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HomeMy WebLinkAbout02-12-2015 IOC Agenda PacketCITY OF SAN LUIS OBISPO ;4 o MW INVESTMENT OVERSIGHT COMMITTEE REGULAR QUARTERLY AGENDA February 12, 2015 1:30 PM Council Hearing Room 990 Palm Street San Luis Obispo, California MISSION: As set forth in the Investment Management Plan, this committee is responsible for reviewing the City's portfolio on an ongoing basis to determine compliance with the City's investment policies and for making recommendations to the City Treasurer (Director of Finance and Information Technology) regarding investment management practices. CALL TO ORDER: Finance & IT Director /Treasurer Padilla ROLL CALL: Mayor Marx; City Manager Lichtig; Assistant City Manager Codron; Finance & IT Director /Treasurer Padilla; Financial Operations Manager Vilma Warner; Steve Barasch, public member. OTHERS PRESENT: Al Eschenbach, Independent Auditor and ex- officio member; Carlos Oblites, PFM Asset Management LLC. PUBLIC COMMENTS: At this time, the public is invited to address the Committee concerning items not on the agenda but are of interest to the public and within the subject matter jurisdiction of the Investment Advisory Committee. Time limit is three minutes. The Committee may not discuss or take action on issues that are not on the agenda other than to briefly respond to statements made or questions raised, or to ask staff to follow up on such issues. 1. Review of Investment Oversight Committee meeting minutes of November 13, 2014 a. Recommend approval of the minutes 2. Presentation of the Quarterly Investment Report on Portfolio Performance a. Review and confirm investment policy compliance 3. Discuss content of the Quarterly Investment Report and identify recommended changes to format and /or content Investment Oversight Committee Regular Quarterly Agenda for February 12, 2015 Page 2 4. Discussion regarding the continued use of the existing investment strategy and benchmark to measure portfolio performance a. Discuss possible alternatives to the current investment strategy as well as alternative performance benchmarks 5. Discussion of PFM's review of the City's investment policy a. Identify major criteria for use in determining if local financial institutions are good investments b. Discuss elements to be considered when determining how much cash the City should invest and how much should remain available as on demand deposits i. Status update on work completed to evaluate liquidity needs vs. investing additional cash into the portfolio 6. Items to be addressed at a future meeting 7. Adjournment IlThe City of San Luis Obispo wishes to make all of its public meetings accessible to the public. Upon request, this agenda will be made available in appropriate alternative formats to persons with disabilities. Any person with a disability who requires a modification or accommodation in order to participate in a meeting should direct such request to the City Clerk's Office at (805) 781 -7100 at least 48 hours before the meeting, if possible. Telecommunications Device for the Deaf (805) 781 -7107. Any writings or documents provide to a majority of the Committee regarding any item on this agenda will be made available for public inspection in the Administration Office located at 990 Palm Street, San Luis Obispo, during normal business hours. CITY OF SAN LUIS OBISPO INVESTMENT OVERSIGHT COMMITTEE MINUTES November 13, 2014 1:00 PM Council Hearing Room 990 Palm Street San Luis Obispo, California MISSION: As set forth in the Investment Management Plan, this committee is responsible for reviewing the City's portfolio on an ongoing basis to determine compliance with the City's investment policies and for making recommendations to the City Treasurer (Director of Finance and Information Technology) regarding investment management practices. CALL TO ORDER A meeting of the Investment Oversight Committee was called to order on Thursday, November 13, 2014, at 1:00 p.m. in the Council Hearing Room at 990 Palm Street, San Luis Obispo, California, by Chairperson Padilla. ROLL CALL Committee Members Present: Committee Members Steve Barasch, Michael Codron, Katie Lichtig, Jan Marx, Vilma Warner, and Chairperson Wayne Padilla Committee Members Absent: None Others Present: Al Eschenbach, Independent Auditor and ex- officio member *, Jayson Schmitt, Chandler Investments (City's Investment Advisor); Anthony Mejia, City Clerk *Arrived at 1:29 p.m. PUBLIC COMMENT Linda White, San Luis Obispo, questioned which funding sources will be utilized to pay down employee pension liabilities and to mitigate impacts from the Cal Poly Grand Avenue Student Dorms; voiced concern related to the low yield of the City's investment portfolio. Chair Padilla advised that many of Ms. White's questions will be addressed during the presentations and that he is available following the meeting for additional questions. Investment Oversight Committee Minutes — November 13, 2014 Page 2 1. REVIEW OF INVESTMENT OVERSIGHT COMMITTEE MEETING MINUTES OF AUGUST 14, 2014 AND OCTOBER 29, 2014 In response to Committee inquiry, City Clerk Mejia explained the procedure for agendizing an item for committee consideration, noting that only agendized items can be discussed or raised at a special meeting; advised that action minutes are taken and only agendized items or committee actions would be noted in the minutes. MOTION BY COMMITTEE MEMBER MARX, SECOND BY COMMITTEE MEMBER LICHTIG, CARRIED 6 -0, to approve the Investment Oversight Committee Meeting minutes of August 14 and October 29, 2014. 2. PRESENTATION OF THE QUARTERLY INVESTMENT REPORT ON PORTFOLIO PERFORMANCE City Treasurer Padilla distributed the Quarterly Investment Report and City Investment Advisor Schmitt reviewed the contents of the report and summarized the portfolio's performance and responded to inquiries from the floor and Committee. It was noted that the Quarterly Investment Report should be corrected to reflect the "negotiable Cash Deposit" with Mission Community Bank should now reflect Heritage Oaks Bank. Following discussion, MOTION BY COMMITTEE MEMBER CODRON, SECOND BY COMMITTEE MEMBER MARX, CARRIED 6 -0, to confirm the Quarterly Investment Report, for the period ending September 30, 2014, is in compliance with the City's Investment Policy. 