145

WAM (Days)
3
3

22

Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018

(3) Investment Disclosures (Continued)

Credit Risk

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations to the holder of the investment. OST utilizes a counterparty risk assessment model to assess the credit risk of counterparties that have been approved to serve as repurchase agreement counterparties or depositories. OST has assigned credit limits to each counterparty based upon the counterparty risk assessment model which incorporates market indicators, default probabilities, issuer research and issuer ratings to determine maximum credit exposure per institution, term of investment for respective counterparties, and collateralization requirements in accordance with the OST Investment Policy.

The nationally recognized statistical rating organizations ("NRSROs") rate the long-term senior debt (with original maturity longer than 1 year) of the government-sponsored enterprises ("GSEs") with split ratings equivalent to AAA and AA+ ratings. In the credit risk disclosure tables, the rating for the long-term senior debt of the GSEs is listed as AA. The short-term rating of the GSEs is equivalent to an A-1+ rating. The issuing GSEs are rated but specific bonds are not always individually rated.

Georgia Fund 1

At June 30, 2018, the pool's securities and underlying collateral for repurchase agreements were rated as

follows (amounts in thousands):

Long-Term Ratings

Short-Te rm

Credit Risk Investments

AAA

AA

A

BBB

BB

A-1+ Carrying Value

Commercial Paper

$

-

$

-

$ -

$

-

$

-

$ 303,246 $ 303,246

Repurchase Agreements

329,622 3,526,626

337,257

429,370

45

501

4,623,421

Supranational Obligations

24,985

24,995

-

-

-

1,248,678

1,298,658

U.S. Agency Obligations

-

100,070

-

-

-

1,854,768

1,954,838

Total Credit Risk Investments

$ 354,607 $ 3,651,691 $ 337,257 $ 429,370 $

45 $ 3,407,193 $ 8,180,163

Repurchase Agreements Backed by:

U.S. Agency Obligations Explicitly Guaranteed

537,968

U.S. Treasury Obligations

1,247,611

Total Securities

$ 9,965,742

Georgia Fund 1 Plus

At June 30, 2018, the pool's securities and underlying collateral for repurchase agreements were rated as

follows (amounts in thousands):

Long-Term Ratings

Short-Term Carrying

Credit Risk Investments

AAA

AA

A

BBB

A-1

Value

Asset-Backed Securities

$ 15,138 $

-

$

-

$

-

$

-

$ 15,138

Commercial Mortgage-Backed Securities

2,164

754

-

-

-

2,918

Commercial Paper

-

-

-

-

119,856

119,856

Corporates

-

2,488

10,177

5,379

-

18,044

Repurchase Agreements

16,259

1,432

49,926

17,383

-

85,000

Sovereign Credit

-

-

10,000

-

-

10,000

Supranational Obligations

71,169

-

-

-

-

71,169

U.S. Agency Obligations

-

24,997

-

-

-

24,997

Total Credit Risk Investments

$ 104,730 $ 29,671 $ 70,103 $ 22,762 $ 119,856 $ 347,122

U.S. Agency Obligations Explicitly Guaranteed

3,177

U.S. Treasury Obligations

45,966

Repurchase Agreements Backed by:

U.S. Treasury Obligations

60,000

Total Securities

$ 456,265

23

Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018

(3) Investment Disclosures (Continued)

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of a bank failure, the Trust's deposits may not be fully recovered. The OST Investment Policy specifies safety of capital, liquidity, investment return and diversification as its objectives. In carrying out these objectives, OST maintains balances in accounts in banks approved for investment by the Board.

As of June 30, 2018, bank deposits of the Trust were as follows (amounts in thousands):

