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HomeMy WebLinkAbout05-14-15 IOC Agenda PacketCITY OF SAN LUIS OBISPO INVESTMENT OVERSIGHT COMMITTEE REGULAR QUARTERLY AGENDA May 14, 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 February 12, 2015 a. Recommend approval of the minutes 2. Presentation of the Quarterly Investment Report on Portfolio Performance a. Review and confirm investment policy compliance 3. Review the changes proposed for the Investment Management Plan and the City’s Investment Policy a. Recommend approval and introduction to City Council Investment Oversight Committee Regular Quarterly Agenda for May 13, 2015 Page 2 4. Discuss the investment strategy in light of possible Federal Reserve Bank actions affecting interest rates and the results of the recent cash flow and liquidity analysis 5. Items to be addressed at a future meeting 6. Adjourn to the next meeting to be held on August 13, 2015 at 1:30 pm. _________________________________________________________________________ The 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 City Clerk’s Office located at 990 Palm Street, San Luis Obispo, during normal business hours. Memorandum To: Investment Oversight Committee Members From: Wayne Padilla, City Treasurer Date: May 7, 2015 Re: Material submitted as part of the next scheduled meeting’s agenda I wanted to provide this overview for the material that is being provided in advance of the meeting scheduled for May 14th. Based on the input received from the committee as it reviewed proposed updates to the Investment Management Plan, I have been working with Carlos Oblites from PFM to incorporate this information into a revised document while also working to identify opportunities to increase the amount of cash that can be added to the investment portfolio by reducing the city’s liquid cash balance based on an evaluation of current and forecast cash flow needs. As you will see when you review the changes to the Investment Management Plan, what has been achieved is an almost complete revision of the document that accomplishes the following: eliminates references that have become outdated because of changes in the Government Code; removes information that was pertinent when the plan was first developed but is no longer relevant; creates a better organization and flow of the material; provides the most current interpretations of the Government Code; updates the list of allowable investments to provide greater investment flexibility to achieve higher yields while maintaining adequate security of the invested principal. I have also provided a copy of a draft, revised Investment Policy, which is part of the City’s budget and fiscal policies. These are reviewed and adopted along with the Financial Plan every two years. Because the revision to the Investment Management Plan is so extensive and hard to read in track-changes mode, I am providing you with a clean copy and a copy that has all of the changes highlighted in track changes mode. Carlos put together a memo which highlights the changes on each page and provides an explanation for why the change is being proposed. In addition to these two documents, you will find a copy of the quarterly compliance report. This has been amended to provide a history of the quarterly trade activity, which is shown in the back of the document. A supplemental document is also being provided and will be reviewed during the meeting to discuss the current economic trends and possible results of any action taken by the Federal Reserve to affect interest rates. The purpose of this discussion is to provide the committee with insight on how upcoming investments are being planned and to explain why we are not immediately sinking large sums of additional cash into the portfolio at this time. City of San Luis Obispo, Title, Subtitle I look forward to the opportunity to discuss these items with the committee at our next meeting. Please contact me in advance if you have any questions. I can be reached by calling 781-7125 or by email: wpadilla@slocity.org CITY OF SAN LUIS OBISPO INVESTMENT OVERSIGHT COMMITTEE MINUTES 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 A meeting of the Investment Oversight Committee was called to order on Thursday, February 12, 2015, at 1:30 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, Carlos Oblites, Public Financial Management (City’s Investment Advisor); Anthony Mejia, City Clerk PUBLIC COMMENT None. 1. REVIEW OF INVESTMENT OVERSIGHT COMMITTEE MEETING MINUTES OF NOVEMBER 13, 2014 MOTION BY COMMITTEE MEMBER CODRON, SECOND BY COMMITTEE MEMBER MARX, CARRIED 6-0, to approve the Investment Oversight Committee Meeting minutes of November 13, 2014. Investment Oversight Committee Minutes – February 12, 2014 Page 2 2. PRESENTATION OF THE QUARTERLY INVESTMENT REPORT ON PORTFOLIO PERFORMANCE City Treasurer Padilla distributed the Quarterly Investment Report and City Investment Advisor Oblites reviewed the contents of the report and summarized the portfolio’s performance and responded to inquiries from the floor and Committee. Following discussion, MOTION BY COMMITTEE MEMBER MARX, SECOND BY COMMITTEE MEMBER LICHTIG, CARRIED 6-0, to confirm the Quarterly Investment Report, for the period ending December 31, 2014, is in compliance with the City’s Investment Policy. 3. DISCUSSION OF THE CONTENT OF THE QUARTERLY INVESTMENT REPORT AND IDENTIFY RECOMMENDED CHANGES TO FORMAT AND/OR CONTENT During the course of discussion, the Committee requested: 1) that the Quarterly Investment Report’s Economic Focus section include relevant California economic indices, 2) that the report’s Account Profile section incorporate an articulation of the City’s investment policies and an explanation related to compliance with such policies; 3) that the Investment Performance chart be clearly labeled as total rate of return “since inception annualized”; and 4) that a table of contents be added to the report.. 4. DISCUSSION REGARDING THE CONTINUED USE OF THE EXISTING INVESTMENT STRATEGY AS WELL AS ALTERNATIVE PERFORMANCE BENCHMARKS City Investment Advisor Oblites explained that an analysis of the City’s current investment strategy and potential alternative performance benchmarks will presented to the Committee at its next meeting. 5. DISCUSSION OF PUBLIC FINANCIAL MANAGEMENT’S REVIEW OF THE CITY’S INVESTMENT POLICY City Investment Advisor Oblites reviewed his recommendations for possible amendments to the City’s Investment Management Plan, noting that a draft plan will be presented to the Committee at its next meeting; reviewed major criteria considerations for determining whether to deposit funds in local financial institutions; responded to inquiries from the floor and Committee. During the course of discussion, it was requested that staff analyze the possibility allowing the deposit of funds with credit unions as well as financial institutions. 6. ITEMS TO BE ADDRESSED AT A FUTURE MEETING City Treasurer Padilla noted that the following items will be presented at a future meeting: • Draft revisions to the City’s Investment Policy. • Assessment of the liquidity needs versus investing additional cast into the portfolio. • Consideration of a Socially Responsible Investment Policy. Investment Oversight Committee Minutes – February 12, 2014 Page 3 ADJOURNMENT MOTION BY COMMITTEE MEMBER LICHTIG, SECOND BY COMMITTEE MEMBER WARNER, CARRIED 6-0, to adjourn at 3:05 p.m. Anthony J. Mejia City Clerk Approved: XX/XX/15 Ci t y o f S a n L u i s O b i s p o In v e s t m e n t R e p o r t Pe r i o d E n d i n g M a r c h 3 1 , 2 0 1 5 PF M A s s e t M a n a g e m e n t L L C 50 C a l i f o r n i a S t r e e t , S u i t e 2 3 0 0 Sa n F r a n c i s c o , C A 9 4 1 1 1 (4 1 5 ) 9 8 2 - 5 5 4 4 © P F M A s s e t M a n a g e m e n t L L C • Se c t i o n I . E c o n o m i c U p d a t e • Se c t i o n I I . A c c o u n t P r o f i l e • Se c t i o n I I I . C o n s o l i d a t e d I n f o r m a t i o n • Se c t i o n I V . P o r t f o l i o H o l d i n g s • Se c t i o n V . M o n t h l y T r a n s a c t i o n s Ta b l e o f C o n t e n t s Se c t i o n I . E c o n o m i c U p d a t e City of Newport News Investment Report – Quarter Ended December 31, 2014 © 2015 PFM Asset Management LLC Summary •For the first quarter of 2015, accommodative global central bank policies were a major driver of financial markets. The European Central Bank (ECB) initiated an asset purchase program similar to the Federal Reserve’s (Fed’s) quantitative easing (QE) policies that concluded last year, and the Federal Open Market Committee (FOMC) seemed comfortable leaving the Fed Funds rate at current levels for the near future. •The yield on 10-year U.S. Treasuries fell for the fifth consecutive quarter, which resulted in the longest period of quarterly gains since 1988. •After trending up briefly, oil prices headed toward the lower end of recent ranges. •Driven by a drop in Treasury yields, fixed-income market performance was generally positive for the quarter. Returns were dependent on both maturity and sector. Economic Snapshot •U.S. gross domestic product (GDP) grew at a pace of 2.2% during the fourth quarter. The GDP report showed that household spending rose to a nine-year high and exports were strong. These positive trends were offset by growth in inventories, which were weaker than previously expected. •The U.S. labor market continued to improve, as the unemployment rate fell from 5.6% in December to 5.5% in March. This was the lowest rate since mid-2008. •Consumer confidence for the first quarter reached its highest level since 2007, as lower gasoline prices and an increase in personal income helped to generate more disposable income. However, consumers slowed their pace of spending during the quarter, causing a lackluster retail sales report. •New-home sales rose nearly 8% in February, marking their highest level since early 2008 and serving as a bright spot in a mixed bag of recent housing-market data. Interest Rates •At its March meeting, the FOMC removed the word “patient” from its previous statement, indicating that the current target range for the Federal funds rate will be appropriate until the FOMC is “reasonably confident” that inflation is increasing toward its 2% objective. The statement also implied that economic growth has been weaker than it was earlier in the year. •A Reuters poll released at the end of March showed that 17 of 21 primary securities dealers expect the Fed’s first interest rate hike to occur in September 2015, at the earliest, with only four dealers expecting the first hike to occur in June 2015. Sector Performance •The yield curve flattened modestly over the quarter as yields on longer maturities declined more than yields on shorter maturities. This market movement and its positive impact on longer durations combined to provide performance in excess of initial yields. •Yields between Treasury and Federal Agency securities in short and intermediate maturities widened modestly during the quarter. This caused the performance of the Agencies to suffer relative to Treasuries. •Corporate securities slightly outperformed government obligations with similar maturities because of higher initial yields and relatively unchanged yield spreads. •While still generating positive performance, mortgage-backed and asset-backed securities trailed other high-quality investment options for the quarter. •Yields on money market securities (primarily commercial paper and certificates of deposit) remained at elevated levels, making them attractive options for short-maturity investment needs. City of Newport News Investment Report – Quarter Ended December 31, 2014 © 2015 PFM Asset Management LLC Economic Snapshot Source: Bloomberg Labor Market Dec 2014Mar 2014 Unemployment Rate Mar'15 5.5%5.6%6.6% Change In Non-Farm Payrolls Mar'15126,000329,000225,000 Average Hourly Earnings (YoY)Mar'15 2.1%1.8%2.2% Personal Income (YoY)Feb'15 4.5%4.8%3.7% Initial Jobless Claims (week)3/27/15268,000293,000329,000 Growth Real GDP (QoQ SAAR)2014Q4 2.2%5.0%3.5% GDP Personal Consumption (QoQ SAAR)2014Q4 4.4%3.2%3.7% Retail Sales (YoY)Feb'15 1.7%3.3%4.1% ISM Manufacturing Survey (month)Mar'15 51.5 55.1 54.4 Existing Home Sales SAAR (month)Feb'154.88 mil.5.07 mil.4.70 mil. Inflation / Prices Personal Consumption Expenditures (YoY)Feb'15 0.3%0.8%1.2% Consumer Price Index (YoY)Feb'15 0.0%0.8%1.5% Consumer Price Index Core (YoY)Feb'15 1.7%1.6%1.7% Crude Oil Futures (WTI, per barrel)Mar 31 $47.60$53.27$101.58 Gold Futures (oz.)Mar 31 $1,183$1,184$1,283 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 Latest 0 50K 100K 150K 200K 250K 300K 350K 400K 2% 4% 6% 8% 10% 3/31/12 9/30/12 3/31/13 9/30/13 3/31/14 9/30/14 3/31/15 Unemployment Rate (left) vs. Change in Nonfarm Payrolls (right) Change In Non-Farm Payrolls Unemployment Rate -4% -2% 0% 2% 4% 6% 12/31/11 6/30/12 12/31/12 6/30/13 12/31/13 6/30/14 12/31/14 Real GDP (QoQ) -1% 0% 1% 2% 3% 4% 2/29/12 8/31/12 2/28/13 8/31/13 2/28/14 8/31/14 2/28/15 Consumer Price Index CPI (YoY)Core CPI (YoY) 2 2 1 1 City of Newport News Investment Report – Quarter Ended December 31, 2014 © 2015 PFM Asset Management LLC Interest Rate Overview Source: Bloomberg 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 12/31/14 1/31/15 2/28/15 3/31/15 Yi e l d U.S. Treasury Note Yields 2-Year 5-Year 10-Year 0% 1% 2% 3% 4% 3- m o 1- y r 2- y r 3- y r 5- y r 7- y r 10 - y r 30 - y r Yi e l d Maturity U.S. Treasury Yield Curve March 31, 2015 December 31, 2014 March 31, 2014 0% 1% 2% 3% 4% 3- m o 1- y r 2- y r 3- y r 5- y r 7- y r 10 - y r 25 - y r 30 - y r Yi e l d Maturity Yield Curves as of 3/31/2015 U.S. Treasury Federal Agency Industrial Corporates, A Rated Maturity 3/31/15 12/31/14 Change over Quarter 3/31/14 Change over Year 3-month0.02%0.04%(0.02%)0.03%(0.01%) 1-year0.23%0.22%0.01%0.11%0.12% 2-year0.56%0.67%(0.11%)0.42%0.14% 5-year1.37%1.65%(0.28%)1.72%(0.35%) 10-year1.92%2.17%(0.25%)2.72%(0.80%) 30-year2.54%2.75%(0.21%)3.56%(1.02%) U.S. Treasury Yields City of Newport News Investment Report – Quarter Ended December 31, 2014 © 2015 PFM Asset Management LLC B of A Merrill Lynch Index Returns DurationYield3 Month1 Year3 Years 1-3 Year Indices U.S. Treasury 1.87 0.55%0.52%1.00%0.67% Federal Agency 1.72 0.68%0.54%1.07%0.74% U.S. Corporates, A-AAA rated 2.05 1.24%0.77%1.43%1.86% Agency MBS (0 to 3 years)2.07 1.36%0.41%1.25%1.18% Municipals 1.75 0.65%0.26%0.73%0.88% 1-5 Year Indices U.S. Treasury 2.69 