3. DISCUSSION REGARDING THE USE OF LOCAL FINANCIAL INSTITUTIONS AS PART OF THE CITY'S INVESTMENT STRATEGY Investment Advisor Schmitt summarized the criteria, regulations, and limitations for utilizing local financial institutions as part of the City's Investment Strategy, focusing on the importance of collateralization, FDIC deposit security, and potential for leveraging of investments. Mike Clark, San Luis Obispo, questioned the purpose of investing in local financial institutions. During the course of discussion, the Committee provided direction that additional information is needed, such as whether other public agencies have policies or programs for utilizing local financial institutions, the objective of such a practice, and the scope of the program in relation to the overall investment strategy. Investment Oversight Committee Minutes — November 13, 2014 Page 3 4. CONTINUE DISCUSSION OF POSSIBLE CHANGES TO THE INVESTMENT POLICY RELATED TO SOCIALLY RESPONSIBLE INVESTMENTS (SRI) AND CONSIDER MAJOR ELEMENTS OF SUCH A POLICY Investment Advisor Schmidt and City Treasurer Padilla reviewed the contents of the agenda report and summarized the socially responsible investment policies from the cities of Davis, Palm Springs, and Santa Monica; noted that a majority of California cities do not have socially responsible investment policies; responded to Committee inquiries. Committee Member Barasch distributed newspaper articles related to municipal bonds markets and green technology. Hard copies of Mr. Barasch's documents are on file with the City. By Committee consensus, staff was directed to draft a socially responsible investment policy which restricts direct investment in tee - certain industries, such as tobacco and fossil fuels, using the policies from Palm Springs and Davis as models. Committee Member Marx left at 2:17 p.m. 5. REVIEW THE COMMITTEE'S MISSION STATEMENT City Treasurer Padilla reviewed the mission statement of the Investment Oversight Committee, noting that the issue of unfunded pension liabilities is not directly related to the performance of the City's Investment Portfolio; responded to Committee inquiries. 6. INTRODUCTION OF STAFF FROM PUBLIC FINANCIAL MANAGEMENT (PFM), THE PROPOSED NEW INVESTMENT ADVISOR TO THE CITY City Treasurer Padilla summarized the process of selecting a new investment advisor and introduced Nancy Jones, Partner at PFM, who summarized the firm's services including in -house trading and research desks; noted that PFM only manages governmental portfolios, including 43 California cities. 7. ITEMS TO BE ADDRESSED AT A FUTURE MEETING Committee Member Barasch requested that discussion of cash flow and liquidity needs and the overall percentage of the liquid assets be agendized for future consideration. It was noted that a draft socially responsible investment policy would not be ready for committee consideration by its next meeting in February 2015. Investment Oversight Committee Minutes — November 13, 2014 Page 4 ADJOURNMENT MOTION BY COMMITTEE MEMBER BARASCH, SECOND BY COMMITTEE MEMBER WARNER, CARRIED 5 -0, to adjourn at 2:35 p.m. Anthony J. Mejia City Clerk Approved: XX /XX /15 City of San Luis Obispo Investment Report Period Ending December 31, 2014 PFM Asset Management LLC 50 California Street, Suite 2300 San Francisco, CA 94111 (415) 982 -5544 © PFM Asset Management LLC Economic Update Summary • The fourth - quarter was characterized by heightened market volatility, continued strengthening of the U.S. dollar, and all -time highs in the U.S. equity markets. • Globally, economic growth patterns diverged, with the U.S. strengthening while other areas of the developed world (such as Europe and Japan) struggled with stagnation. • Strong North American output of crude oil combined with the Organization of Petroleum Exporting Countries' (OPEC's) decision to maintain production levels increased supply while global demand slowed. This imbalance caused oil prices to plummet. Economic Snapshot • Third - quarter gross domestic product (GDP) grew at 5 %, reflecting increases in personal consumption expenditures, exports, and federal, state, and local government spending, among other factors. • The U.S. labor market continued to improve, as the unemployment rate fell from 5.9% in September to 5.6% in December. The business services, retail, transportation, healthcare, and manufacturing sectors all saw job gains. • The housing market had a lackluster quarter with a drop in both new - and existing -home sales. Home price increases slowed to just 4.5% year over year through October 2014, compared to an increase of 10.9% in the prior year. • The Consumer Price Index, which measures inflation, fell 0.3% in November, marking its largest decline since December 2008. Lower oil prices were a major contributor to falling prices. Interest Rates • Throughout 2014, the Federal Open Market Committee (FOMC) stated that there would be "considerable time" before it removed the economic stimulus. The Fed revised their statement in December, saying it would © PFM Asset Management LLC be "patient" when normalizing monetary policy. The market interpreted this change to mean that the FOMC will likely begin to raise the fed funds rate in mid -2015. • The yield curve flattened during the fourth quarter; short- and intermediate -rates rose, while rates on longer -term securities fell. The two -year Treasury reached 0.70 %, a three -year high, in late December. The 10 -year Treasury ended the year at 2.20 %, down from 2.50% at the beginning of the fourth quarter and 3.00% at the beginning of 2014. Sector Performance • Fixed - income market performance for the quarter depended on both maturity and sector. • Longer- duration investments were the strongest performers as they continued to benefit from falling long -term rates. • In short and intermediate maturities, where interest rates rose modestly, the steep yield curve provided enough income and market value appreciation to produce modest positive returns. • Shorter- duration Agency spreads returned to historically tight levels after widening temporarily during the third quarter. This caused Agencies with shorter maturities to perform better relative to Treasuries than Agencies with longer maturities. • Corporate spreads widened modestly, which hurt performance. However, higher corporate yields provided enough extra earnings to produce performance generally on par with Treasuries. • In other sectors, mortgage- backed securities had a strong quarter, and municipals lagged Treasuries significantly. • Yields on money market securities, especially those with maturities greater than six months, rose notably towards the end of the quarter. The rise in rates appears to be in anticipation of a hike in the federal funds rate in 2015. Economic Snaoshot Labor IflarKet Latest Sep Zil i Unemployment Rate Dec'14 5.6% 5.9% 6.7% Unemployment Rate (left) vs. Change in Nonfarm Payrolls (right) 1P 10% 0 _ Change In Non -Farm Payrolls S Dec"! 