Georgia Fund 1 Georgia Fund 1 Plus LGIP Trust Reserve
Total

Insured or Collateralized $ 1,219,070
974,871 17,145
$ 2,211,086

Uninsured and Uncollateralized $ 3,284,265
31,143 -
$ 3,315,408

Total Bank Balance
$ 4,503,335 1,006,014 17,145
$ 5,526,494

Concentration of Credit Risk
Concentration of credit risk is the risk associated with losses that may occur due to lack of diversification. Concentration of credit risk is mitigated by limiting the percentage of total investments with any one issuer. OST limits concentration of credit risk by establishing maximum issuer exposure limits based on criteria established using OST's counterparty risk assessment model.
GASB 40 requires the disclosure of the concentration of credit risk in any issuer that represents 5% or more of total investments. As of June 30, 2018, the concentration of credit risk for the pools in the Trust is as follows:
Approximately 45.5% of GF1 was invested in U.S. agency obligations not explicitly guaranteed by the U.S. Government or in repurchase agreements collateralized with U.S. agency obligations not explicitly guaranteed by the U.S and 9% was invested in supranational obligations.
Approximately 8.2% of GF1 Plus was invested in commercial paper issued by the Bank of Montreal, which were rated by the NRSROs as A-1.
Fair Value Measurements
In accordance with GASB 72, some investments in the pools are measured using inputs divided into three fair value hierarchies:
Level 1 Unadjusted quoted prices for identical assets or liabilities in active markets that a government can access at the measurement date.
Level 2 Inputs, other than quoted prices included within Level 1, that are observable for an asset or liability, either directly or indirectly. Matrix pricing is used for the securities classified in Level 2 of the fair value hierarchy in the Trust.
Level 3 Unobservable inputs for an asset or liability.
Fixed-income securities use price evaluations provided by State Street Corporation, the Trust's custodian. The Trust reports recurring fair value measurements.

24

Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018

(3) Investment Disclosures (Continued)
Georgia Fund 1 At June 30, 2018, GF1 has the following investments reported at fair value (amount in thousands):

Investment Type Supranational Obligations U.S. Agency Obligations Total

Level 1

$

-

-

$

-

Level 2 $ 1,298,658
1,954,838 $ 3,253,496

Level 3

$

-

-

$

-

Fair Value $ 1,298,658
1,954,838 $ 3,253,496

Georgia Fund 1 Plus At June 30, 2018, GF1 Plus has the following investments reported at fair value (amount in thousands):

Investment Type Asset-Backed Securities Commercial Mortgage-Backed Securities Commercial Paper Corporates Sovereign Credit Supranational Obligations U.S. Agency Obligations U.S. Agency Obligations Guaranteed U.S. Treasury Obligations Total

Level 1

$

-

-

-

-

-

-

-

-

45,966

$ 45,966

Level 2 $ 15,138
2,918 119,856
18,044 -
71,169 24,997 3,177
$ 255,299

Level 3

$

-

-

-

-

10,000

-

-

-

-

$ 10,000

Fair Value $ 15,138
2,918 119,856 18,044 10,000 71,169 24,997
3,177 45,966 $ 311,265

The remaining investments in the Trust are exempt from GASB 72's disclosure requirement because they are not reported at fair value and are instead valued using cost-based measures

(4) Equity of Internal and External Participants

Per GASB 31, "The external portion of an external investment pool is the portion that belongs to legally separate entities that are not part of the sponsoring government's financial reporting entity. The internal portion of each external investment pool is the portion that belongs to the primary government and its component units." The following table describes the equity of internal and external participants in the pool's net position, and shows that net position is composed of participants' account balances and the unrealized fair market value adjustment (amounts in thousands):

Internal Participants External Participants Restricted Reserve Funds Unrealized Fair Market Value Adjustment Total Net Position

Georgia Fund 1 $ 7,136,429
7,335,297 -
33 $ 14,471,759

Georgia Fund 1 Plus $ 1,442,124
25,003 -
(910) $ 1,466,217

GEAP

$

-

-

-

-

$

-

Trust Reserve

$

-

-

17,826

Eliminations

Total

$

(2,436) $ 8,576,117

-

7,360,300

(7)

17,819

-

$

17,826 $

-

(877)

(2,443) $ 15,953,359

25

Local Government Investment Pool Trust Notes to the Financial Statements Year Ended June 30, 2018
(5) Involuntary Participation GASB 31 requires the disclosure of any involuntary participation in the Trust. The Statement defines involuntary participants as "those that are required by legal provisions to invest in the external investment pool." O.C.G.A. 50-5A-7 requires certain internal funds to be invested by the State Treasurer but does not require the funds to be invested in the Trust. External participants are voluntary participants of the pools.
26