0.81%0.92%1.91%1.02% Federal Agency 2.15 0.84%0.79%1.77%1.06% U.S. Corporates, A-AAA rated 2.87 1.56%1.20%2.57%2.64% Agency MBS (0 to 5 years)3.29 1.88%0.83%3.79%2.20% Municipals 2.54 0.95%0.35%1.24%1.30% Master Indices (Maturities 1 Year or Greater) U.S. Treasury 6.23 1.33%1.75%6.15%2.57% Federal Agency 3.72 1.21%1.27%4.07%1.97% U.S. Corporates, A-AAA rated 6.96 2.52%2.18%6.93%4.84% Agency MBS (0 to 30 years)3.78 2.11%1.00%5.48%2.51% Municipals 6.80 2.18%1.09%6.90%4.23% Returns for periods greater than one year are annualized. Source: BofA Merrill Lynch Indices Returns for Periods ended 3/31/15As of 3/31/15 Se c t i o n I I . A c c o u n t P r o f i l e In v e s t m e n t O b j e c t i v e s – T h e i n v e s t m e n t o b j e c t i v e s o f t h e C i t y o f S a n L u i s O b is p o a r e f i r s t , t o p r o v i d e s a f e t y o f p r i n c i p a l t o en s u r e t h e p r e s e r v a t i o n o f c a p i t a l i n t h e o v e r a l l p o r t f o l i o ; s e c o n d , t o pr o v i d e s u f f i c i e n t l i q u i d i t y t o me e t a l l o p e r a t i n g r e q u i r e m e n t s ; a n d t h i r d , t o e a r n a c o m m e n s u r a t e r a t e o f r e t u r n c o n s i s t e n t w i t h th e c o n s t r a i n t s i m p o s e d b y t h e sa f e t y a n d l i q u i d i t y o b j e c t i v e s . Pe r f o r m a n c e O b j e c t i v e s – T h e p e r f o r m a n c e o b j e c t i v e f o r t h e p o r t f o l i o i s t o e a r n a t o t a l r a t e o f r e t u r n o v e r a m a r k e t c y c l e th a t e q u a l s o r e x c e e d s t h e m a r k e t i n d e x , t h e Bo f A M e r r i l l L y n c h I n d e x o f 0 - 5 Y e a r T r e a s u r y se c u r i t i e s . St r a t e g y – I n o r d e r t o a c h i e v e t h i s o b j e c t i v e , t h e p o r t f o l i o in v e s t s i n h i g h - q u a l i t y m o n e y m a r k e t i n s t r u m e n t s , U. S . T r e a s u r y s e c u r i t i e s , F e d e r a l A g e n c y s e c u r i t i es , a n d h i g h - g r a d e c o r p o r a t e s e c u r i t i e s , w i t h a ma x i m u m m a t u r i t y o f f i v e y e a r s . Ob j e c t i v e s 5 © P F M A s s e t M a n a g e m e n t L L C Ca t e g o r y S t a n d a r d C o m m e n t Tr e a s u r y O b l i g a t i o n s 5 y e a r m a x i m u m m a t u r i t y C o m p l i e s Go v e r n m e n t S p o n s o r e d E n t e r p r i s e ( G S E ) Se c u r i t i e s 5 y e a r m a x i m u m m a t u r i t y , A A A b y S & P o r M o o d y ’ s C o m p l i e s Co r p o r a t e N o t e s 5 y e a r m a x i m u m m a t u r i t y At l e a s t o n e “ A A ” r a t i n g 30 % m a x i m u m , 5 % p e r i s s u e r Complies Lo c a l G o v e r n m e n t I n v e s t m e n t P o o l ( L A I F ) U p t o m a x i m u m p e r m i t t e d b y S t a t e L a w C o m p l i e s Ne g o t i a b l e C e r t i f i c a t e s o f D ep o s i t 5 y e a r m a x i m u m m a t u r i t y 30 % m a x i m u m , 5 % p e r i s s u e r Complies Co l l a t e r a l i z e d B a n k D e p o s i t s 5 % p e r i s s u e r C o m p l i e s Mo n e y M a r k e t M u t u a l F u n d s H i g h e s t r a t i n g c a t e g o r y b y 2 N R S R O ’ s 20 % m a x i m u m , 1 0 % p e r i s s u e r Complies % m a t u r i n g i n l e s s t h a n 9 0 d a y s 5 % m i n i m u m C o m p l i e s Ma x i m u m m a t u r i t y o f c o r po r a t e 5 y e a r s C o m p l i e s Ma x i m u m m a t u r i t y 1 0 y e a r s ; 1 0 % m a xi m u m o f p o r t f o l i o i n T r e a s u r y a n d GS E o b l i g a t i o n s w i t h m a t u r i t y > 5 y e a r s Complies Co m p l i a n c e 6 © P F M A s s e t M a n a g e m e n t L L C • Po r t f o l i o C o m p l i e s w i t h C a l i f o r n i a G o v e r n m e n t C o d e a n d t h e C i t y o f S a n L u i s O b i s p o ’ s I n v e s t m e n t P o l i c y i n r e g a r d s t o cr e d i t q u a l i t y , a s w e l l a s m a t u r i t y , s e c t o r , a n d i s s u e r l i m i t s . Ad d i t i o n a l l y , n o n e o f t h e C i t y ’ s f u n d s a r e i n v e s t e d i n a n y se c u r i t i e s p r o h i b i t e d b y C o d e . Ci t y o f S a n L u i s O b i s p o Po r t f o l i o C o m p l i a n c e * – P F M M a n a g e d *A p p l i e s t o a g g r e g a t e p o r t f o l i o . Ci t y o f S a n L u i s O b i s p o – P F M M a n a g e d Po r t f o l i o C h a r a c t e r i s t i c s 3/ 3 1 / 1 5 1 2 / 3 1 / 1 4 Be n c h m a r k P o r t f o l i o P o r t f o l i o Av e r a g e M a t u r i t y ( y r s . ) 2 . 2 5 2. 1 6 1 . 8 9 Ef f e c t i v e D u r a t i o n * 2. 1 8 2 . 1 2 1 . 7 8 Av e r a g e P u r c h a s e Y i e l d N / A 1. 1 1 % 1 . 1 3 % Av e r a g e M a r k e t Y i e l d 0 . 6 6 % 0. 7 0 % 0 . 7 6 % Av e r a g e Q u a l i t y A A + AA + / A a a A A + / A a a To t a l M a r k e t V a l u e 45 , 6 3 3 , 3 4 3 4 5 , 2 9 4 , 0 6 5 Ac c o u n t P r o f i l e 7 © P F M A s s e t M a n a g e m e n t L L C • Th e C i t y o f S a n L u i s O b i s p o ’ s c u r r e n t b e n c h m a r k i s t h e B a n k o f A m e r i c a M e r r i l l L y n c h ( B A M L ) 0 - 5 Y e a r U. S . T r e a s u r y I n d e x . *E f f e c t i v e d u r a t i o n u s e d i n p l a c e o f m o d i f i ed d u r a t i o n . E f f e c t i v e d u r a t i o n i s t h e a p p r ox i m a t e p e r c e n t a g e c h a n g e i n p r i c e , f o r e a ch 1 % c h a n g e i n i n t e r e s t r a t e s . M o d i f i e d d u r a t i o n i s a s i m i l a r r i s k me a s u r e , b u t i t i g n o r e s h o w c h a n g e s i n r a t e s w i l l i m p a c t c a s h fl o w s o n b o n d s w i t h e m b e d d e d o p t i o n s s u c h a s c a l l a b l e n o t e s , M B S , o r A B S . E f f e c t i v e d u r a t i o n t a k e s i n t o a c c o u n t t h e i m p a c t t h a t ch a n g i n g i n t e r e s t r a t e s h a s o n c a s h f l o w s ( i . e . i f i n t e r e s t ra t e s f a l l a n d a c a l l a b l e b o n d i s m o r e l i k e l y t o b e c a l l e d p r i o r t o i t s f i n a l m a t u r i t y , t h e e f f e c t i v e d u r a t i o n w i l l d e c r e a s e ) . Se c t o r D i s t r i b u t i o n 8 © P F M A s s e t M a n a g e m e n t L L C Ma r c h 3 1 , 2 0 1 5 D e c e m b e r 3 1 , 2 0 1 4 U. S . T r e a s u r y , $9 , 2 9 1 , 6 1 4 , 20 % Fe d e r a l Ag e n c y , $2 8 , 3 4 2 , 9 8 5 , 63 % Corporate, $6,251,722, 14%Money Market Fund, $1,407,744, 3% Ci t y o f S a n L u i s O b i s p o Se c t o r D i s t r i b u t i o n – P F M M a n a g e d *S e c t o r d i s t r i b u t i o n i n c l u d e s m a r k e t v a l u e a n d e x c l u d e s a c c r u e d i n t e r e s t . U. S . T r e a s u r y $1 4 , 2 7 0 , 5 7 1 31 % Fe d e r a l Ag e n c y $2 3 , 9 2 8 , 0 6 2 53 % Co r p o r a t e $7 , 0 1 8 , 2 2 7 15 % Mo n e y M a r k e t Fu n d $4 1 6 , 4 8 3 1% Is s u e r s 9 © P F M A s s e t M a n a g e m e n t L L C Is s u e r N a m e I n v e s t m e n t T y p e % P o r t f o l i o U. S . T r e a s u r y U . S . T r e a s u r y 3 1 . 2 7 % FH L M C F e d e r a l A g e n c y 1 8 . 5 1 % FN M A F e d e r a l A g e n c y 1 4 . 8 7 % FF C B F e d e r a l A g e n c y 8 . 8 9 % FH L B F e d e r a l A g e n c y 7 . 8 5 % Te n n e s s e e V a l l e y A u t h o r i t y F e d e r a l A g e n c y 2 . 3 2 % Pr o c t e r & G a m b l e C o r p o r a t e N o t e 2 . 0 3 % IB M C o r p o r a t e N o t e 1 . 6 4 % Be r k s h i r e H a t h a w a y Co r p o r a t e N o t e 1 . 5 6 % Ge n e r a l E l e c t r i c C o rp o r a t e N o t e 1 . 5 4 % Wa l - M a r t S t o r e s C o r p o r a t e N o t e 1 . 5 4 % Ch e v r o n C o r p C o r p o r a t e N o t e 1 . 5 4 % Ap p l e I n c C o r p o r a t e N o t e 1 . 5 3 % Jo h n s o n & J o h n s o n C o r p o r a t e N o t e 1 . 5 1 % Mi c r o s o f t C o r p C o r p o r a t e N o t e 1 . 3 3 % Go o g l e I n c C o r p o r a t e N o t e 1 . 1 7 % Dr e y f u s P r i m e C a s h M a n a g e m e n t F u n d M o n e y M a r k e t F u n d 0 . 9 1 % To t a l 10 0 . 0 0 % As o f M a r c h 3 1 , 2 0 1 5 Ci t y o f S a n L u i s O b i s p o Is s u e r D i s t r i b u t i o n – P F M M a n a g e d Qu a l i t y D i s t r i b u t i o n 10 © P F M A s s e t M a n a g e m e n t L L C 0% 20 % 40 % 60 % 80 % 10 0 % 12 0 % AA A A A A < A N R 3/31/2015 12/31/2014 AA A A A A < A N R 3/ 3 1 / 2 0 1 5 3. 8 % 9 6 . 2 % 0 . 0 % 0 . 0 % 0 . 0 % 12 / 3 1 / 2 0 1 4 5. 9 % 9 4 . 1 % 0 . 0 % 0 . 0 % 0 . 0 % Ci t y o f S a n L u i s O b i s p o Cr e d i t Q u a l i t y – P F M M a n a g e d Ma r c h 3 1 , 2 0 1 5 v s . D e c e m b e r 3 1 , 2 0 1 4 Ra t i n g s b y S t a n d a r d & P o o r ’ s Du r a t i o n D i s t r i b u t i o n 11 © P F M A s s e t M a n a g e m e n t L L C 0%5% 10 % 15 % 20 % 25 % 30 % 0 - 0 . 2 5 0 . 2 5 - 0 . 5 0 0 . 5 0 - 1 . 0 0 1 - 2 2 - 3 3 - 4 4 - 5 O v e r 5 Portfolio Benchmark 0 – 0 . 2 5 0 . 2 5 – 0 . 5 0 . 5 0 – 1 1 - 2 2 - 3 3 - 4 4 - 5 O v e r 5 Po r t f o l i o 4. 6 % 4 . 5 % 1 6 . 2 % 2 2 . 8 % 2 7 . 9 % 1 4 . 6 % 9 . 4 % 0 . 0 % Be n c h m a r k 7. 1 % 5 . 4 % 1 1 . 1 % 2 5 . 6 % 2 0 . 6 % 1 7 . 4 % 1 2 . 8 % 0 . 0 % Ci t y o f S a n L u i s O b i s p o Po r t f o l i o E f f e c t i v e D u r a t i o n v s . B e n c h m a r k – P F M M a n a g e d Be n c h m a r k i s t h e B a n k o f A m e r i c a M e r r i l l Ly n c h ( B A M L ) 0 - 5 Y e a r U . S . T r e a s u r y I n d e x As o f D e c e m b e r 3 1 , 2 0 1 4 In v e s t m e n t P e r f o r m a n c e 12 © P F M A s s e t M a n a g e m e n t L L C 3 Mo n t h s 3  Mo n t h s  Annualized Ci t y  of  Sa n L u i s  Ob i s p o 0. 6 5 % 2 . 6 8 % 0‐5 Yr . T r e a s u r y  In d e x 0. 7 4 % 3 . 0 3 % Ci t y o f S a n L u i s O b i s p o T o t a l R e t u r n Pe r i o d E n d i n g M a r c h 3 1 , 2 0 1 5 To t a l R a t e o f R e t u r n * 0. 0 0 % 0. 5 0 % 1. 0 0 % 1. 5 0 % 2. 0 0 % 2. 5 0 % 3. 0 0 % 3. 5 0 % 3 M o n t h s 3 M o n t h s A n n u a l i z e d Ci t y o f S a n L u i s O b i s p o 0- 5 Y r . T r e a s u r y I n d e x • Pe r f o r m a n c e o n t r a d e - d a t e b a s i s , g r o s s ( i . e . , b e f o r e f e e s ) i n a c c o r da n c e w i t h t h e C F A I n s t i t u t e ’ s G l o b a l I n v e s t m e n t P e r f o r m a n c e S t a n d a r d s ( G I P S ) . • Pe r f o r m a n c e n u m b e r s f o r p e r i o d s o n e y e a r a n d gr e a t e r a r e p r e s e n t e d o n a n a n n u a l i z e d b a s i s . • Me r r i l l L y n c h I n d i c e s p r o v i d e d by B l o o m b e r g F i n a n c i a l M a r k e t s . *T o t a l r a t e o f R e t u r n : A m e a s u r e o f a p o r t f o l i o ’ s p e r f o r m a n c e o v e r t i m e . I t i s t h e i n t e r n a l r a t e o f r e t u r n , w h i c h e q u a t e s t h e b e gi n n i n g v a l u e o f t h e p o r t f o l i o w i t h t h e e n d i n g v a l ue; it includes interest earnings, realized an d u n r e a l i z e d g a i n s a n d l o s s e s . R e t u r n s r e p r e s e n t e d c o m p r i s e h i st o r i c a l p o r t f o l i o p e r f o r m a n c e a s c a l c u l a t e d b y t h e C i t y a n d r e po r t e d t o P F M A s s e t M a n a g e m e n t ( “ P F M A M ” ) . These figures include periods during wh i c h P F M A M , a s w e l l a s o t h e r i n v e s t m e n t a d v i s o r s , h a v e p r o v i d e d f i d u c i a r y i n v e s t m en t s e r v i c e s t o t h e C i t y . In v e s t m e n t P e r f o r m a n c e 13 © P F M A s s e t M a n a g e m e n t L L C Si n c e  In c e p t i o n  An n u a l i z e d Ci t y  of  Sa n L u i s  Ob i s p o 2. 3 3 % 0‐5 Yr . T r e a s u r y  In d e x 2. 0 1 % Ci t y o f S a n L u i s O b i s p o T o t a l R e t u r n Pe r i o d E n d i n g M a r c h 3 1 , 2 0 1 5 To t a l R a t e o f R e t u r n * An n u a l i z e d S i n c e I n c e p t i o n ( M a y 3 1 , 2 0 0 8 ) 0. 0 0 % 0. 5 0 % 1. 0 0 % 1. 5 0 % 2. 0 0 % 2. 5 0 % Si n c e I n c e p t i o n A n n u a l i z e d Ci t y o f S a n L u i s O b i s p o 0- 5 Y r . T r e a s u r y I n d e x Ci t y o f S a n L u i s O b i s p o - I n t e r n a l Po r t f o l i o C h a r a c t e r i s t i c s 3/ 3 1 / 1 5 1 2 / 3 1 / 1 4 Po r t f o l i o P o r t f o l i o Ave r a g e M a t u r i t y ( y r s . ) 0. 0 3 0 . 0 5 Ef f e c t i v e D u r a t i o n * 0. 0 3 0 . 0 5 Ave r a g e P u r c h a s e Y i e l d 0. 3 2 % 0 . 3 6 % Ave r a g e M a r k e t Y i e l d 0. 1 5 % 0 . 1 6 % Ave r a g e Q u a l i t y AA + / A a a A A + / A a a To t a l M a r k e t V a l u e 54 , 4 3 4 , 5 8 1 4 7 , 6 1 8 , 9 9 5 Ac c o u n t P r o f i l e 14 © P F M A s s e t M a n a g e m e n t L L C *E f f e c t i v e d u r a t i o n u s e d i n p l a c e o f m o d i f i ed d u r a t i o n . E f f e c t i v e d u r a t i o n i s t h e a p p r ox i m a t e p e r c e n t a g e c h a n g e i n p r i c e , f o r e a ch 1 % c h a n g e i n i n t e r e s t r a t e s . M o d i f i e d d u r a t i o n i s a s i m i l a r r i s k me a s u r e , b u t i t i g n o r e s h o w c h a n g e s i n r a t e s w i l l i m p a c t c a s h fl o w s o n b o n d s w i t h e m b e d d e d o p t i o n s s u c h a s c a l l a b l e n o t e s , M B S , o r A B S . E f f e c t i v e d u r a t i o n t a k e s i n t o a c c o u n t t h e i m p a c t t h a t ch a n g i n g i n t e r e s t r a t e s h a s o n c a s h f l o w s ( i . e . i f i n t e r e s t ra t e s f a l l a n d a c a l l a b l e b o n d i s m o r e l i k e l y t o b e c a l l e d p r i o r t o i t s f i n a l m a t u r i t y , t h e e f f e c t i v e d u r a t i o n w i l l d e c r e a s e ) . Se c t o r D i s t r i b u t i o n 15 © P F M A s s e t M a n a g e m e n t L L C LA I F , $2 7 , 2 3 9 , 5 2 5 , 50 % U. S . T r e a s u r y , $1 , 0 7 7 , 7 3 0 , 2% Mo n e y M a r k e t Ra t e A c c o u n t , $1 , 0 0 7 , 7 1 4 , 2% Ne g o t i a b l e CD , $1 , 0 0 0 , 0 0 0 , 2% Ca s h , $2 4 , 1 0 9 , 6 1 1 , 44 % Ma r c h 3 1 , 2 0 1 5 D e c e m b e r 3 1 , 2 0 1 4 LA I F , $2 7 , 2 2 2 , 0 8 3 , 57 % U. S . T r e a s u r y , $1 , 0 9 9 , 2 9 7 , 2% Mo n e y M a r k e t Ra t e A c c o u n t , $1 , 0 0 6 , 8 0 4 , 2%Negotiable CD, $1,000,000, 2%Cash, $17,290,811, 37% Ci t y o f S a n L u i s O b i s p o S e c t o r D i s t r i b u t i o n – I n t e r n a l *S e c t o r d i s t r i b u t i o n i n c l u d e s m a r k e t v a l u e a n d e x c l u d e s a c c r u e d i n t e r e s t . Is s u e r s 16 © P F M A s s e t M a n a g e m e n t L L C As o f M a r c h 3 1 , 2 0 1 5 Is s u e r D i s t r i b u t i o n – I n t e r n a l Is s u e r N a m e I n v e s t m e n t T y p e % P o r t f o l i o LA I F L A I F 5 0 . 0 4 % Ca s h C a s h 4 4 . 2 9 % U. S . T r e a s u r y U . S . T r e a s u r y 1 . 9 8 % He r i t a g e O a k s B a n k M o n e y M a r k e t R a t e A c c o u n t 1 . 