4 S 252,000 271,000 84,000 unempiooymentRate Payrwls 350K 8 %- 300K 250K Average Hourly Earnings (YoY) Dec'14 1.7% 2.0% 1.9% 6% 200K 1 i 150K Personal Income (YoY) Nod14 4.2% 3.6% -2.1% a% 100K SOK 2% 0 Initial Jobless Claims (week) 1/2/2015 294,000 288,000 344,000 12/31111 6/30/12 12/31/12 6/30/13 12/31/13 6/30/14 12131/14 • Real GDP (QoQ SAAR) 2014Q3 5.0% 5.0 %1 3.5% Z 6.0% Real GDP (QoQ) i 2 5.0 GDP Personal Consumption (QoQ SAAR) 2014Q3 3.2% 3.2% 3.7% 4.0% 3.0 2.0 Retail Sales (YoY) Nod14 5.1% 4.6% 3.4% 1.0% � 0.0 ISM Manufacturing Survey (month) Dec'14' 55 .5 56.5 -20% -3.0% Existing Home Sales SAAR (month) NoV14 4.93 mil. 5.18 mil. 4.87 mil. 9/30/11 3/31/12 9130/12 3/31/13 9/30/13 3/31/14 9/30/14 Inflation Personal Consumption Expenditures (YoY) Nod14 1.2% 1.4% 1.2% Consumer Price Index 4.0% 3.5% CPI (YoY) - Core CPI oY Consumer Price Index (YoY) ` NOd14 1.3% 1.7% 1.5% 3.0% 2.5 Consumer Price Index Core (YoY) Nod14 1.7% 1.7% 1.7% 2.0% 1.5% 1.0% Crude Oil Futures (WTI, per barrel) 12/31/2014 $53.27 $91.16 $98.42 0.5% 0.0% Gold Futures (oz.) 12/31/2014 $1,184 $1,211 $1,202 11/30/11 5/31/12 11/30/12 5/31/13 11/30/13 5/31/14 11/30/14 1. Data as of Third Quarter 2014 2. Data as of Fourth Quarter 2013 Note: YoY = year over year, QoQ = quarter over quarter, SAAR = seasonally adjusted annual rate, WTI = West Texas Intermediate crude oil 0 PFM Asset Management LLC 3.5% 3.0% 2.5% p 2.0% } 1.5% 1.0% 0.5% 0.0% 9/30/14 Interest Rate Overview U.S. Treasury Note Yields 10/31/14 11130/14 2 -Year - • • • • 5 -Year — U.S. Treasury Yields 10 -Year 12/31/14 Maturity 3 -month 12/31/14 0.04% 9/30/14 0.02% Change over Quarter 0.02% 12/31/13 0.07% Change over Year (0.03 %) 1 -year 0.22% 0.10% 0.12% 0.11% 0.11% 2 -year 0.67% 0.57% 0.10% 0.38% 0.29% 5 -year 1.65% 1.76% (0.11%) 134% (0.09 %) 10 -year 2.17% 2.49% (0.32 %) 3.03% (0.86 %) 30 -year 2.75% 3.20% (0.45 %) 3.97% (1.22 %) Source: Bloomberg U.S. Treasury Yield Curve 5% 4% 3% a } 2% 1% 0°/ ° W N W 1P �4 3 o December 31, 2014 a a f-- - -- - -- -- ♦ W O Maturity September 30, 2014 — — December 31, 2013 Yield Curves as of 12/31/2014 5% 4% a 3% d } 2% 1% 0°/ 00 - - - 0 W NNW U7 V N W 3 i i i i O V7 O o Maturity U.S. Treasury Federal Agency — — Industrial Corporates, A Rated © PFM Asset Management LLC 3 B of A Merrill Lvnch Index Returns As of 12/31/2014 Returns for Periods ended 12/31/2014 Year • U.S. Treasury Federal Agency U.S. Corporates, A -AAA rated Duration 1.89 Yield 0.67% 0.80 0/.]L 1.34% 3 Month 0.17 % 0.15% 1 Year 0.62% L70% 1.08% 3 Year 0.47% 0.66% 2.16% 1.98 x1.08% Agency MBS (0 to 3 years) 0.42% 1.18% Municipals 1.79 0.67% 0.01% 0.72% 0.94% Indices 1-5 Year U.S. Treasury 2.69 0.98% 0.49% 1.24% 0.65% Federal Agency 2.35 1.01% 0.42% 1.30% 0.90% U.S. Corporates, A -AAA rated 2.79 1.73% 0.49% 2.12% 3.02% Municipals 2.57 0.96% (0.02%) 1.30% 1.39% 1 Indices U.S. Treasury 2.23 0.79% 0.38% 1.00% 0.54% Agency MBS 3.23 2.03% 1.16% 3.90% 2.12% Returns for periods greater than one year are annualized Source: BofA Merrill Lynch Indices © PFM Asset Management LLC 4 Account Profile Investment Objectives — The investment objectives of the City of San Luis Obispo are first, to provide safety of principal to ensure the preservation of capital in the overall portfolio; second, to provide sufficient liquidity to meet all operating requirements; and third, to earn a commensurate rate of return consistent with the constraints imposed by the safety and liquidity objectives. Performance Objectives — The performance objective for the portfolio is to earn a total rate of return over a market cycle that equals or exceeds the market index, the BofA Merrill Lynch Index of 0 -5 Year Treasury securities. Strategy — In order to achieve this objective, the portfolio invests in high - quality money market instruments, U.S. Treasury securities, Federal Agency securities , and high -grade corporate securities, with a maximum maturity of five years. © PFM Asset Management LLC 5 Portfolio Complies with California Government Code and the City of San Luis Obispo's Investment Policy. Additionally, none of the City's funds are invested in any securities prohibited by Code. City of San Luis Obispo Portfolio Compliance — PFM Managed Category .. Comment Treasury Obligations 5 year maximum maturity Complies Government Sponsored Enterprise (GSE) 5 year maximum maturity, AAA by S &P or Moody's Complies Securities Corporate Notes 5 year maximum maturity Complies At least one "AX rating 30% maximum, 5% per issuer Local Government Investment Pool (LAIF) Up to maximum permitted by State Law Complies Negotiable Certificates of Deposit 5 year maximum maturity Complies 30% maximum, 5% per issuer Collateralized Bank Deposits 5% per issuer Complies Money Market Mutual Funds Highest rating category by 2 NRSRO's Complies 20% maximum, 10% per issuer % maturing in less than 90 days 5% minimum Complies Maximum maturity of corporate 5 years Complies Maximum maturity 10 years; 10% maximum of portfolio in Treasury and Complies GSE obligations with maturity >5 years © PFM Asset Management LLC 6 City of San Luis Obispo — PFM Managed Portfolio Characteristics Benchmark Portfolio Portfolio Average Maturity (yrs.) 2.23 1.89 1.90 Effective Duration* 2.17 1.78 1.85 Average Purchase Yield N/A 1.13% 1.15% Average Market Yield 0.79% 0.76% 0.69% Average Quality AA+ /Aaa AA+ /Aaa AA+ /Aaa Total Market Value 45,294,065 45,285,705 The City of San Luis Obispo's current benchmark is the Bank of America Merrill Lynch (BAML) 0 -5 Year U.S. Treasury Index. "Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price, for each 1% change in interest rates. Modified duration is a similar risk measure, but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e. if interest rates fall and a callable bond is more likely to be called prior to its final maturity, the effective duration will decrease). © PFM Asset Management LLC % Federal Agency $28,342.985 I City of San Luis Obispo Sector Distribution — PFM Managed December 31, 2014 U.S. Treasury $9,291,614 20% Corporate $6,251,722 14% r Market Fund $1,407,744 3% 'Sector distribution includes market value and excludes accrued interest. Federal Agency, $28,338 n A 9 63 September 30, 2014 U.S. Treasury, $9,309,412 20% Corporate, $6,280,367 14% - - - at Fund, $1,357,885 3% © PFM Asset Management LLC 8 City of San Luis Obispo Issuer Distribution — PFM Managed U.S. Treasury U.S. Treasury 20.51% FHLMC Federal Agency 20.11% FNMA Federal Agency 16.31% FFCB Federal Agency 12.07% FHLB Federal Agency 11.73% Dreyfus Prime Cash Management Fund Money Market Fund 3.11% TVA Federal Agency 2.36% Procter & Gamble Corporate Note 2.04% Berkshire Hathaway Corporate Note 1.56% General Electric Corporate Note 1.55% Wal -Mart Stores Corporate Note 1.54% Apple Inc Corporate Note 1.54% Chevron Corp Corporate Note 1.54% Johnson & Johnson Corporate Note 1.52% Microsoft Corp Corporate Note 1.33% Google Inc Corporate Note 1.18% Total 100.00% As of December 31. 