The Massachusetts Health and Educational Facilities Authority has responded to the commonwealth's shrinking short-term investment options by implementing its own short-term mutual fund to house its reserves.

The Short Term Asset Reserve Fund, or STAR fund, was designed to provide more investment options for the authority and the institutions that receive funding through the agency.

"We used to heavily invest in bank certificates of deposit in the state," said Steve Dansby, director of administration and finance at the authority. "But the regulations of the authority prohibit us from investing in banks with less than an A rating."

Mr. Dansby said the state's banking crisis has left only one bank, the State Street Bank, with such a strong rating. "Supply and demand made it less profitable for us to invest there," he said. "You can charge what you want when you're the only game in town."

Although the banking industry has been weakened nationwide in the past five years, there are few areas in the country where the industry has been so hobbled as in New England.

The STAR fund, which as of Aug. 31 had outperformed a national index of mutual funds, was created by a Harrisburg, Pa., financial firm in 1990. The firm, Public Financial Management Inc., because involved in the program after the authority submitted an official request for proposal.

The authority was courted by several mutual funds to handle its investments after Massachusetts banks began having problems, Mr. Dansby said.

"But most of those funds did not provide us with the liquidity we receive from the STAR fund," Mr. Dansby said.

A similar program was created for Virginia by Public Financial Management, according to Martin Margolis, a managing director at the firm. "That fund was used for reinvestment of state and local bond proceeds and was very successful," he said.

Mr. Margolis said similar state funds exist for California, New Jersey, Pennsylvania, Oregon, Florida, and the Virgin Islands. Those funds are called State Non-Arbitrage Programs -- or SNAPS.

"On the state level, it allows for pooling of resources from all sorts of bond sales, maximizing the benefits," Mr. Margolis said.

"The Massachusetts authority is unique in that they manage the funds for another entity," he added. "It seems to be working quite well."

As of Aug. 31, the monthly average of yield for the STAR fund was 3.38%. The Donoghue Index, which measures between 200 and 300 mutual funds, stood at 3.12%.

"We were looking for a new vehicle for investments that improved our flexibility and improved our return," Mr.Dansby said. "The fund really provides us with a broad range of investments."

The Health and Educational Facilities Authority acts as a financial agent for institutions throughout the state that need to borrow funds for large projects. As of June 30, the authority had $5.35 billion in outstanding debt.

When a borrowing is completed and the authority has the proceeds from the bond sale, there is often a lag from when the funds become available to when the institution needs them.

This is when the STAR fund is used.

The fund invests and reinvests the proceeds of bonds, bond anticipation notes, and other obligations issued by the authority; funds controlled by the authority; funds held by trustees with respect to bond issues done in the name of the authority; and funds held by any institutions eligible to borrow from the authority.

Also, proceeds of bonds, bond anticipation notes, and obligations of other bond issuing authorities in the state may be invested in the fund.

Mr. Dansby said he has had conversations with only one other authority, the Massachusetts Educational Loan Authority, about using the STAR fund.

"We are not actively promoting the fund's use by outside forces, but we're not discouraging it, either," he said.

The money in the fund, according to Mr. Dansby, is invested in U.S. Treasury securities; general obligations of entities such as the Federal National Mortgage Association, Federal Home Loan Banks, the Federal Farm Credit System, or other government-supported agencies; repurchase agreements from government securities; and bills of exchange or time drafts drawn on and accepted by commercial banks.

The fund may also invest in commercial paper issued by corporations organized and operating within the United States, as long as the paper is investment grade or higher and its maturities are 270 days or shorter. In addition, investments can be made in general corporate debt with at least a double-A rating.

The other places funds can be invested are in negotiable certificates of deposit or other evidences of deposit if the bank's senior debt is rated at least double-A.

As of Aug. 31, the fund managed over $168 million, with 35.3% of that invested in bankers' acceptances.

The STAR fund has been welcomed by a number of institutions in the state.

"We issue debt through the authority in a project fund," said Joseph J. Trainor, assistant treasurer of the Brigham Women's Hospital in Boston. "We need the funds from a bond sale in various disbursements, so this is really the perfect instrument for us."

"We are very pleased with the overall benefits the plan has brought the authority and the institutions we service," said Edward M. Murphy, executive director of the authority. "We started this plan two years ago hoping for a fund of around $50 million to $60 million. Now we have around $170 million -- that's pretty good."

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