8 5 % He r i t a g e O a k s B a n k N e g o t i a b l e C D 1 . 8 4 % To t a l 10 0 . 0 0 % Se c t i o n I I I . C o n s o l i d a t e d I n f o r m a t i o n Ca t e g o r y S t a n d a r d C o m m e n t Tr e a s u r y O b l i g a t i o n s 5 y e a r m a x i m u m m a t u r i t y C o m p l i e s Go v e r n m e n t S p o n s o r e d E n t e r p r i s e ( G S E ) Se c u r i t i e s 5 y e a r m a x i m u m m a t u r i t y , A A A b y S & P o r M o o d y ’ s C o m p l i e s Co r p o r a t e N o t e s 5 y e a r m a x i m u m m a t u r i t y At l e a s t o n e “ A A ” r a t i n g 30 % m a x i m u m , 5 % p e r i s s u e r Complies Lo c a l G o v e r n m e n t I n v e s t m e n t P o o l ( L A I F ) U p t o m a x i m u m p e r m i t t e d b y S t a t e L a w C o m p l i e s Ne g o t i a b l e C e r t i f i c a t e s o f D ep o s i t 5 y e a r m a x i m u m m a t u r i t y 30 % m a x i m u m , 5 % p e r i s s u e r Complies Co l l a t e r a l i z e d B a n k D e p o s i t s 5 % p e r i s s u e r C o m p l i e s Mo n e y M a r k e t M u t u a l F u n d s H i g h e s t r a t i n g c a t e g o r y b y 2 N R S R O ’ s 20 % m a x i m u m , 1 0 % p e r i s s u e r Complies % m a t u r i n g i n l e s s t h a n 9 0 d a y s 5 % m i n i m u m C o m p l i e s Ma x i m u m m a t u r i t y o f c o r po r a t e 5 y e a r s C o m p l i e s Ma x i m u m m a t u r i t y 1 0 y e a r s ; 1 0 % m a xi m u m o f p o r t f o l i o i n T r e a s u r y a n d GS E o b l i g a t i o n s w i t h m a t u r i t y > 5 y e a r s Complies Co m p l i a n c e 17 © P F M A s s e t M a n a g e m e n t L L C Ci t y o f S a n L u i s O b i s p o Po r t f o l i o C o m p l i a n c e – C o n s o l i d a t e d • Po r t f o l i o C o m p l i e s w i t h C a l i f o r n i a G o v e r n m e n t C o d e a n d t h e C i t y o f S a n L u i s O b i s p o ’ s I n v e s t m e n t P o l i c y i n r e g a r d s t o cr e d i t q u a l i t y , a s w e l l a s m a t u r i t y , s e c t o r , a n d i s s u e r l i m i t s . Ad d i t i o n a l l y , n o n e o f t h e C i t y ’ s f u n d s a r e i n v e s t e d i n a n y se c u r i t i e s p r o h i b i t e d b y C o d e . Ci t y o f S a n L u i s O b i s p o - C o n s o l i d a t e d Po r t f o l i o C h a r a c t e r i s t i c s 3/ 3 1 / 1 5 1 2 / 3 1 / 1 4 Po r t f o l i o P o r t f o l i o Ave r a g e M a t u r i t y ( y r s . ) 1. 0 0 0 . 9 1 Ef f e c t i v e D u r a t i o n * 0. 9 8 0 . 8 9 Ave r a g e P u r c h a s e Y i e l d 0. 6 8 % 0 . 7 2 % Ave r a g e M a r k e t Y i e l d 0. 4 0 % 0 . 4 6 % Ave r a g e Q u a l i t y AA + / A a a A A + / A a a To t a l M a r k e t V a l u e 10 0 , 0 6 7 , 9 2 3 9 2 , 9 1 3 , 0 6 0 Ac c o u n t P r o f i l e 18 © P F M A s s e t M a n a g e m e n t L L C *E f f e c t i v e d u r a t i o n u s e d i n p l a c e o f m o d i f i ed d u r a t i o n . E f f e c t i v e d u r a t i o n i s t h e a p p r ox i m a t e p e r c e n t a g e c h a n g e i n p r i c e , f o r e a ch 1 % c h a n g e i n i n t e r e s t r a t e s . M o d i f i e d d u r a t i o n i s a s i m i l a r r i s k me a s u r e , b u t i t i g n o r e s h o w c h a n g e s i n r a t e s w i l l i m p a c t c a s h fl o w s o n b o n d s w i t h e m b e d d e d o p t i o n s s u c h a s c a l l a b l e n o t e s , M B S , o r A B S . E f f e c t i v e d u r a t i o n t a k e s i n t o a c c o u n t t h e i m p a c t t h a t ch a n g i n g i n t e r e s t r a t e s h a s o n c a s h f l o w s ( i . e . i f i n t e r e s t ra t e s f a l l a n d a c a l l a b l e b o n d i s m o r e l i k e l y t o b e c a l l e d p r i o r t o i t s f i n a l m a t u r i t y , t h e e f f e c t i v e d u r a t i o n w i l l d e c r e a s e ) . Se c t o r D i s t r i b u t i o n 19 © P F M A s s e t M a n a g e m e n t L L C Ma r c h 3 1 , 2 0 1 5 D e c e m b e r 3 1 , 2 0 1 4 U. S . T r e a s u r y , $1 0 , 3 9 0 , 9 1 1 , 11% Fe d e r a l Ag e n c y , $2 8 , 3 4 2 , 9 8 5 , 30 % Co r p o r a t e , $6 , 2 5 1 , 7 2 2 , 7% Ne g o t i a b l e CD , $1 , 0 0 0 , 0 0 0 , 1% Mo n e y M a r k e t Fu n d , $1 , 4 0 7 , 7 4 4 , 2% Mo n e y M a r k e t Ra t e A c c o u n t , $1 , 0 0 6 , 8 0 4 , 1%LAIF, $27,222,083, 29%Cash, $17,290,811, 19% Ci t y o f S a n L u i s O b i s p o Se c t o r D i s t r i b u t i o n – C o n s o l i d a t e d *S e c t o r d i s t r i b u t i o n i n c l u d e s m a r k e t v a l u e a n d e x c l u d e s a c c r u e d i n t e r e s t . U. S . T r e a s u r y $1 5 , 3 4 8 , 3 0 1 15 % Fe d e r a l Ag e n c y $2 3 , 9 2 8 , 0 6 2 24 % Co r p o r a t e $7 , 0 1 8 , 2 2 7 7% Ne g o t i a b l e CD $1 , 0 0 0 , 0 0 0 1% Mo n e y M a r k e t Fu n d $4 1 6 , 4 8 3 1% Mo n e y M a r k e t Ra t e A c c o u n t $1 , 0 0 7 , 7 1 4 1% LA I F $2 7 , 2 3 9 , 5 2 5 27 % Ca s h $2 4 , 1 0 9 , 6 1 1 24 % Is s u e r s 20 © P F M A s s e t M a n a g e m e n t L L C Is s u e r N a m e I n v e s t m e n t T y p e % P o r t f o l i o LA I F L A I F 2 7 . 2 2 % Ca s h C a s h 2 4 . 0 9 % U. S . T r e a s u r y U . S . T r e a s u r y 1 5 . 3 4 % FH L M C F e d e r a l A g e n c y 8 . 4 4 % FN M A F e d e r a l A g e n c y 6 . 7 8 % FF C B F e d e r a l A g e n c y 4 . 0 5 % FH L B F e d e r a l A g e n c y 3 . 5 8 % Te n n e s s e e V a l l e y A u t h o r i t y F e d e r a l A g e n c y 1 . 0 6 % He r i t a g e O a k s B a n k M o n e y M a r k e t R a t e A c c o u n t 1 . 0 1 % He r i t a g e O a k s B a n k N e g o t i a b l e C D 1 . 0 0 % Pr o c t e r & G a m b l e C o r p o r a t e N o t e 0 . 9 3 % IB M C o r p o r a t e N o t e 0 . 7 5 % Be r k s h i r e H a t h a w a y Co r p o r a t e N o t e 0 . 7 1 % Ge n e r a l E l e c t r i c C o rp o r a t e N o t e 0 . 7 0 % Wa l - M a r t S t o r e s C o r p o r a t e N o t e 0 . 7 0 % Ch e v r o n C o r p C o r p o r a t e N o t e 0 . 7 0 % Ap p l e I n c C o r p o r a t e N o t e 0 . 7 0 % Jo h n s o n & J o h n s o n C o r p o r a t e N o t e 0 . 6 9 % Mi c r o s o f t C o r p C o r p o r a t e N o t e 0 . 6 1 % Go o g l e I n c C o r p o r a t e N o t e 0 . 5 3 % Dr e y f u s P r i m e C a s h M a n a g e m e n t F u n d M o n e y M a r k e t F u n d 0 . 4 2 % To t a l 100.00% As o f M a r c h 3 1 , 2 0 1 5 Is s u e r D i s t r i b u t i o n – C o n s o l i d a t e d Se c t i o n I V . P o r t f o l i o H o l d i n g s C i t y o f S a n L u i s O b i s p o H o l d i n g s R e p o r t For the Month Ending March 31, 2015 Se c u r i t y D e s c r i p t i o n Se t t l e D a t e YT M a t Co s t P a r Co s t V a l u e A m o r t i z e d C o s t YT M a t Ma r k e t M a r k e t V a l u e Acc r u e d In t e r e s t % o f Po r t f o l i o Un r e a l G / L Am o r t C o s t S&P/Moody'sYears to MaturityDuration LA I F LO C A L A G E N C Y I N V E S T M E N T F U N D V a r i o u s 0 . 2 6 % 2 7 , 2 3 9 , 5 2 5 . 3 2 27 , 2 3 9 , 5 2 5 . 3 2 27 , 2 3 9 , 5 2 5 . 3 2 0. 2 6 % 2 7 , 2 3 9 , 5 2 5 . 3 2 - 2 7 . 2 2 % - NR NR0.000.00 To t a l L A I F 0. 2 6 % 2 7 , 2 3 9 , 5 2 5 . 3 2 27 , 2 3 9 , 5 2 5 . 3 2 27 , 2 3 9 , 5 2 5 . 3 2 0. 2 6 % 2 7 , 2 3 9 , 5 2 5 . 3 2 - 2 7 . 2 2 % - NR NR0.000.00 Mo n e y M a r k e t F u n d DR E Y F U S P R I M E C A S H M A N A G E M N T M O N E Y MA R K E T F U N D Va r i o u s 0 . 0 0 % 4 1 6 , 4 8 3 . 2 9 41 6 , 4 8 3 . 2 9 41 6 , 4 8 3 . 2 9 0. 0 0 % 4 1 6 , 4 8 3 . 2 9 - 0 . 4 2 % - AAA Aaa0.000.00 To t a l M o n e y M a r k e t F u n d 0. 0 0 % 4 1 6 , 4 8 3 . 2 9 41 6 , 4 8 3 . 2 9 41 6 , 4 8 3 . 2 9 0. 0 0 % 4 1 6 , 4 8 3 . 2 9 - 0 . 4 2 % - AAA Aaa0.000.00 Ca s h CA S H A C C O U N T Va r i o u s 0 . 0 0 % 2 4 , 1 0 9 , 6 1 1 . 0 0 24 , 1 0 9 , 6 1 1 . 0 0 24 , 1 0 9 , 6 1 1 . 0 0 0. 0 0 % 2 4 , 1 0 9 , 6 1 1 . 0 0 - 2 4 . 0 9 % - NR NR0.000.00 CA S H H E R I T A G E O A K S B A N K M O N E Y MA R K E T R A T E A C C O U N T Va r i o u s 0 . 2 1 % 1 , 0 0 7 , 7 1 4 . 2 4 1, 0 0 7 , 7 1 4 . 2 4 1, 0 0 7 , 7 1 4 . 2 4 0. 2 1 % 1 , 0 0 7 , 7 1 4 . 2 4 - 1 . 0 1 % - NR NR0.000.00 To t a l C a s h 0. 0 1 % 2 5 , 1 1 7 , 3 2 5 . 2 4 25 , 1 1 7 , 3 2 5 . 2 4 25 , 1 1 7 , 3 2 5 . 2 4 0. 0 1 % 2 5 , 1 1 7 , 3 2 5 . 2 4 - 2 5 . 1 0 % - NR NR0.000.00 U. S . T r e a s u r y B o n d / N o t e US T R E A S U R Y N O T E S 1. 7 5 % D u e 7 / 3 1 / 2 0 1 5 4/ 1 2 / 2 0 1 1 1 . 9 1 % 1 , 0 5 0 , 0 0 0 . 0 0 1, 0 4 2 , 9 4 8 . 8 3 1, 0 4 9 , 4 3 3 . 1 8 0. 1 0 % 1 , 0 5 5 , 8 2 4 . 3 5 3, 0 4 5 . 5 8 1. 0 6 % 6 , 3 9 1 . 1 7 AA+Aaa0.330.34 US T R E A S U R Y N O T E S 1. 3 8 % D u e 1 1 / 3 0 / 2 0 1 5 5/ 1 6 / 2 0 1 1 1 . 6 3 % 1 , 0 5 5 , 0 0 0 . 0 0 1, 0 4 3 , 2 1 7 . 2 1 1, 0 5 3 , 2 2 1 . 7 4 0. 2 1 % 1 , 0 6 3 , 1 5 9 . 3 7 4, 8 6 1 . 9 8 1. 0 6 % 9 , 9 3 7 . 6 3 AA+Aaa0.670.66 US T RE A S U R Y N O T E S 9. 2 5 % D u e 2 / 1 5 / 2 0 1 6 2/ 1 5 / 1 9 8 6 9 . 2 4 % 1 , 0 0 0 , 0 0 0 . 0 0 1, 0 0 0 , 0 0 0 . 0 0 1, 0 0 0 , 0 0 0 . 0 0 0. 3 9 % 1 , 0 7 7 , 7 3 0 . 0 0 11 , 2 4 3 . 0 9 1. 0 8 % 7 7 , 7 3 0 . 0 0 AA+Aaa0.880.84 US T R E A S U R Y N O T E S 2. 1 3 % D u e 2 / 2 9 / 2 0 1 6 5/ 1 9 / 2 0 1 1 1 . 7 4 % 4 5 0 , 0 0 0 . 0 0 45 7 , 9 9 9 . 6 5 45 1 , 5 7 9 . 1 7 0. 2 9 % 4 5 7 , 5 5 8 . 6 5 83 1 . 5 2 0. 4 6 % 5 , 9 7 9 . 4 8 AA+Aaa0.920.91 US T R E A S U R Y N O T E S 2. 1 3 % D u e 2 / 2 9 / 2 0 1 6 8/ 3 0 / 2 0 1 1 0 . 8 2 % 6 0 0 , 0 0 0 . 0 0 63 4 , 5 4 8 . 8 9 60 7 , 1 0 7 . 8 1 0. 2 9 % 6 1 0 , 0 7 8 . 2 0 1, 1 0 8 . 7 0 0. 6 1 % 2 , 9 7 0 . 3 9 AA+Aaa0.920.91 US T R E A S U R Y N O T E S 0. 2 5 % D u e 4 / 1 5 / 2 0 1 6 4/ 2 4 / 2 0 1 3 0 . 3 4 % 9 0 0 , 0 0 0 . 0 0 89 7 , 6 4 7 . 5 5 89 9 , 1 7 6 . 3 1 0. 3 0 % 8 9 9 , 5 0 7 . 7 0 1, 0 3 8 . 4 6 0. 9 0 % 3 3 1 . 3 9 AA+Aaa1.041.04 US T R E A S U R Y N O T E S 0. 2 5 % D u e 5 / 1 5 / 2 0 1 6 9/ 2 6 / 2 0 1 3 0 . 5 4 % 7 0 0 , 0 0 0 . 0 0 69 4 , 6 9 7 . 6 6 69 7 , 7 3 5 . 0 2 0. 3 3 % 6 9 9 , 3 9 8 . 7 0 66 2 . 2 9 0. 7 0 % 1 , 6 6 3 . 6 8 AA+Aaa1.131.12 US T R E A S U R Y N O T E S 0. 6 3 % D u e 7 / 1 5 / 2 0 1 6 10 / 7 / 2 0 1 3 0 . 5 7 % 7 5 0 , 0 0 0 . 0 0 75 1 , 1 4 5 . 0 9 75 0 , 5 3 5 . 5 2 0. 3 9 % 7 5 2 , 2 8 5 . 2 5 98 4 . 1 2 0. 7 5 % 1 , 7 4 9 . 7 3 AA+Aaa1.291.29 US T R E A S U R Y N O T E S 0. 6 3 % D u e 5 / 3 1 / 2 0 1 7 5/ 1 3 / 2 0 1 3 0 . 6 2 % 6 5 0 , 0 0 0 . 0 0 65 0 , 0 2 7 . 5 7 65 0 , 0 1 4 . 9 8 0. 6 2 % 6 5 0 , 0 5 0 . 7 0 1, 3 6 1 . 6 1 0. 6 5 % 3 5 . 7 2 AA+Aaa2.172.15 US T R E A S U R Y N O T E S 0. 7 5 % D u e 6 / 3 0 / 2 0 1 7 9/ 1 7 / 2 0 1 3 1 . 1 8 % 5 7 5 , 0 0 0 . 0 0 56 5 , 8 8 2 . 7 9 56 9 , 5 3 6 . 9 9 0. 6 6 % 5 7 6 , 1 6 7 . 8 3 1, 0 8 4 . 0 8 0. 5 8 % 6 , 6 3 0 . 8 4 AA+Aaa2.252.23 US T R E A S U R Y N O T E S 0. 7 5 % D u e 1 2 / 3 1 / 2 0 1 7 8/ 1 3 / 2 0 1 3 1. 2 8 % 62 5 , 0 0 0 . 0 0 61 1 , 0 6 1 . 6 6 61 6 , 1 6 5 . 6 6 0. 8 2 % 6 2 3 , 8 2 8 . 1 3 1, 1 7 8 . 3 5 0. 6 2 % 7 , 6 6 2 . 4 7 AA+Aaa2.762.71 US T R E A S U R Y N O T E S 0. 7 5 % D u e 2 / 2 8 / 2 0 1 8 4/ 2 4 / 2 0 1 4 1 . 3 2 % 9 2 5 , 0 0 0 . 0 0 90 5 , 1 6 6 . 1 8 90 9 , 9 0 5 . 8 6 0. 8 6 % 9 2 1 , 9 6 5 . 0 8 60 3 . 2 6 0. 9 2 % 1 2 , 0 5 9 . 2 2 AA+Aaa2.922.88 US T R E A S U R Y N O T E S 1. 3 8 % D u e 9 / 3 0 / 2 0 1 8 2/ 1 9 / 2 0 1 5 1 . 2 5 % 4 0 0 , 0 0 0 . 0 0 40 1 , 7 6 5 . 6 3 40 1 , 7 1 3 . 1 6 1. 0 6 % 4 0 4 , 2 5 0 . 0 0 15 . 0 3 0. 4 0 % 2 , 5 3 6 . 8 4 AA+Aaa3.503.41 US T R E A S U R Y N O T E S 1. 3 8 % D u e 1 2 / 3 1 / 2 0 1 8 2/ 9 / 2 0 1 5 1 . 0 8 % 5 0 0 , 0 0 0 . 0 0 50 5 , 5 2 7 . 3 4 50 5 , 3 3 1 . 4 2 1. 1 4 % 5 0 4 , 3 3 6 . 0 0 1, 7 2 8 . 2 5 0. 5 0 % ( 9 9 5 . 4 2 ) AA+Aaa3.763.64 US T R E A S U R Y N O T E S 1. 3 8 % D u e 1 2 / 3 1 / 2 0 1 8 3/ 2 4 / 2 0 1 5 1 . 1 7 % 1 , 0 0 0 , 0 0 0 . 0 0 1, 0 0 7 , 5 3 9 . 0 6 1, 0 0 7 , 4 9 6 . 1 5 1. 1 4 % 1 , 0 0 8 , 6 7 2 . 0 0 3, 4 5 6 . 4 9 1. 0 1 % 1 , 1 7 5 . 8 5 AA+Aaa3.763.64 US T R E A S U R Y N O T E S 1. 2 5 % D u e 1 / 3 1 / 2 0 1 9 1/ 8 / 2 0 1 5 1 . 3 4 % 1 , 7 7 5 , 0 0 0 . 0 0 1, 7 6 8 , 9 6 7 . 7 7 1, 7 6 9 , 3 0 2 . 4 6 1. 1 5 % 1 , 7 8 1 , 6 5 6 . 2 5 3, 6 7 7 . 4 9 1. 7 8 % 1 2 , 3 5 3 . 7 9 AA+Aaa3.843.73 21 C i t y o f S a n L u i s O b i s p o H o l d i n g s R e p o r t For the Month Ending March 31, 2015 Se c u r i t y D e s c r i p t i o n Se t t l e D a t e YT M a t Co s t P a r Co s t V a l u e A m o r t i z e d C o s t YT M a t Ma r k e t M a r k e t V a l u e Acc r u e d In t e r e s t % o f Po r t f o l i o Un r e a l G / L Am o r t C o s t S&P/Moody'sYears to MaturityDuration US T R E A S U R Y N O T E S 1. 3 8 % D u e 2 / 2 8 / 2 0 1 9 2/ 2 7 / 2 0 1 5 1 . 3 8 % 5 0 0 , 0 0 0 . 0 0 49 9 , 9 6 0 . 9 4 49 9 , 9 6 1 . 8 6 1. 1 8 % 5 0 3 , 7 5 0 . 0 0 59 7 . 8 3 0. 5 0 % 3 , 7 8 8 . 1 4 AA+Aaa3.923.80 US T R E A S U R Y N O T E S 1. 1 3 % D u e 1 2 / 3 1 / 2 0 1 9 1/ 8 / 2 0 1 5 1 . 4 8 % 1 , 7 7 5 , 0 0 0 . 0 0 1, 7 4 4 , 9 7 7 . 5 4 1, 7 4 6 , 3 1 5 . 6 6 1. 3 3 % 1 , 7 5 8 , 0 8 2 . 4 8 5, 0 1 9 . 7 7 1. 7 6 % 1 1 , 7 6 6 . 8 2 AA+Aaa4.764.60 To t a l U . S . T r e a s u r y B o n d / N o t e 1. 7 7 % 1 5 , 2 3 0 , 0 0 0 . 0 0 15 , 1 8 3 , 0 8 1 . 3 6 15 , 1 8 4 , 5 3 2 . 9 5 0. 7 2 % 1 5 , 3 4 8 , 3 0 0 . 6 9 42 , 4 9 7 . 9 0 15 . 3 4 % 1 6 3 , 7 6 7 . 7 4 AA+Aaa2.422.36 Fe d e r a l A g e n c y B o n d / N o t e FF C B N O T E S 1. 6 0 % D u e 5 / 1 8 / 2 0 1 5 7/ 2 0 / 2 0 1 1 1 . 2 8 % 2 3 0 , 0 0 0 . 0 0 23 2 , 7 0 2 . 5 0 23 0 , 0 9 4 . 2 0 0. 1 6 % 2 3 0 , 4 2 9 . 6 4 1, 3 5 9 . 5 6 0. 2 3 % 3 3 5 . 4 4 AA+Aaa0.130.13 TE N N V A L L E Y A U T H O R I T Y G L O B A L N O T E S 4. 3 8 % D u e 6 / 1 5 / 2 0 1 5 6/ 1 4 / 2 0 1 1 1 . 4 6 % 1 , 0 5 0 , 0 0 0 . 0 0 1, 1 6 8 , 3 8 6 . 4 5 1, 0 5 6 , 2 3 6 . 0 6 0. 2 8 % 1 , 0 5 8 , 8 2 1 . 0 5 13 , 5 2 6 . 0 4 1. 0 6 % 2 , 5 8 4 . 9 9 AA+Aaa0.210.21 FH L B N O T E S 2. 1 3 % D u e 6 / 3 0 / 2 0 1 5 5/ 2 6 / 2 0 1 1 1 . 4 9 % 4 0 0 , 0 0 0 . 0 0 41 0 , 1 1 2 . 0 0 40 0 , 6 2 6 . 9 4 0. 1 5 % 4 0 1 , 9 6 8 . 8 0 2, 1 4 8 . 6 1 0. 4 0 % 1 , 3 4 1 . 8 6 AA+Aaa0.250.25 FF C B N O T E S 0. 5 5 % D u e 8 / 1 7 / 2 0 1 5 4/ 2 7 / 2 0 1 2 0 . 6 0 % 1 , 0 0 0 , 0 0 0 . 0 0 99 8 , 5 1 1 . 0 0 99 9 , 8 2 8 . 5 2 0. 1 8 % 1 , 0 0 1 , 4 0 6 . 0 0 67 2 . 2 2 1. 0 0 % 1 , 5 7 7 . 4 8 AA+Aaa0.380.38 FF C B N O T E S 1. 5 0 % D u e 1 1 / 1 6 / 2 0 1 5 3/ 2 5 / 2 0 1 1 2 . 2 0 % 4 0 2 , 0 0 0 . 0 0 38 9 , 6 4 0 . 9 1 40 0 , 2 6 3 . 7 1 0. 2 6 % 4 0 5 , 1 0 1 . 8 3 2, 2 6 1 . 2 5 0. 4 0 % 4 , 8 3 8 . 1 2 AA+Aaa0.630.62 FE D E R A L H O M E L O A N B A N K G L O B A L N O T E S 0. 5 0 % D u e 1 1 / 2 0 / 2 0 1 5 6/ 2 7 / 2 0 1 3 0 . 5 3 % 7 0 0 , 0 0 0 . 0 0 69 9 , 4 4 7 . 0 0 69 9 , 8 5 2 . 7 1 0. 2 3 % 7 0 1 , 2 1 5 . 9 0 1, 2 7 3 . 6 1 0. 7 0 % 1,363.19 AA+Aaa0.640.63 FF C B N O T E S 2. 3 5 % D u e 1 2 / 2 2 / 2 0 1 5 3/ 2 8 / 2 0 1 1 2 . 2 7 % 5 8 0 , 0 0 0 . 0 0 58 2 , 0 9 9 . 