2014 © PFM Asset Management LLC 9 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% City of San Luis Obispo Credit Quality — PFM Managed December 31, 2014 vs. September 30, 2014 AAA AA A <A NR 12/31 /14 5.9% 94.1% 0.0% 0.0% 0.0% 9/30/14 5.9% 94.1% 0.0% 0.0% 0.0% Ratings by Standard & Poor's © PFM Asset Management LLC 10 35% 30% 25% 20% 15% 10% 5% 0% City of San Luis Obispo Portfolio Effective Duration vs. Benchmark — PFM Managed 0 -0.25 0.25 -0.50 0.50 -1.00 1-2 2 -3 3 -4 4 -5 Over Portfolio 8.9% 6.1% 13.6% 29.5% 28.3% 7.3% 6.4% 0.0% Benchmark 7.4% 5.8% 10.7% 25.2% 21.3% 17.0% 12.5% 0.0% Benchmark is the Bank of America Merrill Lynch (BAML) 0 -5 Year U. S. Treasury Index As of December 31, 2014 © PFM Asset Management LLC 11 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% City of San Luis Obispo Total Return Period Ending December 31, 2014 Total Rate of Return* Annualized Since Inception (May 31, 2008) 3 Months Since Inception ■ City of San Luis Obispo City of San Luis Obispo 0 -5 Yr. Treasury Index 0 -5 Yr. Treasury Index 3 Months Since Inception 0.30% 2.32% 0.37% 2.05% *Total rate of Return: A measure of a portfolio's performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains and losses. Returns represented comprise City's historical portfolio performance as reported to PFM Asset Management (` PFMAM'). These figures do not represent periods during which PFMAM has provided fiduciary investment services to the City. © PFM Asset Management LLC 12 City of San Luis Obispo - Internal Portfolio Characteristics Portfolio Average Maturity (yrs.) 0.05 Effective Duration* 0.05 Average Purchase Yield 0.36% Average Market Yield 0.16% Average Quality AA+ /Aaa Total Market Value 47,618,995 Portfolio 0.05 0.04 0.43% 0.19% AA+ /Aaa 38,412,645 "Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price, for each 1% change in interest rates. Modified duration is a similar risk measure, but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e. if interest rates fall and a callable bond is more likely to be called prior to its final maturity, the effective duration will decrease). © PFM Asset Management LLC 13 City of San Luis Obispo Sector Distribution — Internal December 31, 2014 Money Market I l TrPaql 11 V Rate Account, LAI F, $27,222, 57% Negotiable CD, 1,000,000 2% "Sector distribution includes market value and excludes accrued interest. Cash, $17,290,811 37% LAI F, $27,222,587 71% September 30, 2014 U.S. Treasury, $1,133,572 Money Market ^-`- Account, 006,382 3% Negotiable CD, $1,002,138 2% Cash, $8,047,965 21% © PFM Asset Management LLC 14 Issuer Distribution — Internal LAI F LAI F 57.17% Cash Cash 36.31% U.S. Treasury U.S. Treasury 2.31% Heritage Oaks Bank Money Market Rate Account 2.11% Heritage Oaks Bank Negotiable CD 2.10% Total 100.00% As of December 31, 2014 © PFM Asset Management LLC 15 Consolidated Information Portfolio Complies with California Government Code and the City of San Luis Obispo's Investment Policy. Additionally, none of the City's funds are invested in any securities prohibited by Code. City of San Luis Obispo Portfolio Compliance — Consolidated Category .. Comment Treasury Obligations 5 year maximum maturity Complies Government Sponsored Enterprise (GSE) 5 year maximum maturity, AAA by S &P or Moody's Complies Securities Corporate Notes 5 year maximum maturity Complies At least one "AA" rating 30% maximum, 5% per issuer Local Government Investment Pool (LAIF) Up to maximum permitted by State Law Complies Negotiable Certificates of Deposit 5 year maximum maturity Complies 30% maximum, 5% per issuer Collateralized Bank Deposits 5% per issuer Complies Money Market Mutual Funds Highest rating category by 2 NRSRO's Complies 20% maximum, 10% per issuer % maturing in less than 90 days 5% minimum Complies Maximum maturity of corporate 5 years Complies Maximum maturity 10 years; 10% maximum of portfolio in Treasury and Complies GSE obligations with maturity >5 years © PFM Asset Management LLC 16 City of San Luis Obispo - Consolidated Portfolio Characteristics *Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price, for each I% change in interest rates. Modified duration is a similar risk measure, but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e. if interest rates fall and a callable bond is more likely to be called prior to its final maturity, the effective duration will decrease). © PFM Asset Management LLC 17 Portfolio Portfolio Average Maturity (yrs.) 0.91 1.05 Effective Duration* 0.89 1.02 Average Purchase Yield 0.72% 0.82% Average Market Yield 0.46% 0.46% Average Quality AA+ /Aaa AA+ /Aaa Total Market Value 92,913,060 83,698,350 *Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price, for each I% change in interest rates. Modified duration is a similar risk measure, but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e. if interest rates fall and a callable bond is more likely to be called prior to its final maturity, the effective duration will decrease). © PFM Asset Management LLC 17 Money Market Fund $1,407,744 2% December 31, 2014 Money Market Rate Account $1,006,804 1% Negotiable CD / $1,000,000 1% Corporate $6,251,722 7% Federal Agency $28,342,985 30% City of San Luis Obispo Sector Distribution — Consolidated LAI F $27,222,083 29% September 30, 2014 Negotiable Money Market CD, Fund, Money Market $1,002,138 $1,357,885 Rate Account, 1 % 20�� $1,006,382 \ 10/ Corporate, $6,200 Qa7 i Federal Agency, $28,338,042 Cash 34% $17,290,811 19% reasury $10,390,911 11% 'Sector distribution includes market value and excludes accrued interest. 0 U.S. Treasury, $10,442,984 12% LA I F, $27,222,587 33% ,ash, 047,965 10% © PFM Asset Management LLC 18 Issuer Distribution — Consolidated LAIF LAIF 29.30% Cash Cash 18.61% U.S. Treasury U.S. Treasury 11.18% FHLMC Federal Agency 9.80% FNMA Federal Agency 7.95% FFCB Federal Agency 5.88% FHLB Federal Agency 5.72% Dreyfus Prime Cash Management Fund Money Market Fund 1.52% TVA Federal Agency 1.15% Heritage Oaks Bank Money Market Rate Account 1.08% Heritage Oaks Bank Negotiable CD 1.08% Procter & Gamble Corporate Note 1.00% Berkshire Hathaway Corporate Note 0.76% General Electric Corporate Note 0.76% Wal -Mart Stores Corporate Note 0.75% Apple Inc Corporate Note 0.75% Chevron Corp Corporate Note 0.75% Johnson & Johnson Corporate Note 0.74% Microsoft Corp Corporate Note 0.65% Google Inc Corporate Note 0.57% Total 100.00% As of December 31. 2014 © PFM Asset Management LLC 19 Portfolio Holdings City of San Luis Obispo Holdings Report YTM at Security Description Settle Date Cost Par YTM at Cost Value Amortized Cost Market Market Value For the Month Ending December 31, 2014 Accrued % of Unreal G/L S &P/ Years to Interest Portfolio Amort Cost Moody's Maturity Duration LOCAL AGENCY INVESTMENT FUND Various 0.24% 27,222,083.00 27,222,083.00 27,222,083.00 0.24% 27,222,083.00 29.30% NR 0.00 0.00 NR 0.00 0.00 :U.S. US TREASURY NOTES CASH HERITAGE OAKS BANK MONEY NR MARKET RATE ACCOUNT Various 0.21% 1,006,804.00 1,006,804.00 1,006,804.00 0.21% 1,006,804.00 1.08% 0.00 0.00 NR NR 1,050,000.00 1,042,948.83 Total LAIF 0.24% 27,222,083.00 27,222,083.00 27,222,083.00 0.24% 27,222,083.00 29.30% NR 0.00 0.00 AA+ !Money Market Fund DREYFUS PRIME CASH MANAGEMNT 1.38% Due 11/30/2015 5/16/2011 1.63% 1,055,000.00 1,043,217.21 1,052,564.44 0.28% AAA 1,275.27 1.15% MONEY MARKET FUND Various 0.00% 1,407,743.91 1,407,743.91 1,407,743.91 0.00% 1,407,743.91 1.52% Aaa 0.00 0.00 Total Money Market Fund 0.00% 1,407,743.91 1,407,743.91 1,407,743.91 0.00% 1,407,743.91 1.52% AAA 0.00 0.00 1,000,000.00 1,000,000.00 