SUPPLEMENTARY INFORMATION

Local Government Investment Pool Trust Supplementary Information
Combining Statement of Net Position As of June 30, 2018

(amounts in thousands)
Assets Cash and Cash Equivalents Investments in Securities Accrued Interest and Other Receivables TOTAL ASSETS
Liabilities Accrued Expenses and Other Payables TOTAL LIABILITIES TOTAL NET POSITION

Georgia Fund 1

Georgia Fund 1 Plus

GEAP

$ 13,091,678 $ 1,128,450 $

-

1,377,399

336,265

-

3,244

1,641

-

14,472,321

1,466,356

-

562

139

-

562

139

-

$ 14,471,759 $ 1,466,217 $

-

Net Position Consists of

Net Position Held in Trust for

Internal Pool Participants

$ 7,136,429 $ 1,442,124 $

-

Net Position Held in Trust for

External Pool Participants

7,335,297

25,003

-

Restricted Reserve Funds(1)

-

-

-

Unrealized Fair Market Value Adjustment

33

(910)

-

TOTAL NET POSITION

$ 14,471,759 $ 1,466,217 $

-

Trust Reserve Eliminations

Total

$

17,151 $

(2,443) $ 14,234,836

-

-

1,713,664

675 17,826

(675) (3,118)

4,885 15,953,385

-

(675)

26

-

(675)

26

$

17,826 $

(2,443) $ 15,953,359

$

-

$

(2,436) $ 8,576,117

17,826

-

7,360,300

(7)

17,819

-

-

(877)

$

17,826 $

(2,443) $ 15,953,359

(1) See Note 1 to the Financial Statements subsection Administrative Fees and LGIP Trust Reserve for more information on the Reserve Funds.

28

Local Government Investment Pool Trust Supplementary Information
Combining Statement of Changes in Net Position For the Fiscal Year Ended June 30, 2018

(amounts in thousands)

Additions Interest Income Net Increase (Decrease) in Fair Value of Investments Less: Administrative Fees Net Investment Income Pool Participant Deposits and Reinvestment of Distributions TOTAL ADDITIONS

Georgia Fund 1

$

132,467

44,752 (6,335) 170,884

53,648,826 $ 53,819,710

Georgia Fund 1 Plus

$

38,771

724 (1,262) 38,233

1,506,754 $ 1,544,987

GEAP

Trust Reserve

$

2,264 $

(109) 2,155

20,269

$

22,424 $

208
7,706 7,914
7,914

Eliminations

$

-

-

(36,645)

$

(36,645)

Total

$

173,710

45,476 -
219,186

55,139,204 $ 55,358,390

Deductions

Distribution of Earnings

$

170,685 $

38,111 $

Operating Expenses

-

151

Pool Participant Withdrawals

51,187,194

2,259,643

TOTAL DEDUCTIONS

$ 51,357,879 $ 2,297,905 $

2,169 $ -
193,029 195,198 $

-

$

2,712

-

2,712 $

(44,158) (44,158)

$

210,965

2,863

53,595,708

$ 53,809,536

Change in Net Position

2,461,831

(752,918)

(172,774)

5,202

7,513

1,548,854

Net Position Beginning of Year End of Year

12,009,928

2,219,135

$ 14,471,759 $ 1,466,217 $

172,774

-

$

12,624 17,826 $

(9,956)

14,404,505

(2,443) $ 15,953,359

29

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SECTION II INTERNAL CONTROL AND COMPLIANCE

(This page intentionally left blank)

GREG S. GRIFFIN
STATE AUDITOR
(404) 656-2174

DEPARTMENT OF AUDITS AND ACCOUNTS
270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400

Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards
Independent Auditor's Report
The Honorable Nathan Deal, Governor of Georgia Members of the General Assembly of the State of Georgia Members of the State Depository Board
and Mr. Steven N. McCoy, State Treasurer
We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Local Government Investment Pool Trust of the Office of the State Treasurer of the State of Georgia (together the Trust), as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the Trust's basic financial statements, and have issued our report thereon dated October 18, 2018.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the Trust's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control. Accordingly, we do not express an opinion on the effectiveness of the Trust's internal control.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any