6 0 58 0 , 3 3 7 . 5 2 0. 2 6 % 5 8 8 , 7 5 2 . 2 0 3, 7 4 8 . 2 5 0. 5 9 % 8 , 4 1 4 . 6 8 AA+Aaa0.730.72 FH L B N O T E S 3. 1 3 % D u e 3 / 1 1 / 2 0 1 6 8/ 1 0 / 2 0 1 1 1 . 1 2 % 9 6 5 , 0 0 0 . 0 0 1, 0 5 1 , 4 4 9 . 5 3 98 3 , 1 6 4 . 1 1 0. 3 6 % 9 9 0 , 0 9 3 . 8 6 1, 6 7 5 . 3 5 0. 9 9 % 6 , 9 2 9 . 7 5 AA+Aaa0.950.94 FF C B N O T E S 1. 0 5 % D u e 3 / 2 8 / 2 0 1 6 9/ 1 4 / 2 0 1 2 0 . 5 3 % 9 2 4 , 0 0 0 . 0 0 94 0 , 8 7 9 . 2 8 92 8 , 7 6 1 . 8 1 0. 3 5 % 9 3 0 , 3 5 6 . 2 0 80 . 8 5 0. 9 3 % 1 , 5 9 4 . 3 9 AA+Aaa0.990.99 FA N N I E M A E G L O B A L N O T E S 0. 5 0 % D u e 3 / 3 0 / 2 0 1 6 3/ 2 7 / 2 0 1 3 0 . 4 5 % 9 5 0 , 0 0 0 . 0 0 95 1 , 4 3 4 . 5 0 95 0 , 4 7 7 . 6 6 0. 3 2 % 9 5 1 , 6 8 7 . 2 0 13 . 1 9 0. 9 5 % 1 , 2 0 9 . 5 4 AA+Aaa1.001.00 FH L B N O T E S 2. 0 0 % D u e 9 / 9 / 2 0 1 6 10 / 2 4 / 2 0 1 3 0 . 6 7 % 2 8 0 , 0 0 0 . 0 0 29 0 , 5 5 0 . 4 0 28 5 , 3 0 5 . 9 3 0. 4 7 % 2 8 6 , 1 4 0 . 6 8 34 2 . 2 2 0. 2 9 % 8 3 4 . 7 5 AA+Aaa1.451.42 FA N N I E M A E N O T E S 1. 3 8 % D u e 1 1 / 1 5 / 2 0 1 6 3/ 1 4 / 2 0 1 2 1 . 2 1 % 9 8 5 , 0 0 0 . 0 0 99 2 , 5 4 5 . 1 0 98 7 , 6 7 0 . 5 6 0. 5 2 % 9 9 8 , 6 4 4 . 2 2 5, 1 1 6 . 5 3 1. 0 0 % 1 0 , 9 7 3 . 6 6 AA+Aaa1.631.60 FH L B N O T E S 0. 6 3 % D u e 1 1 / 2 3 / 2 0 1 6 2/ 9 / 2 0 1 5 0 . 5 2 % 5 0 0 , 0 0 0 . 0 0 50 0 , 9 1 5 . 0 0 50 0 , 8 4 1 . 6 5 0. 5 7 % 5 0 0 , 4 7 7 . 5 0 1, 1 6 3 . 1 9 0. 5 0 % ( 3 6 4 . 1 5 ) AA+Aaa1.651.63 FA N N I E M A E G L O B A L N O T E S 1. 2 5 % D u e 1 / 3 0 / 2 0 1 7 2/ 2 7 / 2 0 1 2 1 . 0 7 % 8 0 0 , 0 0 0 . 0 0 80 7 , 0 1 6 . 0 0 80 2 , 6 5 0 . 9 8 0. 6 2 % 8 0 9 , 1 7 1 . 2 0 1, 6 9 4 . 4 4 0. 8 1 % 6 , 5 2 0 . 2 2 AA+Aaa1.841.81 FF C B N O T ES 2. 8 8 % D u e 2 / 1 0 / 2 0 1 7 7/ 2 5 / 2 0 1 2 0. 7 4 % 8 6 5 , 0 0 0 . 0 0 94 7 , 4 7 7 . 7 5 89 9 , 0 7 8 . 2 1 0. 6 9 % 8 9 9 , 8 5 6 . 9 1 3, 5 2 3 . 0 7 0. 9 0 % 7 7 8 . 7 0 AA+Aaa1.871.81 FR E D D I E M A C G L O B A L N O T E S 1. 0 0 % D u e 3 / 8 / 2 0 1 7 3/ 1 4 / 2 0 1 2 1 . 2 9 % 1 , 0 0 0 , 0 0 0 . 0 0 98 6 , 0 5 0 . 0 0 99 4 , 4 7 4 . 4 8 0. 6 3 % 1 , 0 0 7 , 0 9 5 . 0 0 63 8 . 8 9 1. 0 1 % 1 2 , 6 2 0 . 5 2 AA+Aaa1.941.92 FH L M C N O T E S 1. 2 5 % D u e 5 / 1 2 / 2 0 1 7 10 / 1 7 / 2 0 1 2 0 . 8 2 % 5 0 0 , 0 0 0 . 0 0 50 9 , 6 3 5 . 0 0 50 4 , 5 0 2 . 0 4 0. 6 8 % 5 0 5 , 9 6 4 . 0 0 2, 4 1 3 . 1 9 0. 5 1 % 1 , 4 6 1 . 9 6 AA+Aaa2.122.08 FN M A N O T E S ( E X - C A L L A B L E ) 2. 0 5 % D u e 5 / 2 3 / 2 0 1 7 8/ 7 / 2 0 1 2 0 . 9 0 % 3 6 5 , 0 0 0 . 0 0 38 4 , 7 3 9 . 2 0 37 3 , 9 3 3 . 4 0 0. 6 3 % 3 7 5 , 9 9 3 . 0 7 2, 6 6 0 . 4 4 0. 3 8 % 2 , 0 5 9 . 6 7 AA+Aaa2.152.09 FE D E R A L H O M E L O A N B A N K G L O B A L N O T E S 1. 0 0 % D u e 6 / 2 1 / 2 0 1 7 11 / 2 6 / 2 0 1 2 0 . 7 0 % 7 0 0 , 0 0 0 . 0 0 70 9 , 4 7 8 . 0 0 70 4 , 6 4 6 . 9 9 0. 7 0 % 7 0 4 , 5 4 4 . 4 0 1, 9 4 4 . 4 4 0. 7 0 % ( 1 0 2 . 5 9 ) AA+Aaa2.232.19 FR E D D I E M A C G L O B A L N O T E S 1. 0 0 % D u e 6 / 2 9 / 2 0 1 7 7/ 3 0 / 2 0 1 2 0 . 8 5 % 7 7 5 , 0 0 0 . 0 0 78 0 , 6 7 3 . 0 0 77 7 , 6 2 0 . 6 7 0. 7 5 % 7 7 9 , 3 1 3 . 6 5 1, 9 8 0 . 5 6 0. 7 8 % 1 , 6 9 2 . 9 8 AA+Aaa2.252.21 FR E D D I E M A C G L O B A L N O T E S 1. 0 0 % D u e 6 / 2 9 / 2 0 1 7 12 / 1 4 / 2 0 1 2 0 . 7 4 % 1 3 5 , 0 0 0 . 0 0 13 6 , 5 8 7 . 6 0 13 5 , 7 9 1 . 1 6 0. 7 5 % 1 3 5 , 7 5 1 . 4 1 34 5 . 0 0 0. 1 4 % ( 3 9 . 7 5 ) AA+Aaa2.252.21 FR E D D I E M A C G L O B A L N O T E S 1. 0 0 % D u e 7 / 2 8 / 2 0 1 7 11 / 2 6 / 2 0 1 2 0 . 8 0 % 9 0 0 , 0 0 0 . 0 0 90 8 , 3 1 6 . 0 0 90 4 , 1 7 7 . 5 2 0. 6 8 % 9 0 6 , 7 1 2 . 2 0 1, 5 7 5 . 0 0 0. 9 1 % 2 , 5 3 4 . 6 8 AA+Aaa2.332.29 22 C i t y o f S a n L u i s O b i s p o H o l d i n g s R e p o r t For the Month Ending March 31, 2015 Se c u r i t y D e s c r i p t i o n Se t t l e D a t e YT M a t Co s t P a r Co s t V a l u e A m o r t i z e d C o s t YT M a t Ma r k e t M a r k e t V a l u e Acc r u e d In t e r e s t % o f Po r t f o l i o Un r e a l G / L Am o r t C o s t S&P/Moody'sYears to MaturityDuration FR E D D I E M A C G L O B A L N O T E S 1. 0 0 % D u e 7 / 2 8 / 2 0 1 7 3/ 2 3 / 2 0 1 5 0 . 8 2 % 4 9 5 , 0 0 0 . 0 0 49 7 , 0 1 9 . 6 0 49 7 , 0 0 0 . 7 0 0. 6 8 % 4 9 8 , 6 9 1 . 7 1 86 6 . 2 5 0. 5 0 % 1 , 6 9 1 . 0 1 AA+Aaa2.332.29 FA N N I E M A E G L O B A L N O T E S 0. 8 8 % D u e 8 / 2 8 / 2 0 1 7 6/ 2 0 / 2 0 1 4 1 . 1 0 % 6 2 5 , 0 0 0 . 0 0 62 0 , 6 8 7 . 5 0 62 1 , 7 3 0 . 3 1 0. 8 2 % 6 2 5 , 7 8 0 . 6 3 47 0 . 9 2 0. 6 3 % 4 , 0 5 0 . 3 2 AA+Aaa2.412.39 FR E D D I E M A C G L O B A L N O T E S 1. 0 0 % D u e 9 / 2 9 / 2 0 1 7 1/ 4 / 2 0 1 3 0 . 8 9 % 9 5 0 , 0 0 0 . 0 0 95 4 , 7 8 8 . 0 0 95 2 , 5 4 8 . 2 8 0. 8 7 % 9 5 2 , 9 4 7 . 8 5 52 . 7 8 0. 9 5 % 3 9 9 . 5 7 AA+Aaa2.502.46 FA N N I E M A E G L O B A L N O T E S 0. 8 8 % D u e 1 0 / 2 6 / 2 0 1 7 6/ 2 0 / 2 0 1 4 1 . 1 7 % 6 2 5 , 0 0 0 . 0 0 61 8 , 9 8 7 . 5 0 62 0 , 3 6 9 . 1 3 0. 8 3 % 6 2 5 , 7 7 3 . 7 5 2, 3 5 4 . 6 0 0. 6 3 % 5 , 4 0 4 . 6 2 AA+Aaa2.582.53 FH L M C N O T E S 0. 7 5 % D u e 1 / 1 2 / 2 0 1 8 10 / 1 / 2 0 1 4 1 . 2 6 % 8 0 0 , 0 0 0 . 0 0 78 7 , 0 0 8 . 0 0 78 8 , 9 5 7 . 3 0 0. 8 1 % 7 9 8 , 5 8 4 . 0 0 1, 3 1 6 . 6 7 0. 8 0 % 9 , 6 2 6 . 7 0 AA+Aaa2.792.74 FR E D D I E M A C G L O B A L N O T E S 0. 8 8 % D u e 3 / 7 / 2 0 1 8 11 / 2 0 / 2 0 1 4 1 . 2 0 % 9 0 0 , 0 0 0 . 0 0 89 0 , 4 6 9 . 0 0 89 1 , 5 0 5 . 4 9 0. 9 3 % 8 9 8 , 5 5 3 . 7 0 52 5 . 0 0 0. 9 0 % 7 , 0 4 8 . 2 1 AA+Aaa2.942.89 FA N N I E M A E G L O B A L N O T E S 0. 8 8 % D u e 5 / 2 1 / 2 0 1 8 4/ 2 4 / 2 0 1 4 1 . 4 6 % 9 2 5 , 0 0 0 . 0 0 90 3 , 6 9 1 . 7 0 90 8 , 4 7 8 . 8 9 0. 9 5 % 9 2 2 , 8 0 2 . 2 0 2, 9 2 2 . 7 4 0. 9 2 % 1 4 , 3 2 3 . 3 1 AA+Aaa3.143.08 FR E D D I E M A C N O T E S 1. 7 5 % D u e 5 / 3 0 / 2 0 1 9 8/ 4 / 2 0 1 4 1 . 6 7 % 9 0 0 , 0 0 0 . 0 0 90 3 , 4 2 0 . 0 0 90 2 , 9 7 5 . 2 7 1. 3 8 % 9 1 3 , 4 6 7 . 6 0 5, 2 9 3 . 7 5 0. 9 1 % 1 0 , 4 9 2 . 3 3 AA+Aaa4.173.99 FN M A N O T E S 1. 7 5 % D u e 6 / 2 0 / 2 0 1 9 10 / 2 / 2 0 1 4 1 . 7 7 % 5 0 0 , 0 0 0 . 0 0 49 9 , 6 3 0 . 0 0 49 9 , 6 7 1 . 8 6 1. 3 5 % 5 0 8 , 2 2 7 . 0 0 2, 4 5 4 . 8 6 0. 5 1 % 8,555.14 AA+Aaa4.224.04 FN M A N O T E S 1. 7 5 % D u e 6 / 2 0 / 2 0 1 9 8/ 5 / 2 0 1 4 1 . 7 4 % 3 5 0 , 0 0 0 . 0 0 35 0 , 2 2 7 . 5 0 35 0 , 2 0 0 . 1 4 1. 3 5 % 3 5 5 , 7 5 8 . 9 0 1, 7 1 8 . 4 0 0. 3 6 % 5 , 5 5 8 . 7 6 AA+Aaa4.224.04 FN M A N O T E S 1. 7 5 % D u e 6 / 2 0 / 2 0 1 9 11 / 2 1 / 2 0 1 4 1 . 7 1 % 1 0 0 , 0 0 0 . 0 0 10 0 , 1 5 7 . 0 0 10 0 , 1 4 5 . 5 1 1. 3 5 % 1 0 1 , 6 4 5 . 4 0 49 0 . 9 7 0. 1 0 % 1 , 4 9 9 . 8 9 AA+Aaa4.224.04 FR E D D I E M A C G L O B A L N O T E S 1. 2 5 % D u e 8 / 1 / 2 0 1 9 9/ 1 5 / 2 0 1 4 1 . 8 8 % 1 , 0 5 0 , 0 0 0 . 0 0 1, 0 1 9 , 0 7 7 . 5 0 1, 0 2 2 , 3 9 8 . 6 4 1. 2 9 % 1 , 0 4 8 , 3 1 2 . 6 5 2, 1 8 7 . 5 0 1. 0 5 % 2 5 , 9 1 4 . 0 1 AA+Aaa4.344.20 FN M A N O T E S 1. 7 5 % D u e 9 / 1 2 / 2 0 1 9 2/ 9 / 2 0 1 5 1 . 3 6 % 5 0 0 , 0 0 0 . 0 0 50 8 , 6 6 5 . 0 0 50 8 , 4 0 2 . 4 1 1. 3 8 % 5 0 8 , 0 1 9 . 5 0 46 1 . 8 1 0. 5 1 % ( 3 8 2 . 9 1 ) AA+Aaa4.454.27 To t a l F e d e r a l A g e n c y B o n d / N o t e 1. 1 2 % 2 3 , 7 2 6 , 0 0 0 . 0 0 24 , 0 3 2 , 4 7 4 . 1 2 23 , 7 6 4 , 7 2 0 . 7 6 0. 6 8 % 2 3 , 9 2 8 , 0 6 1 . 8 1 71 , 2 7 2 . 1 5 23 . 9 1 % 1 6 3 , 3 4 1 . 0 5 AA+Aaa2.072.02 Ne g o t i a b l e C D HE R I T A G E O A K S B A N K Y A N K E E C D 0. 2 7 % D u e 1 2 / 2 0 / 2 0 1 5 12 / 2 0 / 2 0 1 4 0 . 2 7 % 1 , 0 0 0 , 0 0 0 . 0 0 1, 0 0 0 , 0 0 0 . 0 0 1, 0 0 0 , 0 0 0 . 0 0 0. 2 7 % 1 , 0 0 0 , 0 0 0 . 0 0 82 . 5 0 1. 0 0 % - NR NR0.720.72 To t a l N e g o t i a b l e C D 0. 2 7 % 1 , 0 0 0 , 0 0 0 . 0 0 1, 0 0 0 , 0 0 0 . 0 0 1, 0 0 0 , 0 0 0 . 0 0 0. 2 7 % 1 , 0 0 0 , 0 0 0 . 0 0 82 . 5 0 1. 0 0 % - NR NR0.720.72 Co r p o r a t e N o t e GE N E R A L E L E C T R I C C O N O T E S 0. 8 5 % D u e 1 0 / 9 / 2 0 1 5 4/ 2 4 / 2 0 1 3 0 . 5 9 % 7 0 0 , 0 0 0 . 0 0 70 4 , 5 1 5 . 0 0 70 0 , 9 6 4 . 5 7 0. 2 5 % 7 0 2 , 2 0 5 . 0 0 2, 8 4 2 . 7 8 0. 7 0 % 1 , 2 4 0 . 4 3 AA+A10.530.90 WA L - M A R T S T O R E S I N C G L O B A L N O T E S 0. 6 0 % D u e 4 / 1 1 / 2 0 1 6 6/ 2 7 / 2 0 1 3 0. 8 1 % 70 0 , 0 0 0 . 0 0 69 6 , 0 1 7 . 0 0 69 8 , 5 2 2 . 2 0 0. 4 1 % 7 0 1 , 3 9 3 . 0 0 1, 9 8 3 . 3 3 0. 7 0 % 2 , 8 7 0 . 8 0 AA Aa21.031.02 AP P L E I N C G L O B A L N O T E S 0. 4 5 % D u e 5 / 3 / 2 0 1 6 5/ 1 3 / 2 0 1 3 0 . 5 5 % 7 0 0 , 0 0 0 . 0 0 69 8 , 0 0 5 . 0 0 69 9 , 2 6 5 . 4 7 0. 4 3 % 7 0 0 , 1 5 6 . 8 0 1, 2 9 5 . 0 0 0. 7 0 % 8 9 1 . 3 3 AA+Aa11.091.08 JO H N S O N & J O H N S O N G L O B A L N O T E 2. 1 5 % D u e 5 / 1 5 / 2 0 1 6 1/ 1 5 / 2 0 1 3 0 . 5 8 % 6 7 5 , 0 0 0 . 0 0 70 9 , 8 7 0 . 5 0 68 6 , 8 1 4 . 7 2 0. 4 5 % 6 8 7 , 8 2 7 . 0 3 5, 4 8 2 . 5 0 0. 6 9 % 1 , 0 1 2 . 3 1 AAA Aaa1.131.10 GO O G L E I N C G L O B A L N O T E S 2. 1 3 % D u e 5 / 1 9 / 2 0 1 6 4/ 2 3 / 2 0 1 2 0 . 9 1 % 5 2 3 , 0 0 0 . 0 0 54 8 , 3 6 0 . 2 7 53 0 , 1 5 1 . 3 7 0. 4 1 % 5 3 3 , 1 0 0 . 7 0 4, 0 7 5 . 0 4 0. 5 3 % 2 , 9 4 9 . 3 3 AA Aa21.141.12 CA L L A B L E ) 1. 4 5 % D u e 8 / 1 5 / 2 0 1 6 8/ 3 / 2 0 1 2 0 . 8 2 % 9 1 5 , 0 0 0 . 0 0 93 7 , 8 9 3 . 3 0 92 2 , 8 7 2 . 7 1 0. 5 8 % 9 2 5 , 9 1 8 . 7 0 1, 6 9 5 . 2 9 0. 9 3 % 3 , 0 4 5 . 9 9 AA-Aa31.381.36 BE R K S H I R E H A T H A W A Y F I N G L O B A L N O T E S 1. 6 0 % D u e 5 / 1 5 / 2 0 1 7 4/ 2 4 / 2 0 1 3 1 . 0 0 % 7 0 0 , 0 0 0 . 0 0 71 6 , 7 6 5 . 0 0 70 8 , 8 5 1 . 0 5 0. 8 8 % 7 1 0 , 5 1 6 . 8 0 4, 2 3 1 . 1 1 0. 7 1 % 1 , 6 6 5 . 7 5 AA Aa22.132.07 CH E V R O N C O R P ( C A L L A B L E ) G L O B A L N O T E S 1. 1 0 % D u e 1 2 / 5 / 2 0 1 7 1/ 1 0 / 2 0 1 3 1 . 0 3 % 7 0 0 , 0 0 0 . 0 0 70 2 , 4 4 2 . 0 0 70 1 , 3 3 0 . 9 3 1. 0 7 % 7 0 0 , 6 1 9 . 5 0 2, 4 9 0 . 1 3 0. 7 0 % ( 7 1 1 . 4 3 ) AA Aa12.683.00 23 C i t y o f S a n L u i s O b i s p o H o l d i n g s R e p o r t For the Month Ending March 31, 2015 Se c u r i t y D e s c r i p t i o n Se t t l e D a t e YT M a t Co s t P a r Co s t V a l u e A m o r t i z e d C o s t YT M a t Ma r k e t M a r k e t V a l u e Acc r u e d In t e r e s t % o f Po r t f o l i o Un r e a l G / L Am o r t C o s t S&P/Moody'sYears to MaturityDuration IB M C O R P N O T E S 1. 1 3 % D u e 2 / 6 / 2 0 1 8 2/ 9 / 2 0 1 5 1 . 1 6 % 7 5 0 , 0 0 0 . 0 0 74 9 , 3 1 7 . 5 0 74 9 , 3 5 0 . 0 3 1. 2 1 % 7 4 8 , 1 4 8 . 2 5 1, 2 8 9 . 0 6 0. 7 5 % ( 1 , 2 0 1 . 7 8 ) AA-Aa32.862.79 MI C R O S O F T C O R P G L O B A L N O T E S 1. 6 3 % D u e 1 2 / 6 / 2 0 1 8 6/ 2 0 / 2 0 1 4 1 . 6 2 % 6 0 0 , 0 0 0 . 0 0 60 0 , 0 7 8 . 0 0 60 0 , 0 6 5 . 9 2 1. 2 4 % 6 0 8 , 3 4 1 . 2 0 3, 1 1 4 . 5 8 0. 6 1 % 8 , 2 7 5 . 2 8 AAA Aaa3.693.55 To t a l C o r p o r a t e N o t e 0. 9 0 % 6 , 9 6 3 , 0 0 0 . 0 0 7, 0 6 3 , 2 6 3 . 5 7 6, 9 9 8 , 1 8 8 . 9 7 0. 6 9 % 7 , 0 1 8 , 2 2 6 . 9 8 28 , 4 9 8 . 8 2 7. 0 1 % 2 0 , 0 3 8 . 0 1 AA Aa21.751.79 To t a l P o r t f o l i o 0. 6 8 % 9 9 , 6 9 2 , 3 3 3 . 8 5 10 0 , 0 5 2 , 1 5 2 . 9 0 9 9 , 7 2 0 , 7 7 6 . 5 3 0. 4 0 % 1 0 0 , 0 6 7 , 9 2 3 . 3 3 14 2 , 3 5 1 . 3 7 1 0 0 . 0 0 % 3 4 7 , 1 4 6 . 8 0 AA+0.990.98 To t a l M a r k e t V a l u e P l u s A c c r u e d 10 0 , 2 1 0 , 2 7 4 . 7 0 24 Se c t i o n V . M o n t h l y T r a n s a c t i o n s For the Month Ending January 31, 2015Managed Account Security Transactions & Interest CITY OF SAN LUIS OBISPO OPERATING FUNDS Transaction Type Trade CUSIPSecurity DescriptionSettle Par Proceeds Principal Accrued Interest Total Cost Realized G/LRealized G/L Sale Amort Cost Method BUY 01/08/15 US TREASURY NOTES DTD 01/31/2012 1.250% 01/31/2019 912828SD3 (1,768,967.77)(9,707.03)(1,778,674.80) 1,775,000.00 01/07/15 01/08/15 US TREASURY NOTES DTD 12/31/2012 1.125% 12/31/2019 912828UF5 (1,744,977.54)(441.30)(1,745,418.84) 1,775,000.00 01/07/15 (10,148.33)(3,524,093.64)(3,513,945.31) 3,550,000.00 Transaction Type Sub-Total INTEREST 01/12/15 FHLMC NOTES DTD 11/21/2012 0.750% 01/12/2018 3137EADN6 0.00 3,000.00 3,000.00 800,000.00 01/12/15 01/15/15 US TREASURY NOTES DTD 07/15/2013 0.625% 07/15/2016 912828VL1 0.00 2,343.75 2,343.75 750,000.00 01/15/15 01/28/15 FREDDIE MAC GLOBAL NOTES DTD 06/25/2012 1.000% 07/28/2017 3137EADJ5 0.00 4,500.00 4,500.00 900,000.00 01/28/15 01/30/15 FANNIE MAE GLOBAL NOTES DTD 01/09/2012 1.250% 01/30/2017 3135G0GY3 0.00 5,000.00 5,000.00 800,000.00 01/30/15 01/31/15 US TREASURY NOTES DTD 08/02/2010 1.750% 07/31/2015 912828NP1 0.00 9,187.50 9,187.50 1,050,000.00 01/31/15 01/31/15 US TREASURY NOTES DTD 07/31/2012 0.500% 07/31/2017 912828TG5 0.00 500.00 500.00 200,000.00 01/31/15 01/31/15 US TREASURY NOTES DTD 07/31/2012 0.500% 07/31/2017 912828TG5 0.00 750.00 750.00 300,000.00 01/31/15 01/31/15 US TREASURY NOTES DTD 01/31/2012 1.250% 01/31/2019 912828SD3 0.00 11,093.75 11,093.75 1,775,000.00 01/31/15 36,375.00 36,375.00 0.00 6,575,000.00 Transaction Type Sub-Total SELL 01/08/15 FHLB NOTES DTD 05/10/2011 2.125% 06/10/2016 313373SZ6 1,022,770.00 1,652.78 1,024,422.78 9,310.00 18,794.08 SPEC LOT 1,000,000.00 01/07/15 01/08/15 FEDERAL HOME LOAN BANK GLOBAL NOTES DTD 05/10/2013 0.375% 06/24/2016 3133834R9 699,062.00 102.08 699,164.08 7,245.00 3,081.85 SPEC LOT 700,000.00 01/07/15 01/08/15 FANNIE MAE GLOBAL NOTES DTD 08/17/2012 0.500% 09/28/2015 3135G0NV1 651,163.50 902.78 652,066.28 1,137.50 1,154.97 SPEC LOT 650,000.00 01/07/15 25 For the Month Ending January 31, 2015Managed Account Security Transactions & Interest CITY OF SAN LUIS OBISPO OPERATING FUNDS Transaction Type Trade CUSIPSecurity DescriptionSettle Par Proceeds Principal Accrued Interest Total Cost Realized G/LRealized G/L Sale Amort Cost Method 2,657.64 23,030.90 17,692.50 2,375,653.14 2,372,995.50 2,350,000.00 Transaction Type Sub-Total (1,140,949.81) 28,884.31 (1,112,065.50) 17,692.50 23,030.90 Managed Account Sub-Total Total Security Transactions $17,692.50 ($1,112,065.50)$28,884.31 ($1,140,949.81)$23,030.90 26 For the Month Ending February 28, 2015Managed Account Security Transactions & Interest CITY OF SAN LUIS OBISPO OPERATING FUNDS Transaction Type Trade CUSIPSecurity DescriptionSettle Par Proceeds Principal Accrued Interest Total Cost Realized G/LRealized G/L Sale Amort Cost Method BUY 02/09/15 FNMA NOTES DTD 07/28/2014 1.750% 09/12/2019 3135G0ZG1 (508,665.00)(3,572.92)(512,237.92) 500,000.00 02/04/15 02/09/15 FHLB NOTES DTD 11/17/2014 0.625% 11/23/2016 3130A3J70 (500,915.00)(711.81)(501,626.81) 500,000.00 02/04/15 02/09/15 US TREASURY NOTES DTD 01/03/2012 1.375% 12/31/2018 912828RY8 (505,527.34)(759.67)(506,287.01) 500,000.00 02/04/15 02/09/15 IBM CORP NOTES DTD 02/06/2015 1.125% 02/06/2018 459200HZ7 (749,317.50)(70.31)(749,387.81) 750,000.00 02/04/15 02/19/15 US