0.39% 1,099,296.88 34,938.86 1.17% 99,296.88 Aaa 1.13 US TREASURY NOTES Treasury Bond/Note CASH ACCOUNT Various 0.00% 17,290,811.00 17,290,811.00 17,290,811.00 0.00% 17,290,811.00 18.61% NR 0.00 0.00 :U.S. US TREASURY NOTES CASH HERITAGE OAKS BANK MONEY NR MARKET RATE ACCOUNT Various 0.21% 1,006,804.00 1,006,804.00 1,006,804.00 0.21% 1,006,804.00 1.08% 0.00 0.00 NR 1.91% 1,050,000.00 1,042,948.83 1,049,015.18 0.18% 1,059,639.00 Total Cash 0.01% 18,297,615.00 18,297,615.00 18,297,615.00 0.01% 18,297,615.00 19.69% NR 0.00 0.00 Treasury Bond/Note :U.S. US TREASURY NOTES AA+ 1.75% Due 7/31/2015 4/12/2011 1.91% 1,050,000.00 1,042,948.83 1,049,015.18 0.18% 1,059,639.00 7,689.54 1.14% 10,623.82 Aaa 0.58 0.58 US TREASURY NOTES AA+ 1.38% Due 11/30/2015 5/16/2011 1.63% 1,055,000.00 1,043,217.21 1,052,564.44 0.28% 1,065,550.00 1,275.27 1.15% 12,985.56 Aaa 0.92 0.91 US TREASURY NOTES AA+ 9.25% Due 2/15/2016 2/15/1986 9.24% 1,000,000.00 1,000,000.00 1,000,000.00 0.39% 1,099,296.88 34,938.86 1.17% 99,296.88 Aaa 1.13 1.06 US TREASURY NOTES AA+ 2.13% Due 2/29/2016 5/19/2011 1.74% 450,000.00 457,999.65 452,002.29 0.36% 459,211.05 3,249.14 0.49% 7,208.76 Aaa 1.16 1.15 US TREASURY NOTES AA+ 2.13% Due 2/29/2016 8/30/2011 0.82% 600,000.00 634,548.89 609,022.63 0.36% 612,281.40 4,332.18 0.66% 3,258.77 Aaa 1.16 1.15 US TREASURY NOTES AA+ 0.25% Due 4/15/2016 4/24/2013 0.34% 900,000.00 897,647.55 898,980.67 0.37% 898,594.20 482.14 0.97% (386.47) Aaa 1.29 1.28 US TREASURY NOTES AA+ 0.25% Due 5/15/2016 9/26/2013 0.54% 700,000.00 694,697.66 697,234.74 0.40% 698,523.70 227.21 0.75% 1,288.96 Aaa 1.37 1.37 US TREASURY NOTES AA+ 0.63% Due 7/15/2016 10/7/2013 0.57% 750,000.00 751,145.09 750,638.08 0.50% 751,464.75 2,165.42 0.81% 826.67 Aaa 1.54 1.53 US TREASURY NOTES AA+ 0.88% Due 11/30/2016 12/15/2011 0.84% 500,000.00 500,782.93 500,305.87 0.64% 502,187.50 384.62 0.54% 1,881.63 Aaa 1.92 1.90 US TREASURY NOTES AA+ 0.63% Due 5/31/2017 5/13/2013 0.62% 650,000.00 650,027.57 650,016.67 0.86% 646,292.97 357.14 0.70% (3,723.70) Aaa 2.42 2.39 US TREASURY NOTES AA+ 0.75% Due 6/30/2017 9/17/2013 1.18% 575,000.00 565,882.79 568,940.85 0.90% 572,843.75 11.91 0.62% 3,902.90 Aaa 2.50 2.47 US TREASURY NOTES AA+ 0.50% Due 7/31/2017 9/28/2012 0.59% 200,000.00 199,164.73 199,551.61 0.94% 197,734.38 418.48 0.21% (1,817.23) Aaa 2.58 2.55 US TREASURY NOTES AA+ 0.50% Due 7/31/2017 1/29/2013 0.78% 300,000.00 296,297.88 297,863.02 0.94% 296,601.56 627.72 0.32% (1,261.46) Aaa 2.58 2.55 US TREASURY NOTES AA+ 0.75% Due 12/31/2017 8/13/2013 1.28% 625,000.00 611,061.66 615,380.35 1.11% 618,408.13 12.95 0.67% 3,027.78 Aaa 3.00 2.96 US TREASURY NOTES AA+ 0.75% Due 2/28/2018 4/24/2014 1.32% 925,000.00 905,166.18 908,652.09 1.19% 912,281.25 2,357.22 0.98% 3,629.16 Aaa 3.16 3.11 Total U.S. Treasury Bond /Note 1.94% 10,280,000.00 10,250,588.62 10,250,168.49 0.57% 10,390,910.52 58,529.80 11.17% 140,742.03 AAAa+ 1.67 1.64 City of San Luis Obispo Holdings Report For the Month Ending December 31, 2014 YTM at YTM at Accrued % of Unreal G/L S &P/ Years to Security Description Federal Settle Date Cost Par Cost Value Amortized Cost Market Market Value Interest Portfolio Amort Cost Moody's Maturity Duration FHLMC GLOBAL NOTES AA+ 2.88% Due 2/9/2015 3/9/2010 2.63% 1,225,000.00 1,238,784.93 1,225,313.67 0.75% 1,227,707.25 13,891.84 1.32 %0 2,393.58 Aaa 0.11 0.11 FFCB NOTES AA+ 2.05% Due 2/18/2015 7/26/2011 1.23% 400,000.00 411,440.00 400,427.35 0.21% 400,956.40 3,029.44 0.43% 529.05 Aaa 0.13 0.13 FFCB NOTES AA+ 1.67% Due 3/24/2015 7/21/2011 1.18% 1,000,000.00 1,017,410.00 1,001,113.18 0.15% 1,003,504.00 4,499.72 1.08% 2,390.82 Aaa 0.23 0.23 FFCB NOTES AA+ 1.60% Due 5/18/2015 7/20/2011 1.28% 230,000.00 232,702.50 230,274.57 0.20% 231,226.13 439.56 0.25% 951.56 Aaa 0.38 0.38 TVA GLOBAL NOTES AA+ 4.38% Due 6/15/2015 6/14/2011 1.46% 1,050,000.00 1,168,386.45 1,063,820.44 0.43% 1,068,810.75 2,041.67 1.15% 4,990.31 Aaa 0.45 0.46 FHLB NOTES AA+ 2.13% Due 6/30/2015 5/26/2011 1.49% 900,000.00 922,752.00 902,837.07 0.21% 908,599.50 53.13 0.98% 5,762.43 Aaa 0.50 0.50 FFCB NOTES AA+ 0.55% Due 8/17/2015 4/27/2012 0.60% 1,000,000.00 998,511.00 999,715.21 0.26% 1,001,804.00 2,047.22 1.08% 2,088.79 Aaa 0.63 0.63 FNMA GLOBAL NOTES AA+ 0.50% Due 9/28/2015 6/27/2013 0.50% 650,000.00 650,026.00 650,008.76 0.26% 651,170.65 839.58 0.70% 1,161.89 Aaa 0.74 0.74 FFCB NOTES AA+ 1.50% Due 11/16/2015 3/25/2011 2.20% 402,000.00 389,640.91 399,575.24 0.30% 406,219.79 753.75 0.44% 6,644.55 Aaa 0.88 0.87 FHLB GLOBAL NOTES AA+ 0.50% Due 11/20/2015 6/27/2013 0.53% 700,000.00 699,447.00 699,794.94 0.33% 701,031.10 398.61 0.75% 1,236.16 Aaa 0.89 0.88 FFCB NOTES AA+ 2.35% Due 12/22/2015 3/28/2011 2.27% 580,000.00 582,099.60 580,453.00 0.32% 591,453.26 340.75 0.64% 11,000.26 Aaa 0.98 0.97 FHLB NOTES AA+ 3.13% Due 3/11/2016 8/10/2011 1.12% 965,000.00 1,051,449.53 987,937.41 0.48% 995,381.10 9,214.41 1.07% 7,443.69 Aaa 1.19 1.17 FFCB NOTES AA+ 1.05% Due 3/28/2016 9/14/2012 0.53% 924,000.00 940,879.28 929,957.62 0.40% 931,444.67 2,506.35 1.00% 1,487.05 Aaa 1.24 1.23 FNMA GLOBAL NOTES AA+ 0.50% Due 3/30/2016 3/27/2013 0.45% 950,000.00 951,434.50 950,597.00 0.42% 950,950.00 1,200.69 1.02% 353.00 Aaa 1.25 1.24 FHLB NOTES AA+ 2.13% Due 6/10/2016 6/20/2011 1.84% 1,000,000.00 1,013,460.00 1,004,029.76 0.56% 1,022,400.00 1,239.58 1.10% 18,370.24 Aaa 1.44 1.42 FHLB GLOBAL NOTES AA+ 0.38% Due 6/24/2016 6/27/2013 0.77% 700,000.00 691,817.00 695,926.86 0.54% 698,289.20 51.04 0.75% 2,362.34 Aaa 1.48 1.47 FHLB NOTES AA+ 2.00% Due 9/9/2016 10/24/2013 0.67% 280,000.00 290,550.40 286,222.25 0.68% 286,202.00 1,742.22 0.31% (20.25) Aaa 1.69 1.65 FNMA NOTES AA+ 1.38% Due 11/15/2016 3/14/2012 1.21% 985,000.00 992,545.10 988,077.56 0.65% 998,276.82 1,730.59 1.07% 10,199.26 Aaa 1.88 1.85 FNMA GLOBAL NOTES AA+ 1.25% Due 1/30/2017 2/27/2012 1.07% 800,000.00 807,016.00 803,009.26 0.82% 807,172.00 4,194.44 0.87% 4,162.74 Aaa 2.08 2.04 FFCB NOTES AA+ 2.88% Due 2/10/2017 7/25/2012 0.74% 865,000.00 947,477.75 903,628.33 0.89% 900,807.54 9,740.26 0.97% (2,820.79) Aaa 2.12 2.03 FNMA (CALLABLE) NOTES AA+ 1.00% Due 2/27/2017 4/24/2013 0.75% 500,000.00 504,750.00 500,402.56 1.00% 500,005.00 1,722.22 0.54% (397.56) Aaa 2.16 0.29 FHLMC GLOBAL NOTES AA+ 1.00% Due 3/8/2017 3/14/2012 1.29% 1,000,000.00 986,050.00 993,771.45 0.87% 1,002,898.00 3,138.89 1.08% 9,126.55 Aaa 2.19 2.15 FHLMC NOTES AA+ 1.25% Due 5/12/2017 10/17/2012 0.82% 500,000.00 509,635.00 505,029.34 0.93% 503,705.50 850.69 0.54% (1,323.84) Aaa 2.36 2.32 FNMA NOTES (EX- CALLABLE) AA+ 2.05% Due 5/23/2017 8/7/2012 0.90% 365,000.00 384,739.20 374,964.06 1.13% 372,913.93 789.82 0.40% (2,050.13) Aaa 2.39 2.33 FHLB GLOBAL NOTES AA+ 1.00% Due 6/21/2017 11/26/2012 0.70% 700,000.00 709,478.00 705,165.69 0.97% 700,574.00 194.44 0.75% (4,591.69) Aaa 2.47 2.44 City of San Luis Obispo Holdings Report For the Month Ending December 31, 2014 HERITAGE OAKS BANK YANKEE CD 12/20/2014 0.27% 1,000,000.00 1,000,000.00 1,000,000.00 0.27% 1,000,000.00 82.50 