Program Management Philosophy

General Information

The Credit Enhancement Program management philosophy is to credit enhance investment grade transactions with an expected underwriting objective of zero losses. The CEP mitigates underwriting risk by carefully analyzing potential investments and by partnering with another financial institution. CalSTRS conducts its own due diligence, including a thorough credit analysis of the obligor, and presents its findings to an investment review committee. Credit approval by CalSTRS’ partner as well as by the CEP’s investment review committee is required before a transaction is underwritten.

Portfolio Quality

Staff use a credit risk management grading system based on rating agency standards to monitor the portfolio’s quality. As shown below, the CEP portfolio is a very high quality portfolio.

All commitments in the CEP portfolio are of investment grade and the average credit quality of the CEP portfolio is AA-/Aa3. The following table lists the ratings guidelines and actual composition of the CEP portfolio, as of December 31, 2013, and the corresponding default percentage by Moody’s. The default percentage is the historical weighted average cumulative default rate at year 10 for municipal bonds in the rating category, based on Moody’s rated bond data from 1970 through 2012, the most recent study available.

Rating Category Guideline
(Not to Exceed)
CalSTRS Portfolio
Moody’s Municipal Default Rate1
AAA/Aaa 100% 7.4% 0.00%
AA/Aa 100% 67.2% 0.01%
A/A 80% 20.8% 0.05%
BBB/Baa 35% 4.6% 0.30%

1 Source: Moody’s U.S. Municipal Bond Defaults and Recoveries, 1970-2012. The default chart above shows the weighted average cumulative default rates at year 10 for investment grade municipal bonds (i.e., municipal bonds rated AAA/Aaa through BBB/Baa). For non-investment grade municipal bonds (i.e., municipal bonds rated BB/Ba through C/C), the default rates are much higher: 2.85% for BB/Ba, 13.88% for B/B, and 12.66% for CCC-C/Caa-C. The default rate for all non-investment grade municipal bonds is 5.67%, whereas it is 0.07% for all investment grade municipal bonds. The default rate for all investment grade municipal bonds is less than the default rate for all investment grade U.S. corporate bonds (i.e., 0.07% vs. 2.78%). The chart is based on Moody’s rated municipal bonds data 1970 through 2012 and future performance could be different.

Term to Maturity and Weighted Average Maturity of Portfolio

In the credit enhancement market, there are three broad duration terms, including short, medium and long, with the following definitions:

  • Short-term (0-10 years)
  • Medium-term (11-20 years)
  • Long-term (over 21 years)

The CEP portfolio has always concentrated on short-term enhancements since it is the least risky segment of the market. Bond insurers, on the other hand, typically underwrite in the medium to long-term segment of the market. The weighted average maturity of the CEP’s portfolio decreased in 2013 from 1.66 years to 1.40 years. No commitment has a term beyond four years.

Term to Maturity

Years Guideline
(Not to Exceed)
≤ 3 Years 100% 93.3%
> 3 Years but ≤ 5 Years 80% 6.7%
> 5 Years but ≤ 7 Years 30% 0.0%
> 7 Years but ≤ 12 Years 10% 0.0%

Weighted Average Maturity

  • Guideline (Not to Exceed): 5 years
  • Current Portfolio: 1.40 years


The CEP uses sector diversification to help mitigate the program risks. Program commitments are distributed among eight sectors. The municipal sector accounts for 45 percent of the program commitments, while no other sector accounts for more than 27 percent of the total exposure. All sector allocations are well within the guidelines.

Sector Breakdown

Pie chart: Municipal: 45%; Water and/or Sewer: 27%; Transportation: 19%; Redevelopment: 5%; Pollution Control: 2%; Affordable Housing: 1%; Not for Profit: 1%; IDB: <1%\

* IDB (Industrial Development Bond) – A municipal bond issued by a government agency on behalf of a private sector company to provide funds for the acquisition, construction, rehabilitation, and equipping of manufacturing facilities. The intent of the IDB is to attract private industry to promote local economic development.

Geographic Distribution

The CEP portfolio commitments are diversified geographically and represent municipal bond issuers in six states, as summarized in the table and chart below. The greatest value of commitments is in California and New York, the two states with the largest amount of municipal debt outstanding.

State Commitment Amount Percent of Total Commitment
California $380,211,140 31%
New York $332,978,896 27%
Tennessee $214,603,994 18%
Texas $136,095,890 11%
Ohio $82,027,397 7%
Wisconsin $70,000,000 6%
Total Commitment $1,215,917,317 100%

Geographic Distribution

Pie chart: California, 31%; New York, 27%; Tennessee, 18%; Texas, 11%; Ohio, 7%; Wisconsin, 6%