TREASURY NOTES DTD 09/30/2011 1.375% 09/30/2018 912828RH5 (401,765.63)(2,145.60)(403,911.23) 400,000.00 02/18/15 02/27/15 US TREASURY NOTES DTD 02/29/2012 1.375% 02/28/2019 912828SH4 (499,960.94)(3,418.51)(503,379.45) 500,000.00 02/26/15 (10,678.82)(3,176,830.23)(3,166,151.41) 3,150,000.00 Transaction Type Sub-Total INTEREST 02/01/15 FREDDIE MAC GLOBAL NOTES DTD 07/30/2012 1.250% 08/01/2019 3137EADK2 0.00 6,562.50 6,562.50 1,050,000.00 02/01/15 02/09/15 FHLMC GLOBAL NOTES DTD 01/07/2010 2.875% 02/09/2015 3137EACH0 0.00 17,609.38 17,609.38 1,225,000.00 02/09/15 02/10/15 FFCB NOTES DTD 02/10/2011 2.875% 02/10/2017 31331KBX7 0.00 12,434.38 12,434.38 865,000.00 02/10/15 02/15/15 PROCTER & GAMBLE CO NOTES (EX-CALLABLE) DTD 08/15/2011 1.450% 08/15/2016 742718DV8 0.00 6,633.75 6,633.75 915,000.00 02/15/15 02/17/15 FFCB NOTES DTD 02/17/2012 0.550% 08/17/2015 3133EADW5 0.00 2,750.00 2,750.00 1,000,000.00 02/17/15 02/18/15 FFCB NOTES DTD 02/18/2011 2.050% 02/18/2015 31331KCR9 0.00 4,100.00 4,100.00 400,000.00 02/18/15 02/27/15 FNMA NOTES (CALLED, OMD 02/27/17) DTD 02/27/2013 1.000% 02/27/2015 3135G0UY7 0.00 2,500.00 2,500.00 500,000.00 02/27/15 02/28/15 US TREASURY NOTES DTD 02/28/2011 2.125% 02/29/2016 912828QJ2 0.00 4,781.25 4,781.25 450,000.00 02/28/15 02/28/15 US TREASURY NOTES DTD 02/28/2011 2.125% 02/29/2016 912828QJ2 0.00 6,375.00 6,375.00 600,000.00 02/28/15 27 For the Month Ending February 28, 2015Managed Account Security Transactions & Interest CITY OF SAN LUIS OBISPO OPERATING FUNDS Transaction Type Trade CUSIPSecurity DescriptionSettle Par Proceeds Principal Accrued Interest Total Cost Realized G/LRealized G/L Sale Amort Cost Method INTEREST 02/28/15 FANNIE MAE GLOBAL NOTES DTD 07/20/2012 0.875% 08/28/2017 3135G0MZ3 0.00 2,734.38 2,734.38 625,000.00 02/28/15 02/28/15 US TREASURY NOTES DTD 02/29/2012 1.375% 02/28/2019 912828SH4 0.00 3,437.50 3,437.50 500,000.00 02/28/15 02/28/15 US TREASURY NOTES DTD 02/28/2013 0.750% 02/28/2018 912828UR9 0.00 3,468.75 3,468.75 925,000.00 02/28/15 73,386.89 73,386.89 0.00 9,055,000.00 Transaction Type Sub-Total MATURITY 02/09/15 FHLMC GLOBAL NOTES DTD 01/07/2010 2.875% 02/09/2015 3137EACH0 1,225,000.00 0.00 1,225,000.00 (13,784.93) 0.00 1,225,000.00 02/09/15 02/18/15 FFCB NOTES DTD 02/18/2011 2.050% 02/18/2015 31331KCR9 400,000.00 0.00 400,000.00 (11,440.00) 0.00 400,000.00 02/18/15 02/27/15 FNMA NOTES (CALLED, OMD 02/27/17) DTD 02/27/2013 1.000% 02/27/2015 3135G0UY7 500,000.00 0.00 500,000.00 (4,750.00) 0.00 500,000.00 02/27/15 0.00 0.00 (29,974.93) 2,125,000.00 2,125,000.00 2,125,000.00 Transaction Type Sub-Total SELL 02/09/15 US TREASURY NOTES DTD 11/30/2011 0.875% 11/30/2016 912828RU6 503,769.53 853.37 504,622.90 2,986.60 3,480.69 SPEC LOT 500,000.00 02/04/15 02/09/15 FHLB NOTES DTD 03/11/2011 2.125% 06/30/2015 313372XB5 503,905.00 1,151.04 505,056.04 (8,735.00) 2,663.45 SPEC LOT 500,000.00 02/04/15 2,004.41 6,144.14 (5,748.40) 1,009,678.94 1,007,674.53 1,000,000.00 Transaction Type Sub-Total (33,476.88) 64,712.48 31,235.60 (35,723.33) 6,144.14 Managed Account Sub-Total Total Security Transactions ($35,723.33)$31,235.60 $64,712.48 ($33,476.88)$6,144.14 28 For the Month Ending March 31, 2015Managed Account Security Transactions & Interest CITY OF SAN LUIS OBISPO OPERATING FUNDS Transaction Type Trade CUSIPSecurity DescriptionSettle Par Proceeds Principal Accrued Interest Total Cost Realized G/L Realized G/L Sale Amort Cost Method BUY 03/23/15 FREDDIE MAC GLOBAL NOTES DTD 06/25/2012 1.000% 07/28/2017 3137EADJ5 (497,019.60)(756.25)(497,775.85) 495,000.00 03/20/15 03/24/15 US TREASURY NOTES DTD 01/03/2012 1.375% 12/31/2018 912828RY8 (1,007,539.06)(3,152.62)(1,010,691.68) 1,000,000.00 03/24/15 (3,908.87)(1,508,467.53)(1,504,558.66) 1,495,000.00 Transaction Type Sub-Total INTEREST 03/07/15 FREDDIE MAC GLOBAL NOTES DTD 01/17/2013 0.875% 03/07/2018 3137EADP1 0.00 3,937.50 3,937.50 900,000.00 03/07/15 03/08/15 FREDDIE MAC GLOBAL NOTES DTD 01/30/2012 1.000% 03/08/2017 3137EADC0 0.00 5,000.00 5,000.00 1,000,000.00 03/08/15 03/09/15 FHLB NOTES DTD 08/26/2010 2.000% 09/09/2016 313370TW8 0.00 2,800.00 2,800.00 280,000.00 03/09/15 03/11/15 FHLB NOTES DTD 03/16/2010 3.125% 03/11/2016 3133XXP43 0.00 15,078.13 15,078.13 965,000.00 03/11/15 03/12/15 FNMA NOTES DTD 07/28/2014 1.750% 09/12/2019 3135G0ZG1 0.00 4,375.00 4,375.00 500,000.00 03/12/15 03/24/15 FFCB NOTES DTD 03/24/2011 1.670% 03/24/2015 31331KFS4 0.00 8,350.00 8,350.00 1,000,000.00 03/24/15 03/28/15 FFCB NOTES DTD 03/28/2012 1.050% 03/28/2016 3133EAJU3 0.00 4,851.00 4,851.00 924,000.00 03/28/15 03/29/15 FREDDIE MAC GLOBAL NOTES DTD 08/10/2012 1.000% 09/29/2017 3137EADL0 0.00 4,750.00 4,750.00 950,000.00 03/29/15 03/30/15 FANNIE MAE GLOBAL NOTES DTD 02/15/2013 0.500% 03/30/2016 3135G0VA8 0.00 2,375.00 2,375.00 950,000.00 03/30/15 03/31/15 US TREASURY NOTES DTD 09/30/2011 1.375% 09/30/2018 912828RH5 0.00 2,750.00 2,750.00 400,000.00 03/31/15 54,266.63 54,266.63 0.00 7,869,000.00 Transaction Type Sub-Total MATURITY 03/24/15 FFCB NOTES DTD 03/24/2011 1.670% 03/24/2015 31331KFS4 1,000,000.00 0.00 1,000,000.00 (17,410.00) 0.00 1,000,000.00 03/24/15 29 For the Month Ending March 31, 2015Managed Account Security Transactions & Interest CITY OF SAN LUIS OBISPO OPERATING FUNDS Transaction Type Trade CUSIPSecurity DescriptionSettle Par Proceeds Principal Accrued Interest Total Cost Realized G/LRealized G/L Sale Amort Cost Method 0.00 0.00 (17,410.00) 1,000,000.00 1,000,000.00 1,000,000.00 Transaction Type Sub-Total SELL 03/23/15 US TREASURY NOTES DTD 07/31/2012 0.500% 07/31/2017 912828TG5 298,300.78 211.33 298,512.11 2,002.90 255.27 SPEC LOT 300,000.00 03/20/15 03/23/15 US TREASURY NOTES DTD 07/31/2012 0.500% 07/31/2017 912828TG5 198,867.19 140.88 199,008.07 (297.54)(722.80)SPEC LOT 200,000.00 03/20/15 352.21 (467.53) 1,705.36 497,520.18 497,167.97 500,000.00 Transaction Type Sub-Total (7,390.69) 50,709.97 43,319.28 (15,704.64)(467.53)Managed Account Sub-Total Total Security Transactions ($15,704.64)$43,319.28 $50,709.97 ($7,390.69)($467.53) 30 50 California Street Suite 2300 San Francisco, CA 94111 415 982-5544 415 982-4513 fax www.pfm.com Public Financial Management, Inc. PFM Asset Management LLC PFM Advisors January 16, 2015 Memorandum To: Wayne Padilla, Director of Finance & Information Technology City of San Luis Obispo From: Carlos Oblites, Director Charles Cook, Senior Analyst PFM Asset Management LLC Re: Investment Management Plan and Investment Policy Review We have completed our review of the City’s Investment Management Plan/Investment Policy. There were no changes to California Government Codes (“Code”) that regulate the investment of public funds that require the District to change its policy. We do, however recommend some changes to reflect current best practices for the prudent management of public funds. The majority of our changes focus on i) updating language to reflect current Code language, ii) expanding on asset classes, credit quality, and concentration limits to prudently manage risk and return, and iii) including current industry practices that promote the generation of return prudently. This memorandum serves as a guide to our recommended revisions to the Policy, and we will plan on attending the Investment Oversight Committee meeting on May 14, 2015, to provide more in-depth information regarding these changes. Page 4 Changes: • I. Introduction; Purpose: We recommend the City explicitly state that the Investment Policy is the most recently adopted version, not the version originally adopted along with the Financial Plan. • I. Introduction; Primary Investment Objective: We recommend the City permit its investment advisor to use its own list of approved and monitored broker/dealers with which they may conduct transactions for the City. Page 5 Changes: • I. Introduction; Primary Investment Objective; Credit Risk, Subsection 4: We recommend the City add obligations of supranational entities, local agency investment pools and money market funds as exceptions to the 5% issuer limit. Supranationals are considered instrumentalities of the U.S. Government, and investment pools and money market funds already provide sufficient issuer diversification by their nature. City of San Luis Obispo May 1, 2015 Page 2 • I. Introduction; Primary Investment Objective; Interest Rate Risk; Subsection 1: In order to accommodate debt reserve funds, we recommend the City allow up to 10% of the portfolio to be invested in securities with maturities longer than 5 years in certain circumstances. • I. Introduction; Primary Investment Objective; Interest Rate Risk; Subsection 2: We recommend the City remove the 20% minimum in securities with maturities under 90 days and instead utilize an annual analysis of the City’s funds to determine the appropriate level of liquidity. • I. Introduction; Primary Investment Objective; Interest Rate Risk; Subsection 3: We recommend the City augment the language referring to sales of securities prior to maturity in order to increase the flexibility for managing the portfolio and executing trades when prudent and advantageous. Page 6 Changes: • I. Introduction; Primary Investment Objective; Yield: Return on Investments: We recommend the City augment the language referring to sales of securities prior to maturity in order to increase the flexibility for managing the portfolio and executing trades when prudent and advantageous (continued). Page 7 Changes: • I. Introduction; Use of State Guidelines: We have updated Code references under “Use of State Guidelines.” • I. Introduction; Preparation and Administration of the Plan: We recommend the City remove information on the history of the City’s Investment Management Plan under “Preparation and administration of the plan.” • I. Introduction; Preparation and Administration of the Plan: This section should clarify that the annual review of the investment policy is recommended, but not required, by Code. Page 8 Changes: • II. Investment Authority and Responsibilities; Authorized Investment Officers: We have updated the title from Finance Manager to Finance Operations Manager. • II. Investment Authority and Responsibilities; Authorized Investment Officers: We recommend the City require its investment advisor to certify that they have read and understand Code, the Investment Management Plan, and the Investment Policy. Page 9 Changes: • II. Investment Authority and Responsibilities; Investment Manager Resources, Subsection 6: We recommend the City include emails as a permitted form of communication for the confirmation of telephone transactions. City of San Luis Obispo May 1, 2015 Page 3 Page 10 Changes: • II. Investment Authority and Responsibilities; Evaluation of Investment Officer Actions: We recommend the City include language referring to Code’s requirement of reporting monthly investment transactions to the City Council. Additionally, we recommend the City include language which states that the City Council shall determine each year whether or not to delegate investment authority to the Treasurer. • II. Investment Authority and Responsibilities; Evaluation of Investment Officer Actions: We recommend removal of this section on the use of an investment advisor, as this is permitted by the Treasurer’s management authority (continues on page 11) Page 12 Changes: • III. Capital Preservation and Risk; Portfolio Diversification Practices: We recommend the City include a statement that credit criteria in the policy are as of time of purchase. Additionally, if a holding is downgraded below its minimum the Treasurer must review the investment to determine whether it should be sold or held. Page 13 Changes: • IV. Investment Vehicles; Portfolio Diversification and Credit Worthiness Standards; Subsection 3: We recommend the City clarify that the 5% issuer limit does not apply to U.S. Treasuries, Federal Agencies (GSEs), LAIF, local government investment pools(LGIP), Supranationals, money market funds, and the City’s primary financial institution (bank). Government securities and obligations of supranational entities are considered to maintain a very high credit quality; specifically, U.S. Treasury obligations have the full faith and credit of the United States government. Moreover, pooled investments such as LAIF, LGIPs, and money market funds generally maintain diversification and risk management policies to make the 5% limit redundant. • IV. Investment Vehicles; Portfolio Diversification and Credit Worthiness Standards; Subsection 5: Remove negotiable certificates of deposit from the CD limitations under “Portfolio Diversification and Credit-Worthiness Standards,” as these standards relate to time CDs, and not negotiable CDs. • IV. Investment Vehicles; Certification and Reporting Requirements: We recommend the City state that it does not need to maintain a list of qualified security dealers if it has an investment advisor performing this task. Page 14 Changes: • IV. Investment Vehicles; Individual Placement of Deposits: Remove negotiable CDs from the requirements on the “Individual Placement of Deposits.” Due to their liquid and tradable nature we do not consider negotiable CDs to be deposits like collateralized, time CDs. City of San Luis Obispo May 1, 2015 Page 4 • IV. Investment Vehicles; Individual Placement of Deposits; Subsections 2, 3: We have updated the language currently stating insurance on non-collateralized CDs at $100,000, to the “FDIC limit.” The FDIC limit is currently $250,000, but this is subject to future change. Page 15 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments: With input from City staff, we have included language limiting issuers to 5% of the total portfolio unless the issuer is the U.S. Government or its agencies or instrumentalities, approved local agency investment pools, or money market funds, in order to increase diversification of issuers to protect the City’s funds. Additionally, the City may invest funds in maturities over 5 years up to 10% of the total portfolio in the event that the yield environment provides opportunities to enhance returns safely. Per the requirements of Code, investments with maturities longer than 5 years require approval from the City Council, and can only be made in U.S. Treasury obligations, Federal Agency securities (GSE), and municipal bonds. Moreover, the City shall maintain a minimum of 3 months’ worth of budgeted expenses in short-term investments. Lastly, the duration of longer- term securities not needed for cash shall