1.08% NR 0.97 0.97 0.27% Due 12/20/2015 NR Total Negotiable CD 0.27% 1,000,000.00 1,000,000.00 1,000,000.00 0.27% 1,000,000.00 82.50 1.08% NR 0.97 0.97 YTM at YTM at Accrued % of Unreal G/L S &P/ Years to Security Description Settle Date Cost Par Cost Value Amortized Cost Market Market Value Interest Portfolio Amort Cost Moody's Maturity Duration FHLMC GLOBAL NOTES 4/24/2013 0.59% 700,000.00 704,515.00 701,425.04 0.52% 701,791.30 1,355.28 0.76% 366.26 AA+ 0.77 0.90 1.00% Due 6/29/2017 7/30/2012 0.85% 775,000.00 780,673.00 777,909.84 0.92% 776,525.98 43.06 0.84% (1,383.86) Aaa 2.50 2.46 FHLMC GLOBAL NOTES 6/27/2013 0.81% 700,000.00 696,017.00 698,164.85 0.64% 699,672.40 933.33 0.75% 1,507.55 AA+ 1.28 1.27 1.00% Due 6/29/2017 12/14/2012 0.74% 135,000.00 136,587.60 135,878.57 0.92% 135,265.82 7.50 0.15% (612.75) Aaa 2.50 2.46 FHLMC GLOBAL NOTES 5/13/2013 0.55% 700,000.00 698,005.00 699,097.46 0.53% 699,241.20 507.50 0.75% 143.74 AA+ 1.34 1.33 1.00% Due 7/28/2017 11/26/2012 0.80% 900,000.00 908,316.00 904,622.35 1.01% 899,662.50 3,825.00 0.97% (4,959.85) Aaa 2.58 2.53 FNMA GLOBAL NOTES 1/15/2013 0.58% 675,000.00 709,870.50 689,436.50 0.65% 688,844.93 1,854.38 0.74% (591.57) AA+ 1.37 1.35 0.88% Due 8/28/2017 6/20/2014 1.10% 625,000.00 620,687.50 621,402.66 1.01% 622,816.88 1,868.49 0.67% 1,414.22 Aaa 2.66 2.61 FHLMC GLOBAL NOTES 4/23/2012 0.91% 523,000.00 548,360.27 531,719.42 0.56% 534,241.89 1,296.60 0.57% 2,522.47 AA+ 1.38 1.36 1.00% Due 9/29/2017 1/4/2013 0.89% 950,000.00 954,788.00 952,800.31 1.08% 947,913.80 2,427.78 1.02% (4,886.51) Aaa 2.75 2.69 FNMA GLOBAL NOTES 8/3/2012 0.82% 915,000.00 937,893.30 924,297.76 0.73% 925,620.41 5,012.17 1.00% 1,322.65 AA+ 1.62 1.60 0.88% Due 10/26/2017 6/20/2014 1.17% 625,000.00 618,987.50 619,926.16 1.18% 619,717.50 987.41 0.67% (208.66) Aaa 2.82 2.77 FHLMC NOTES 4/24/2013 1.00% 700,000.00 716,765.00 709,881.55 1.23% 705,984.30 1,431.11 0.76% (3,897.25) AA+ 2.37 2.32 0.75% Due 1/12/2018 10/1/2014 1.26% 800,000.00 787,008.00 787,981.46 1.23% 788,519.20 2,816.67 0.85% 537.74 Aaa 3.04 2.97 FHLMC GLOBAL NOTES AA+ 0.88% Due 3/7/2018 11/20/2014 1.20% 900,000.00 890,469.00 890,793.32 1.26% 889,157.70 2,493.75 0.96% (1,635.62) Aaa 3.18 3.12 FNMA GLOBAL NOTES AA+ 0.88% Due 5/21/2018 4/24/2014 1.46% 925,000.00 903,691.70 907,194.77 1.38% 909,619.10 899.31 0.98% 2,424.33 Aaa 3.39 3.32 FHLMC NOTES AA+ 1.75% Due 5/30/2019 8/4/2014 1.67% 900,000.00 903,420.00 903,147.57 1.62% 904,989.60 1,356.25 0.97% 1,842.03 Aaa 4.41 4.23 FNMA NOTES AA+ 1.75% Due 6/20/2019 10/2/2014 1.77% 500,000.00 499,630.00 499,653.14 1.64% 502,464.00 267.36 0.54% 2,810.86 Aaa 4.47 4.28 FNMA NOTES AA+ 1.75% Due 6/20/2019 8/5/2014 1.74% 350,000.00 350,227.50 350,211.57 1.64% 351,724.80 187.15 0.38% 1,513.23 Aaa 4.47 4.28 FNMA NOTES AA+ 1.75% Due 6/20/2019 11/21/2014 1.71% 100,000.00 100,157.00 100,153.82 1.64% 100,492.80 53.47 0.11% 338.98 Aaa 4.47 4.28 FHLMC GLOBAL NOTES AA+ 1.25% Due 8/1/2019 9/15/2014 1.88% 1,050,000.00 1,019,077.50 1,020,870.46 1.67% 1,030,612.80 5,468.75 1.11% 9,742.34 Aaa 4.59 4.41 AA± Total Federal Agency Bond /Note 1.21% 28,206,000.00 28,566,202.45 28,254,598.58 0.79% 28,342,985.07 89,352.86 30.50% 88,386.49 1.94 1.87 HERITAGE OAKS BANK YANKEE CD 12/20/2014 0.27% 1,000,000.00 1,000,000.00 1,000,000.00 0.27% 1,000,000.00 82.50 1.08% NR 0.97 0.97 0.27% Due 12/20/2015 NR Total Negotiable CD 0.27% 1,000,000.00 1,000,000.00 1,000,000.00 0.27% 1,000,000.00 82.50 1.08% NR 0.97 0.97 !Corporate Note GENERAL ELECTRIC CO NOTES AA+ 0.85% Due 10/9/2015 4/24/2013 0.59% 700,000.00 704,515.00 701,425.04 0.52% 701,791.30 1,355.28 0.76% 366.26 Aa3 0.77 0.90 WAL-MART STORES INC NOTES AA 0.60% Due 4/11/2016 6/27/2013 0.81% 700,000.00 696,017.00 698,164.85 0.64% 699,672.40 933.33 0.75% 1,507.55 Aa2 1.28 1.27 APPLE INC GLOBAL NOTES AA+ 0.45% Due 5/3/2016 5/13/2013 0.55% 700,000.00 698,005.00 699,097.46 0.53% 699,241.20 507.50 0.75% 143.74 Aa1 1.34 1.33 JOHNSON & JOHNSON NOTE AAA 2.15% Due 5/15/2016 1/15/2013 0.58% 675,000.00 709,870.50 689,436.50 0.65% 688,844.93 1,854.38 0.74% (591.57) Aaa 1.37 1.35 GOOGLE INC GLOBAL NOTES AA 2.13% Due 5/19/2016 4/23/2012 0.91% 523,000.00 548,360.27 531,719.42 0.56% 534,241.89 1,296.60 0.57% 2,522.47 Aa2 1.38 1.36 PROCTER & GAMBLE CO NOTES AA 1.45% Due 8/15/2016 8/3/2012 0.82% 915,000.00 937,893.30 924,297.76 0.73% 925,620.41 5,012.17 1.00% 1,322.65 Aa3 1.62 1.60 BERKSHIRE HATHAWAY NOTES AA 1.60% Due 5/15/2017 4/24/2013 1.00% 700,000.00 716,765.00 709,881.55 1.23% 705,984.30 1,431.11 0.76% (3,897.25) Aa2 2.37 2.32 City of San Luis Obispo Holdings Report For the Month Ending December 31, 2014 Total Portfolio 0.72% 92,626,441.91 93,058,179.05 92,687,759.10 0.44% 92,913,059.93 161,590.74 99.99% 225,300.83 AA+ 0.91 0.89 Total Market Value Plus Accrued 93,074,650.67 YTM at YTM at Accrued % of Unreal G/L S &P/ Years to Security Description Settle Date Cost Par Cost Value Amortized Cost Market Market Value Interest Portfolio Amort Cost Moody's Maturity Duration CHEVRON CORP NOTES AA 1.10% Due 12/5/2017 1/10/2013 1.03% 700,000.00 702,442.00 701,457.27 1.32% 695,672.60 558.13 0.75% (5,784.67) Aa1 2.93 3.00 MICROSOFT CORP NOTES AAA 1.63% Due 12/6/2018 6/20/2014 1.62% 600,000.00 600,078.00 600,070.27 1.60% 600,653.40 677.08 0.65% 583.13 Aaa 3.93 3.79 Total Corporate Note 0.86% 6,213,000.00 6,313,946.07 6,255,550.12 0.86% 6,251,722.43 13,625.58 6.73% (3,827.69) 2 1.86 1.85 AA Total Portfolio 0.72% 92,626,441.91 93,058,179.05 92,687,759.10 0.44% 92,913,059.93 161,590.74 99.99% 225,300.83 AA+ 0.91 0.89 Total Market Value Plus Accrued 93,074,650.67 I- Economic Focus • Interest rates have almost doubled in the last year. At the end of 2014, as global fears eased, yields rose to their highest levels since 2011. 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 2 -Year U.S. Treasury Yield January 1. 2014 — December 31. 2014 Rates volatile, but higher than ' stt year f 0.20% Jan -14 Feb -14 Mar -14 Apr -14 May -14 Jun -14 Jul -14 Aug -14 Sep -14 Oct -14 Nov -14 Dec -14 Source: Bloomberg © PFM Asset Management LLC 24 U.S. Treasury Yields 6% January 1, 2005 — December 31, 2014 2 -Year Treasury 5% ?� r' I f _ - - - - -- - 5 -Year Treasury r 4% 3 %- .. ...._.. _ . --- ---- ----------- 10 -Year Average 2.52% 2° /o ---------- - - - - -- -- ------------------------ 1.81% Uy" y 1 % _. --------- .........� Ahk j 0% — - Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Source: Bloomberg © PFM Asset Management LLC 25 © PFM Asset Management LLC 26 Longer rates lower, but could move higher fast U.S. Treasury Yield Curve { 9/30/14 12/31/14 4.0% - - 3 Month 0.02% 0.04% 3.5% 3.0% 6 Month 0.03% 0.12% 2.5% -_ �— — -' 1 Year 0.10% 0.22% _ 2.0% _— ..r'� 2 Year 0.57% 0.67% � 1.5% r 3 Year 1.14% 1.15% 1.0% Provides opportunities 5 Year 1.76% 1.65% ° 0.5 /° for roll -down 10 Year 2.49% 2.17% 3 1 2 3 5 10 30 30 Year 3.20% 2.75% M YYY Y Y Y Maturity ---December 31, 2014 September 30, 2014 Source: Bloomberg © PFM Asset Management LLC 26 After a slow start to 2014, GDP growth recovered strongly in the 2nd and 3rd quarters. 