SAN FRANCISCO The California State Teachers Retirement System is taking its credit enhancement program nationwide.
Since the CalSTRS credit enhancement program was created in 1994, its policies limited the system to underwriting credit enhancement business for municipal bonds in California and its three bordering states.
The new policy, adopted this week, expands the program from border to border and coast to coast, allowing it to underwrite business in all 50 states and the District of Columbia.
The retirement systems investment committee approved the new policy in June, though it has yet to close a transaction in one of the newly eligible states, spokeswoman Sherry Reser said.
Theres been no deal closed, she said. Theres things in the pipeline, its my understanding.
CalSTRS will continue to underwrite its credit enhancement to a zero-loss objective, with the objective of generating fee income.
Standard & Poors rates debt backed with CalSTRS enhancement AA-plus long-term and F1-plus short-term, Fitch Ratings assigns ratings of AAA and F1-plus, and Moodys Investors Service assigns ratings of Aaa and P-1.
Basically, we think that diversification is a good thing for their program, Standard & Poors analyst Parry Young said. They have always run a relatively conservative underwriting policy.
According to the minutes of the board meeting where the policy change was approved, CalSTRS chief investment officer Christopher Ailman said the rating agencies told him that more geographic diversification of the credit enhancement program would be in the best interest of CalSTRS.
The new policy will still require 67% of the programs credit enhancement commitments to be within California. The state currently accounts for 95% of the programs commitments, according to CalSTRS documents.
The larger industrial states New York, Florida, New Jersey, Texas, Pennsylvania, Illinois, Massachusetts, Michigan and Ohio will be likely states for underwriting activity, according to the staff report recommending the change.
It will give them more opportunities, Young said.
CalSTRS began offering credit enhancement more than 10 years ago and was the only public pension fund in the United States to offer such a product until earlier this year, when the California Public Employees Retirement System launched its own credit enhancement program.
CalSTRS staff believes that opening up its geographic possibilities will allow it to expand its total credit enhancement portfolio to $3 billion in 2010 from $2.1 billion in 2006. That would raise fee income generated by the program to $9.4 million from $6.4 million during that period.
The maximum amount of outstanding commitments that can be enhanced by the credit enhancement program is 3% of the market value of the CalSTRS investment portfolio, which was $132.5 billion as of July 31.
CalSTRS provides retirement, disability, and survivor benefits to teachers in California public schools from kindergarten through community colleges.