not deviate more than 10% from its benchmark index. Page 16 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 2: We have adjusted the language on Government Sponsored Enterprise (GSE) Securities to the language permitting Federal Agencies in Code. • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 3: We have added language permitting municipal securities including bonds issued by the State of CA, any of the other 49 states, or CA local agencies. • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 4: We have adjusted this section on commercial paper to match Code requirements. Page 17 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 5: We recommend the City expand the credit requirement on corporate securities from “AA” to “A” except for bonds issued by financial institutions. Corporate bonds issued by financial institutions must still be rated “AA.” This approach is consistent with prior Investment Oversight Committee discussions. • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 9: We recommend adjusting the language for negotiable CDs to include CDs issued by federally- licensed branches of a foreign bank, as permitted by Code, and to institute a “AA or A-1” credit requirement. • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 10: We recommend the City permit higher than 25% of the City’s funds to be placed with one financial institution if needed to meet short-term needs. City of San Luis Obispo May 1, 2015 Page 5 Page 18 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 11: We have adjusted language on money market mutual funds to match Code. • IV. Investment Vehicles; Suitable and Authorized Investments; Subsection 12, 13, 14: We recommend including language permitting local government investment pools (LGIPs), Asset- Backed Securities (ABS) , and Supranationals as allowed by Code (continued on page 19). The City may be able to enhance its overall return prudently from the yield advantage these sectors provide, and will increase its overall diversification as it increases its list of allowable investments. Page 19 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments; Investments in Community Banks: After discussion with City staff, we recommend instituting criteria for investments with community banks for the benefit of the community, including but not limited to location and credit requirements. • IV. Investment Vehicles; Suitable and Authorized Investments; City Policies: We recommend the City remove current language referring to maximum maturities for debt reserve funds, and replace it with language that recognizes that the investment of debt-related funds is governed by the debt’s trust indenture/bond covenants. Page 20 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments; Allowed Investments but Use Unlikely: We recommend removal of this section stating that municipal securities are permitted, but unlikely. Certain municipal issues, including taxable issues, may provide value to the City. • IV. Investment Vehicles; Suitable and Authorized Investments; Prohibited Investment Vehicles and Practices: We recommend removal of the limitation to government money market funds under “Prohibited Investment Vehicles and Practices” so the City may invest in prime money market funds as permitted by Code. We recommend the same removal of collateralized mortgage obligations (CMO) which are covered under the ABS section of the permitted investments, as well as financial futures, option contracts, mortgage pass-through securities, and asset-backed securities (continued on page 18). Some of these sectors may be utilized prudently in an advantageous manner to enhance the City’s diversification and return. Futures and options contracts may also be utilized in the investment of debt proceeds to hedge changes in debt service amounts. City of San Luis Obispo May 1, 2015 Page 6 Page 21 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments; Authorized Investment Summary: We have updated the Authorized Investments Summary to reflect changes recommended in the Investment Management Plan (continued on page 22). Page 22 Changes: • IV. Investment Vehicles; Suitable and Authorized Investments; Socially Responsible Investing: Per ongoing discussion with City staff and the Investment Oversight Committee, we recommend including a section addressing socially responsible investing practices for the City. The section also restricts investments in the tobacco and fossil fuel industries. Page 23 Changes: • V. Investment Maturity: We recommend removal of the percentage requirements for securities under one year to allow the City flexibility to maintain an appropriate amount of liquidity as liquidity needs evolve. • V. Investment Maturity; Subsection 4: We recommend the City include language requiring prior approval for investments with maturities longer than 5 years. Approval must be obtained 3 months prior to initial investment per Government Code. Page 25 Changes: • VII. Evaluation of Investment Performance: We have updated the name of the index to BofA Merrill Lynch which stands for Bank of America Merrill Lynch. Page 26 Changes: • VIII. Investment Reporting: We have removed a reference to Code Section 16481 which refers to the State Treasurer and is not relevant to the City’s investment program. • VIII. Investment Reporting: We have updated this section to reflect current practice of generating a quarterly, rather than monthly investment report that is provided to the City Council and Investment Oversight Committee on a voluntary basis, per California Government Code 53646. Additionally, to reflect the current report, we have the amount paid for an investment and par amount to the items to be included in the investment report. Page 28 Changes: • IX. Investment Management Plan Review: In consultation with City staff, we have updated this section to reflect the current make-up of the Investment Oversight Committee. City of San Luis Obispo May 1, 2015 Page 7 Appendix Changes (pages 29-36) • We recommend the City update the Investment Policy in the appendix to be consistent with the changes listed for the Investment Management Plan. • We have inserted a glossary of key financial terminology used in the Investment Management Plan. We will contact you in the coming days to answer any questions you may have. In the meantime, please do not hesitate to call me with any questions or feedback you may have INVESTMENT MANAGEMENT PLAN May 2015 2 INVESTMENT MANAGEMENT PLAN Katie Lichtig, City Manager Prepared by the Department of Finance & Information Technology Wayne Padilla, Finance Director/City Treasurer 3 INVESTMENT MANAGEMENT PLAN Table of Contents Introduction Purpose .................................................................................................................................................... 1 Primary Investment Objective ................................................................................................................ 1 Scope of Investment Management Plan ................................................................................................. 3 Use of State Guidelines .......................................................................................................................... 3 Preparation and Administration of the Plan ........................................................................................... 4 Investment Authority and Responsibilities Authorized Investment Officers ............................................................................................................. 5 Internal Controls ..................................................................................................................................... 5 Investment Management Resources ....................................................................................................... 5 Evaluation of Investment Officer Actions .............................................................................................. 6 Use of an Investment Advisor ................................................................................................................ 7 Capital Preservation and Risk Overview ................................................................................................................................................. 9 Portfolio Diversification Practices .......................................................................................................... 9 Eligible Financial Institutions Portfolio Diversification and Credit-Worthiness Standards ................................................................. 10 Certification and Reporting Requirements ........................................................................................... 10 Individual Placement of Investments ................................................................................................... 10 Individual Placement of Deposits ......................................................................................................... 11 Investment Vehicles State of California Limitations ............................................................................................................. 11 Suitable and Authorized Investments………………………………………………………………11 City Policies .......................................................................................................................................... 14 Authorized Investment Summary ......................................................................................................... 15 Investment Maturity ........................................................................................................................................ 16 Cash Management ............................................................................................................................................ 17 Evaluation of Investment Performance ......................................................................................................... 18 Investment Reporting ...................................................................................................................................... 19 Investment Management Plan Review ........................................................................................................... 20 Appendix Investment Policy ................................................................................................................................. 21 Resolution No. 8477 Appointing the Director of Finance as City Treasurer ....................................... 23 Resolution No. 8523 Approving the Investment Management Plan ................................................... 24 4 I. INTRODUCTION PURPOSE The purpose of the investment management plan is to establish strategies, practices and procedures to be used in administering the City's portfolio in accordance with the City's Statement of Investment Policy. Included in the Appendix is a copy of the City's most recently adopted Investment Policy., PRIMARY INVESTMENT OBJECTIVE The City's primary investment objective is to achieve a reasonable rate of return on public funds while minimizing the potential for capital losses arising from market changes or issuer default. Although the generation of revenues through interest earnings on investments is an appropriate City goal, the primary consideration in the investment of City funds is capital preservation in the overall portfolio. As such, the City's yield objective is to achieve a reasonable rate of return on City investments rather than the maximum generation of income, which could expose the City to unacceptable levels of risk. In determining individual investment placements, the following factors shall be considered in priority order: 1. Safety 2. Liquidity 3. Yield. Safety Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, the City will diversify its investments so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. The objective is to mitigate credit risk and interest rate risk summarized as follows: Credit Risk. Credit risk is the risk that a security or a portfolio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay its debt. The City shall mitigate credit risk by adopting the following strategies: 1. Limiting investments to the safest types of securities. 2. Pre-qualifying the financial institutions, broker/dealers, intermediaries and advisors with which the City will do business. If the City has an investment advisor, the investment advisor may use its own list of authorized broker/dealers to conduct transactions on behalf of the City. 3. It is the intent of the City to diversify the investments within the portfolio to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturities. The asset allocation in the portfolio should, however, be flexible depending upon the outlook for the economy, the securities market, and the City’s anticipated cash flow needs. I. INTRODUCTION 5 4. No more than 5% of the total portfolio may be invested in securities of any single issuer, other than the US Government, its agencies and instrumentalities (including Supranationals), approved local agency investment pools and money market funds. 5. The City may elect to sell a security prior to its maturity and record a capital gain or loss in order to improve the quality, liquidity or yield of the portfolio in response to market conditions or the City’s risk preferences. 6. If securities owned by the City are downgraded by either Moody’s or S&P to a level below the quality required by this Investment Management Plan, it shall be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. a. If a security is downgraded below the level required by this policy, the City Treasurer determine whether to sell or hold the security based on its current maturity, the economic outlook for the issuer, and other relevant factors. b. If a decision is made to retain a downgraded security in the portfolio, it will be monitored and reported monthly to the City Council. Interest Rate Risk. Interest rate risk is the risk that the portfolio will decline in value (or will not optimize its value) due to changes in the general level of interest rates. The City recognizes that, over time, longer-term portfolios achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The City will mitigate interest rate risk by providing adequate liquidity for short-term cash needs, and by making some longer-term investments only with funds that are not needed for current cash flow purposes. The City further recognizes that certain types of securities, including variable rate securities, securities with principal pay downs prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to interest rate risk: 1. The maximum stated final maturity of individual securities in the portfolio shall be five years, except that up to 10% of the portfolio can be invested in Treasury and GSE securities maturing over 5 years. . 