4th quarter GDP disappointed moderately at 2.6 %. as 6% 5% N 4% - c C 3% d a 2% Q 1% — — �a c 0 i Co 0% 1 ;, -1 % IM C 0 V -2% e 0 cY U.S. Real GDP Post Recession Average = 2.4% Bloomberg Survey of Economists -4% - — ItT N M N M � N M I;T T— N M I N M It r— N M tt 2009 2010 2011 2012 2013 2014 2015 Sow•ce: Bureau Of Economic Analysis © PFM Asset Management LLC 27 U.S. GDP fully recovered from 2007 -8 financial crisis; moderate growth expected Eurozone and Japan struggling Emerging markets slow from historic pace GDP Growth (4Q2005 = 100) IMF Projections 135 130 — 1 e 125 120 0 � 115 110 i � — ° -- 105 100 95 90 - - ln O Cfl O r— O CO O O O O — N M_ U') CO � CA CA r r — r O N O N O N O N O N O O N N O N O O O O O O O N N N N N N N It It It v It It 't It It 't It It Nt It United States Eurozone Japan Sources: Bloomberg and International Monetary Fund (IMF) expectations. Actual data through 3Q20I4 Historical and Expected Long -Term GDP Growth Rates 2.2% United States 2.9% 1.0% Eurozone 2.0% 1.6% Japan .0.9% China 0.0% 2.0% 8.5% 6.6% 4.0% 6.0% 8.0% 10.0% m2010-2014 ■ 2015 -2019 © PFM Asset Management LLC 28 Reinvestments will continue • Rate hike is data dependent — no preset course When rate increases arrive, they are expected to be modest and over an extended period of time 5% 4% 3% 2% 1% 0% Fed Dot Plot versus Previous Plot and Fed Funds o Minutes Dec -14 Dec -14 Median Sep -14 Median 3.75% 00 0 0 .63% coo Sources: Bloomberg and Federal Reserve. Summary, of economic projections from December 17, 2014 © PFM Asset Management LLC 2014 2015 2016 2017 Longer Term 29 • The personal consumption expenditures (PCE) price index, the Federal Reserve's preferred gauge of core inflation, continues to be less than the Federal Reserve's 2% target; the PCE index advanced 1.6% year- over -year through October. • The Core Consumer Price Index (CPI) registered 1.8% year- over -year growth through October. Inflation Measures: Consumer Price Index vs Personal Consumption Expenditures 3.0% 2.5% as a� c V 1.5% - _------------ ---- - - - - -- 0 0 } 1.0% _ ------------ - - - - -- 0.5% 0.0% Oct -04 Oct -05 Oct -06 Source: Bloomberg Oct -07 Oct -08 Oct -09 Oct -10 Oct -11 Oct -12 Oct -13 Oct -14 © PFM Asset Management LLC 30 West Texas Intermediate (WTI) Crude: — 46% year -to -date decline — 50% decline from the 2014 peak Plunge in oil prices attributed to: — Oversupply 0 Increased North American production OPEC maintaining output — Slowing global demand ® Weaker global economy Improvements in energy efficiency and use of alternative energy sources Source: Bloomberg and Barclays. Data as of December 31, 2014 $160 $140 $120 $100 $80 $60 $40 $20 $0 WTI Price per Barrel (10 Years) 03 ODD Oh GOB O'l GOB G,O°� G,�O G�� G�� G�3 GNtK Net Positive For U.S. Economy: Oil prices boost consumer discretionary income Energy employment may decline, but offset by gains in other industries Municipalities with fleets of vehicles should save money © PFM Asset Management LLC 31 $120 $110 $100 $90 $80 $70 $60 $50 $40 Dec -13 West Texas Intermediate Oil Price per Barrel January 2014 — December 2014 $4.00 c $3.50 0 R $3.00 d CL $2.50 a $2.00 - Feb -14 Apr -14 Jun -14 Aug -14 Oct -14 Dec -14 Price of Regular Gasoline (U.S. Average Retail) $1.50 Dec -13 Feb -14 Apr -14 Jun -14 Aug -14 Oct -14 Dec -14 Source: Bloomberg © PFM Asset Management LLC 01 Oil prices have steadily fallen over the past 6 months. Growth: Typically, lower oil prices boost consumer discretionary income, while lower production costs for energy- intensive industries increase efficiency and profitability Jobs: Energy employment may decline, but may be offset by gains in other industries • Inflation: Expect lower headline inflation, with modest spillover to core price indexes Capital Expenditures: Oil related industries' capital expenditures may decline as new projects are halted or deferred Trade: Lower import prices should narrow trade deficits 32 Winners: — United States — China ID- Japan — India — South Korea — Germany — France — Spain Oil imp09rt5 %expoits Including petroleum products' 4- i M v yam, •e ':,7 r� Losers: Saudi Arabia Russia U.A.E. Kuwait raq Nigeria Iran Venezuela s ti. �v mac• 1� N-_ 10 NFL :j N_ a �_ o e.ls __�- 1+� G Ne< r P e ID N"e. ,.,ource: UNCTAD "Suc.h as refln--d a;l or &eroseme Nei Iml!+orrs /e:cvarts of lass t4en a.1% o= GDP Unsettled outlook 0 2 4 6 a = OPEC members Biggest oil producers Russia Government budgets' break -even oil price 2013, barrels per day, m �m change en a yearear9er 2014, 5 per barrel 140 0 2 4 6 8 10 12! • —Iran United States 111 T •— Bahrain Saudi Arabia =_1 Russia 1.3 • 1300 m China 20 ■ M Canada 5,6 r~ 4 UAE I� [ES ■ � Erugm Iran •4.3 • 120 —Venom eU Iraq L 2e a Algeria log" Mexico 1_1A ■ • —Iraq Kuwait ro .5 • Brazil L 110 • Lib a — y Venezuela nit + _ Biggest net ok 2013, barrels per day, m exporters 0 2 4 6 a Saudi Arabia Russia UAE Kuwait low Iraq M importers 0 2 4 6 8 United States China Japan India South Korea Sources: EIA; Deutsche Bank; B,00mberg 10 10 100 •— Russia .s Angola ' —Saudi 90 Arabia 11 7 j pel uairer N 80 • —Oman ._r Kuwait 70 —Qatar t . + ' UAE 2013 2014 Source: The Economist; Deutsche Bank. © PFM Asset Management LLC 33 As economic conditions have improved in the United States and global expectations have weakened, the dollar has increased in value relative to foreign currencies. Value of U.S. Dollar vs. Euro and Japanese Yen January 2014 — December 2014 0.84 0.82 ---------- - 0.80 — ----- - - - - - - ----------------------------------- --- 125 120 0.78 ------ - - -------- - ----- - --------------- - -_------_--- - -------_------ - -- - - - ---------------- - - --- - ------------ -------- ---- ---- - ----- 115 0.76 C — ------ ,tO K 0.74 - - --------------- ----------- - ------------- - - - - - ------------ - ------- - - - - ----------- --------------------- ------------ 0.72 .. ..... .. ----------------------------------- - ----------------------- - ---- ------------ ----- - ----- - --------- - ------ ----------_-- 0.70 Jan-14 Feb-14 Mar-14 Apr -14 May -14 Jun-14 Jul-14 Aug-14 Sep -14 Oct -14 Nov-14 Dec-14 Source: Bloomberg —Euro (Left) —Yen (Right) @ PFM Asset Management LLC 110 L 105 100 34 We expect similar market forces in 2015: Central Bank Action Diverging Global Economic Activity Oil /Currency impact of inflation and trade balance Geopolitical Risk Closely Monitor movements of the FOMC: Expect first rate hike in 2015 Timing uncertain - Possibly late summer to early fall Market will likely react ahead of rate hike announcement Yields on money market securities have risen notably: Especially for maturities greater than six months In response to rising short term rates; expected to continue as Fed Hike approaches © PFM Asset Management LLC 35 MMF /LGIP Commercial Paper /CDs Treasury: T -Bill T -Note Agency: <= 3 years > 3 Years Corporates: Financials Industrials { Municipal Bonds Asset - Backed Mortgage Backed CP /CDs Supply is constrained for shorter maturities, but Fed expectations has improved value in 6 -12 month maturities. Treasuries New issuance shrinking as federal deficit improves; 1 -5 year maturities offer value near the upper end of recent trading ranges. Federal Agencies Housing GSEs continue to reduce issuance as they shrink their balance sheets; result is diminished supply and shrinking spreads, little value in short maturities. Corporates Positive macro environment is particularly supportive of industrial issuers which appear attractive; some new issues still contain price concessions; bank sector may come under ratings pressure in 2015, but still provide an opportunity to enhance returns. Municipals Supply has diminished as advance refundings decline and new money projects lag; taxables offer occasional value compared to other spread products. ABS Economic outlook supports incremental value in AAA senior fixed -rate auto loan and credit card tranches. MBS Sector remains vulnerable to volatility, bank regulations and investor preferences; risk of slowing pre - payments if rates rise; seasoned issues with shorter final maturities have modest value. Source: PFMAM. As of December 31, 2014- This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. .SUt)JeGQo Channec �n hha markeh gpvirnnmgntand may. vAN 6aSed nn the C- Il�nt'e narti[��Iar CirC��m,$t r!rQS, - © PFM Asset Management LLC 36 Cash Flow Analysis Compute the growth of the total portfolio over the historical period Projects future balances Determine "seasonality" and historical seasonal factors Identify cash flow needs in the near -term Identify an appropriate allocation between assets invested short -term ( "liquidity ") and assets that can be invested longer term ( "core" portfolio) © PFM Asset Management LLC 37 Average Monthly Month Balance Average 71,548,864 January 71,970,385 February 72,828,217 March 74,428,657 April 77, 846, 068 May 77,098,912 June 75,762,304 July 63,945,565 August 66,876,998 September 67,043,774 October 71,959,118 November 70,010,625 December 68,815,743 © PFM Asset Management LLC Historical Factor 100.00% 100.59% 101.79% 104.02% 108.80% 107.76% 105.89% 89.37% 93.47% 93.70% 100.57% 97.85% 96.11 $100 $90 $80 $70 N $60 $50 $40 $30 $20 $10 $o Dec -11 San Luis Obispo Total Portfolio Balance December 2011 —June 2014 Jun -12 Dec -12 Jun -13 Dec -13 Jun -14 38 w Liquidity Balance — Highly liquid funds to meet daily disbursements needs and unforeseen expenditures — Funds to cover specific, predictable cash flows (i.e., payrolls, debt service) — Can be lower during periods of net cash inflow — Short -term money market instruments such as money market mutual funds, local government investment pools, commercial paper, and negotiable CDs • Core Portfolio — Funds that are not expected to be spent, but may be disbursed in extraordinary circumstances. — Available to be invested in longer -term securities with the potential to generate a higher return. © PFM Asset Management LLC 39 Risk/Return of Various Benchmarks 10 Years Ended December 31, 2014 Merrill Lynch Duration Annualized Total Cumulative Value Quarters With Treasury Index (years) Return of $50 Million Negative Return 1 Year 1.00 2.00% $60,969,081 4 out of 40 1 -3 Year 1.89 2.54% $64,234,764 0 -5 Year 2.23 2.77% $65,720,025 1 1 -5 Year 2.69 3.08% $67,736,348 3 -5 Year 3.84 Source: Bloomberg, Bank of America Merrill Lynch 3.96% $73,747,054 6 out of 40 9 out of 40 11 out of 40 13 out of 40 © PFM Asset Management LLC 40 Investment Management Plan Observations • Policy is robust and adequately addresses major considerations for investing City's funds City may consider the following changes and updates: — Update Investment manager references — Revisit cash flow assumptions outlined in plan — Review language addressing eligible financial institutions — Review GSE credit requirements — Expand commercial paper language — Review additional investments allowed by California Government Code since 2008 — Include a section describing collateral policy — Include a glossary Consider reorganizing plan according to GFOA or APT of U.S. and Canada models © PFM Asset Management LLC 41 ® The City can consider placement of funds in local financial institutions to support the local community economy. = In selecting financial institutions, the City may consider guidelines that address: — Maximum amount available for investment in local institutions — Maximum amount deposited in any one financial institution — Criteria defining a "local" bank — History of Community Reinvestment Act (CRA) or similar community based activity in San Luis Obispo County — Qualified as public depository under California law -- Deposit interest rate meets requirements established by City's Director of Finance © PFM Asset Management LLC 42 In addition to being in compliance with California Code sections 530630 -53653 and City of San Luis Obispo Investment Management Plan, funds may be invested in small and community banks within the San Luis Obispo County service area under the following criteria: — The bank must be based and have its headquarters in San Luis Obispo County, with at least one branch within the City of San Luis Obispo — The bank must provide certification and supporting information that indicates at least 25% in loans is invested within the City of San Luis Obispo — To ensure the City obtains a competitive rate for investments in the program, any potential investment or proposal must enjoy a rate of return equal to or greater than the Local Agency Investment Fund (LAIF) average quarterly rate existing at the time of the proposal; — Participating banks shall make a presentation to the City of San Luis Obispo Investment Oversight Committee about their community involvement at least one per year, or one month prior to maturity of any certificates of deposit held — Upon the Investment Oversight Committee's review of community involvement, the existing investment will be evaluated for renewal by City finance staff. © PFM Asset Management LLC 43 Portfolio Activity 2/9/15 Maturity FHLMC $1,225,000 2/9/15 2/9/15 Sale FHLB $500,000 6/30/15 0.13% 2/9/15 Sale U.S. Treasury $500,000 11/30/16 0.46% 2/9/15 Purchase FHLB $500,000 11/23/16 0.52% 2/9/15 Purchase FNMA $500,000 9/12/19 1.36% 2/9/15 Purchase IBM $750,000 2/6/18 1.16% 2/9/15 Purchase U.S. Treasury $500,000 12/31/18 1.08% © PFM Asset Management LLC 44 Effective Duration 2/3/15 1.99 2.23 2/9/15 2.10 2.21 Portfolio Maturity Distribution Portfolio Sector Allocation 35% 70% 30% 27% 27% 28% 29% ■ 2/3/2015 60% 58% 56% ■ 2/3/2015 25% 2/9/2015 50% 2/9/2015 20% 40% 15% 13% 11.)3% 29% 29% 12% 30% 10% 9 /° ° 10% 10% 10% 20% 14% 15% 5% i 10% 0% - Under 6 6 -12 1 -2 2 -3 3 -4 4 -5 0% Months Months Years Years Years Years U.S. Treasury Federal Agency Corporate © PFM Asset Management LLC 45 This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. © PFM Asset Management LLC