2. The City shall maintain a minimum of three months of budgeted operating expenditures in short term investments The level of operating expenses shall be measured once per year and shall based on the most recently adopted budget. 3. The duration of that part of the portfolio that is not needed for liquidity purposes shall typically be approximately equal to the duration of an index of US Treasury and Federal Agency Securities with maturities which meet the Authority’s needs for cashflow and level of risk tolerance (the Benchmark Index) plus or minus 10%. I. INTRODUCTION 6 Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same-day liquidity for short-term funds. Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Yield: Return on Investments The City’s investment portfolio shall be designed with the objective of attaining a market benchmark rate of return throughout budgetary and economic cycles, commensurate with the City’s investment risk constraints and the cash flow characteristics of the portfolio. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a reasonable return relative to the risk being assumed. SCOPE OF INVESTMENT MANAGEMENT PLAN Included in the scope of the City's investment management plan are the following major guidelines and practices to be used in achieving the City's primary investment objective: 1. Investment authority and responsibilities 2. Capital preservation and risk 3. Eligible financial institutions 4. Allowable investment vehicles 5. Investment maturity 6. Cash management 7. Evaluation of investment performance 8. Investment reporting 9. Investment management plan review These guidelines apply to all cash-related assets included within the scope of the City's audited financial statements and held either directly by the City or held and invested by trustees or fiscal agents. The only exception is funds invested in the City's deferred compensation plan, which are controlled by federal law, specific provisions of the City's adopted plan and individual employee decisions. USE OF STATE GUIDELINES The California Government Code (including sections 16429.1, 16481.2, 53600-53609, 53630- 53634, 53635, 53635.2, 53635.3, 53635.8, 53637-53638 and 53684) regulates public agency investment and investment reporting practices. It is the policy of the City of San Luis Obispo to use the State's provisions for local government investments in developing and implementing the City's investment policies and practices. I. INTRODUCTION 7 PREPARATION AND ADMINISTRATION OF THE PLAN As set forth in the Statement of Investment Policy, the City Treasurer is responsible for developing and monitoring the Investment Management Plan. As recommended by Government Code Section and 53646, the Council will review the Investment Policy annually. The Council will review the Investment Management Plan at a public meeting when changes in strategies, practices or procedures are proposed. In the interim, the City Treasurer is responsible for keeping the Investment Management Plan up-to-date to reflect changes in legislation, organizational structure, and other policies and administrative procedures approved by the Council. 8 II. INVESTMENT AUTHORITY AND RESPONSIBILITIES AUTHORIZED INVESTMENT OFFICERS Authority to manage the investment portfolio is granted to the Director of Finance & Information Technology (Director/City Treasurer) pursuant to Resolution No. 8477. Responsibility for the day- to-day operation of the investment program may b e delegated to the Finance Operations Manager, who is responsible for carrying-out established written procedures and internal controls for the operation of the investment program consistent with this plan. These procedures should include references to: safekeeping, delivery vs payment, investment accounting, repurchase agreements, wire transfer agreements, collateral/depository agreements and banking services contracts. Transactions Directed by City Staff. No person may engage in an investment transaction except as provided under the terms of this plan and the procedures established by the Director/City Treasurer. Although the Director/City Treasurer may delegate these duties to another official in the Department of Finance & Information Technology, every investment transaction must be reviewed and approved by the Director/City Treasurer. Additionally, the Director/City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. Transaction Directed by an Investment Advisor. The City may engage the services of an external investment adviser to assist in the management of the City’s investment portfolio in a manner consistent with the City’s objectives. The external investment adviser may be granted discretion to purchase and sell investment securities in accordance with the City’s Investment Policy and this Investment Management Plan. The investment adviser must be registered under the Investment Advisers Act of 1940. (The investment advisor shall be required to provide a certification that it has read and understands the applicable sections of the California Government Code relating to municipal investments, this Investment Management Plan and the City’s Investment Policy). INTERNAL CONTROLS The Director/City Treasurer is responsible for ensuring compliance with the City's Investment Policy as well as for establishing systems of internal control designed to prevent losses due to fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by City officers and employees. Additionally, the Director/City Treasurer is responsible for the physical security of City investments and shall use custodial safekeeping for negotiable and bearer instruments whenever possible. INVESTMENT MANAGEMENT RESOURCES The concept of reasonable assurance recognizes that the: 1. Cost of a control procedure should not exceed the benefits likely to be derived. 2. Valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Director/City Treasurer shall establish a process for annual independent review by an external auditor to assure compliance with policies and procedures. II. INVESTMENT AUTHORITY AND RESPONSIBILITIES 9 Internal controls shall address the following points: 1. Separating transaction authority from accounting and record keeping. By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved. 2. Custodial safekeeping. Securities purchased from any bank or dealer including appropriate collateral (as defined by State Law) shall be placed with an independent third party for custodial safekeeping as evidenced by safekeeping receipts in the City of San Luis Obispo’s name. 3. Avoiding physical delivery securities. Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities. 4. Delivery versus payment. All trades where applicable will be executed by delivery vs payment (DVP). This ensures that securities are deposited in the eligible financial institution before the release of funds. Securities will be held by a third party custodian as evidenced by safekeeping receipts. 5. Clearly delegating authority to subordinate staff members. Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities. 6. Confirming telephone transactions for investments and wire transfers in writing. Due to the potential for error and improprieties arising from telephone transactions, all telephone transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead or e-mail and the safekeeping institution has a list of authorized signatures. 7. Developing wire transfer agreements with the lead bank or third party custodian. This agreement should outline the various controls, security provisions, and delineate responsibilities of each party making and receiving wire transfers. EVALUATION OF INVESTMENT OFFICER ACTIONS The standard of prudence to be applied by the Director of Finance/City Treasurer shall be the "prudent investor" standard, as defined under Government Code Section 53600.3 which states: When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the Agency. Within the limitations of this II. INVESTMENT AUTHORITY AND RESPONSIBILITIES 10 section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law. Investment officers acting in accordance with written procedures and this Investment Management Plan, and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of securities are carried out in accordance with the terms of this plan. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. In accordance with Government Code Section 53607, the Treasurer shall prepare a report of monthly investment transactions for the City Council’s review. In addition, the City Council shall determine each year whether the delegation of investment authority to the Treasurer shall be renewed. 11 III. CAPITAL PRESERVATION AND RISK OVERVIEW Some level of risk is inherent in any investment transaction. Losses may be incurred due to issuer default, market price changes or technical cash flow complications such as investments in non- marketable certificates of deposit. Diversification of the City's portfolio by institution, investment vehicle and maturity term is the primary tool available to the City in minimizing investment risk and capital losses by safeguarding the overall portfolio from any individual loss. PORTFOLIO DIVERSIFICATION PRACTICES The following sections summarize the City's major portfolio diversification practices and guidelines in determining: 1. Eligible financial institutions 2. Investment vehicles 3. Investment maturity Portfolio limitations included in these guidelines are to be based on the portfolio composition and Investment Management Plan policies in effect at the time of placement; the actual composition of the City's investments may vary over time from plan limitations due to overall portfolio changes from when the individual placement was made as well as changes in the City's Investment Management Plan. Credit criteria listed in these guidelines refer to the credit rating at the time the security is purchased. If an investment’s credit rating falls below the minimum rating required at the time of purchase, the Finance Director/City Treasurer will consult with the Investment Advisor and perform a timely review to decide whether to sell or hold the investment. 12 IV. INVESTMENT VEHICLES PORTFOLIO DIVERSIFICATION AND CREDIT-WORTHINESS STANDARDS The following general criteria relating to portfolio diversification and credit-worthiness will be used in selecting depositories and broker/dealers (financial institutions) in the placement of City investments: 1. The financial capacity and credit-worthiness of the financial institution shall be considered before the placement of City investments. 2. Current financial statements shall be maintained for each institution in which or through which cash is invested. 3. No more than 5% of the City's portfolio (exclusive of Treasury obligations, federal agency securities, government sponsored enterprise (GSE) securities, LAIF, local government investment pools, Supranationals, and money market funds, and the City’s main financial institution) shall be placed with any financial institution. 4. No more than 25% of the City's portfolio shall be invested in collateralized certificates of deposit issued by savings and loan institutions. 5. Certificates of deposit placed by the City shall not constitute more than 15% of the total assets of the institution;and the institution must have total assets in excess of $200 million. CERTIFICATION AND REPORTING REQUIREMENTS Unless the City has engaged an investment advisor, the City shall establish a list of qualified securities dealers based on a certification submitted by all financial institutions with which the City has an investment relationship. The certification shall state that the institution has reviewed the City's Investment Management Plan and that it will: 1. Exercise due diligence in monitoring the activities of its officers and employees engaged in transactions with the City. 2. Ensure that all of its officers and employees offering investments to the City are trained in the precautions appropriate to public sector investments. 3. Submit audited financial statements prepared by an independent certified public accountant to the City on an annual basis within 180 days after the end of the institution's fiscal year. INDIVIDUAL PLACEMENT OF INVESTMENTS A list will be maintained of financial institutions and depositories authorized to provide investment services. In addition, a list will be maintained of approved security broker/dealers selected by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at least IV. INVESTMENT VEHICLES 13 five years of operation). These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate: 1. Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines 2. Proof of National Association of Securities Dealers (NASD) certification (not applicable to Certificate of Deposit counterparties) 3. Proof of state registration 4. Certification of having read and understood and agreeing to comply with the applicable sections of the California Government Code and the City’s Investment Policy and that all securities recommended shall be suitable for the City of San Luis Obispo. The investment advisor (or City staff if applicable) will strive to obtain competitive bids from at least three brokers or financial institutions on all purchases and sales of investment instruments whenever possible. INDIVIDUAL PLACEMENT OF DEPOSITS Individual placement of collateralizedcertificates of deposit with eligible financial institutions shall be based on the following practices and procedures: 1. Deposits shall only be placed with financial institutions maintaining offices within the City of San Luis Obispo. 2. Unless collateralized by eligible securities as provided in Sections 53651 and 53652 of the Government Code, the maximum amount of Certificates of Deposit to be placed with any single institution is the amount up to the Federal Deposit Insurance Corporation (FDIC) limit. 3. Reasonable efforts will be made to place deposits of less than the FDIC limit with each eligible institution. Any deposits in excess of this amount shall be awarded based on competitive bids. Documentation relating to rate quotes shall be maintained by Finance for six months. 4. Within the context of the City's policies regarding competitive bidding and portfolio limitations, deposits shall be distributed as evenly as possible between financial institutions. STATE OF CALIFORNIA LIMITATIONS As provided in the applicable sections of the Government Code, the State of California limits the investment vehicles available to local agencies. IV. INVESTMENT VEHICLES 14 SUITABLE AND AUTHORIZED INVESTMENTS City funds may be invested in the following subject to the following restrictions: 1. No more than 5% of the total portfolio may be invested in securities of any single issuer, other than the US Government, its agencies and instrumentalities (including Supranationals), approved local agency investment pools and money market funds. 2. The maximum stated final maturity of individual securities in the portfolio shall be five years, except that up to 10% of the portfolio can be invested in Treasury, municipal, and GSE securities maturing over 5 years. 3. The City shall maintain a minimum of three months of budgeted operating expenditures in short term investments The level of operating expenses shall be measured once per year and shall be based on the most recently adopted budget. 4. The duration of that part of the portfolio that is not needed for liquidity purposes shall typically be approximately equal to the duration of an index of US Treasury and Federal Agency Securities with maturities which meet the Authority’s needs for cashflow and level of risk tolerance (the Benchmark Index) plus or minus 10%. 15 IV. INVESTMENT VEHICLES 1. Treasury Obligations: Treasury bills, Treasury notes, Treasury bonds and Treasury STRIPS with maturities not exceeding five years from the date of purchase. 2. Federal Agency or Government Sponsored Enterprise (GSE) Securities: Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises with maturities not exceeding five years from the date of purchase. Municipal Securities: include obligations of the City, the State of California, any of the other 49 states, and any local agency within the State of California, provided that the securities are rated “A” or higher by at least one nationally recognized statistical rating organization. No more than 30% of the portfolio may be invested in these securities and no more than 5% of the portfolio may be invested in any issuer. 4. Commercial Paper: With “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a NRSRO. The entity that issues the commercial paper must meet all of the following conditions in either paragraph a or paragraph b: a) The entity meets the following criteria: (i) is organized and operating in the United States as a general corporation, (ii) has total assets in excess of five hundred million dollars ($500,000,000), and (iii) has debt other than commercial paper, if any, that is rated “A” or higher by a NRSRO. b) The entity meets the following criteria: (i) is organized within the United States as a special purpose corporation, trust, or limited liability company, (ii) has program-wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond, and (iii) has commercial paper that is rated “A-1” or higher, or the equivalent, by a NRSRO. Eligible commercial paper will have a maximum maturity of 270 days or less. No more than 40% of the City’s portfolio may be invested in commercial paper. The City may purchase no more than 10% of the outstanding commercial paper of any single issuer. 5. Medium Term Notes: Issued by corporations organized and operating in the U.S. or by depository institutions licensed by the U.S. or any state and operating within the U.S., except financial institutions shall not be considered. At the time of purchase, the notes must mature within five years and must be rated in the “A” category or better by two or more nationally recognized statistical-rating organizations (NRSRO). If the notes are issued by a financial institution they must be rated in the “AA” category or better by one or more NRSRO. At the time of purchase, no more than 30% of the City’s portfolio may be invested in medium term notes and no more than 5% of the City’s portfolio may be invested in any one issuer. 6. Bankers’ Acceptances: Not exceeding 180 days to maturity. At the time of purchase, no more than 40% of the City’s surplus funds may be invested in bankers’ acceptances and no more than 5% of the City’s surplus funds may be invested in bankers’ acceptances from any one bank. IV. INVESTMENT VEHICLES 16 7. Repurchase Agreements: With a term of the agreement not exceeding one year, collateralized by U.S. Treasury and agency securities listed in items 1 and 2 above. The value of the collateral underlying the agreement shall be 102%. The market value of the collateral shall be marked-to-the-market at least weekly based on the bid price and adjustments made when the value falls below 102%. Collateral shall be held in the City’s custodial bank as safekeeping agent. Repurchase Agreements shall be entered into only with dealers who have executed a Master Repurchase Agreement with the City and who are recognized as Primary Dealers with the Market Reports Division of the Federal Reserve Bank of New York. There are no limitations on the amount that can be invested in repurchase agreements. No more than 25% of the portfolio can be invested with any one financial institution. 8. Local Agency Investment Fund (LAIF): A local government investment pool established by the State Treasurer of California for the benefit of California local agencies. City funds can be invested in LAIF up to the maximum permitted by State Law. 9. Negotiable Certificates of Deposit: Issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally- or state-licensed branch of a foreign bank. At the time of purchase, the maturity of the certificate may not exceed five years, must be rated at least “AA” or “A-1” by one or more NRSRO, no more than 30% of the City’s surplus funds may be invested in certificates of deposit and no more than 5% of the City’s surplus funds may be invested in certificates from any one bank. 10. Collateralized Bank Deposits: Shall be evaluated in term of Federal Deposit Insurance Corporation (FDIC) coverage. For deposits in excess of the FDIC insured limit, approved collateral at the percentage above market value as specified by California Government Code, Sections 53651 et seq. and Sections 53652 et seq. shall be required. No more than 25% of the portfolio can be placed with any one financial institution. This limit may be exceeded if necessary to allow the City to meet its short term operational needs. 11. Money Market Mutual Funds: Shall be registered under the Investment Company Act of 1940. To be eligible for investment pursuant to this subdivision, these companies will either: (i) attain the highest ranking letter or numerical rating provided by at least two NRSROs or (ii) have retained an investment advisor registered or exempt from registration with the Securities and Exchange Commission with not less than five years of experience managing money market mutual funds and with assets under management in excess of $500,000,000. At the time of purchase, no more than 20% of the City’s surplus funds may be invested in money market mutual funds and no more than 10% of the City’s surplus funds may be invested in any one fund. 12. Local Government Investment Pools: Shares of beneficial interest issued by a joint powers authority (Local Government Investment Pools) organized pursuant to Government Code Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (o) of California Government Code Section 53601, inclusive. Each share will represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. IV. INVESTMENT VEHICLES 17 The Pool will be rated in a rating category “AAA” or its equivalent by a NRSRO. To be eligible under this section, the shares will maintain a stable net asset value (NAV) and the joint powers authority issuing the shares will have retained an investment adviser that meets all of the following criteria: a) The adviser is registered or exempt from registration with the Securities and Exchange Commission. b) The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (o) Government Code Section 53601, inclusive. c) The adviser has assets under management in excess of five hundred million dollars ($500,000,000). 13. Asset-Backed Securities (ABS): Securities such as a mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable- backed bond of a maximum of five years' maturity. ABS eligible for investment shall be issued by an issuer having an "A" or higher rating for the issuer's debt as provided by an NRSRO while the security acquired is rated "AA" or its equivalent or better by an NRSRO. No more than 20% of the City’s surplus funds may be invested in ABS and no more than 5% may be invested in any issuer. 14. Supranationals: United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Obligations issues by supranationals will be rated in a rating category "AA" or better by an NRSRO. No more than 30% of the City’s surplus funds may be invested in supranationals. Investments in Community Banks Provided that the requirements of these guidelines and California Code sections 53630-53653 are adhered to, funds may be invested in community banks within the San Luis Obispo County service area under the following criteria: a) 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. b) As indicated by Government Code Section 53635.2 the bank must receive an overall rating of not less than “satisfactory” from the appropriate federal supervisory agency for meeting the criteria specified in Section 2906 of Title 12 of the U.S. Code (Community Reinvestment Act of 1977). c) The bank must provide certification and supporting information that indicates at least 25% in loans is invested within the City of San Luis Obispo. d) 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 investment; e) Participating banks shall make a presentation to the City of San Luis Obispo Investment Oversight Committee about their community involvement at least once per year.. IV. INVESTMENT VEHICLES 18 f) Upon the Investment Oversight Committee’s review of community involvement, the existing investment will be evaluated for renewal by City finance staff. CITY POLICIES Debt Funds Reserve funds from the proceeds of debt issues shall be invested by the Director/City Treasurer in accordance with bond covenants. Deferred Compensation These policies do not apply to deferred compensation plans. Individual investment policies are adopted by each deferred compensation plan and approved independently by Council. Further, individual investments are directed solely by the employee. Prohibited Investment Vehicles and Practices 1. State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to, mutual funds (other than money market funds as described above in No. 10), unregulated and/or unrated investment pools or trusts, and futures and options. 2. In accordance with Government Code Section 53601.6, investment in inverse floaters, range notes or mortgage derived interest-only strips is prohibited. 3. Investment in any security that could result in a zero interest accrual if held to maturity is prohibited. 4. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. 5. Purchasing or selling securities on margin is prohibited. 6. The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited without Council approval. AUTHORIZED INVESTMENTS SUMMARY Investment Type Government Code Maximum Maturity Maximum % of Portfolio Quality Requirements San Luis Obispo Maximum Maturity Maximum % of Portfolio Quality Requirements 1. Treasury Obligations 5 Years None None 5 Yearsa None None 2. GSE Securities 5 Years None 5 Yearsa None IV. INVESTMENT VEHICLES 19 None None 3. Municipal Securitiesb 5 years None None 5 yearsa 30% per type; 5% per issuer “A” or better 4. Commercial Paper 270 Days 25% per type; none per issuer A-1/P-1/F-1; Long-term “A” 270 Days 25% per type; 10% per issuer A-1/P-1/F-1; Long-term “A” 5. Medium Term Notes 5 Years 30% per type; none per issuer “A” 5 Years 30% per type; 5% per issuer “A” or better “AA” or better for financial issuers 6. Bankers’ Acceptances 180 Days 40% per type; 30% per issuer None 180 Days 40% per type; 5% per issuer None 7. Repurchase Agreement 1 Year None None 1 Year None per type; 5% per counterparty Primary Dealers/ Collateralization requirements 8. LAIF N/A None None N/A Limit per Gov’t Code None 9. Negotiable CDs 5 Years 30% per type; none per issuer None 5 Years 30% per type; 5% per issuer “AA” or “A-1” 10. Collateralized Bank Deposits 5 Years None None 5 Years Non per type; 25% per institution None 11. Money Market Mutual Funds N/A 20% per type; 10% per issuer Highest rating of at least two NRSRO N/A 20% per type; 10% per issuer Highest rating of at least two NRSRO 12. Local Government Investment Pools (LGIPs) N/A N/A Advisor requirements N/A N/A Advisor requirements/“AAA” 13. Supranationals 5 Years 30% per type; none per issuer “AA” 5 Years 30% per type; none per issuer “AA” 14. Asset-Backed Securities (ABS) including Mortgage Pass-Throughs 5 Years 20% per type; none per issuer “AA” for issue; “A” for issuer 5 Years 20% per type; 5% per issuer “AA” for issue; “A” for issuer a. Up to 10% of the portfolio can be invested in Treasury and GSE securities maturing over 5 years. This includes municipal obligations. b. Includes State Obligations, City of San Luis Obispo obligations and California Local Agency obligations SOCIALLY RESPONSIBLE INVESTING IV. INVESTMENT VEHICLES 20 City funds should be guided by the following provisions when investing in securities of non- governmental entities: • Priority shall be given to investments in entities that support community well-being through safe and environmentally sound practices and fair labor practices. • Priority shall be given to investments in entities that promote equality of rights regardless of race, religion, color, ancestry, age, national origin, gender, marital status, sexual orientation, disability or place of birth. • Priority shall be given to investments in entities that promote community economic development. In addition the direct investment of City funds is restricted as follows: • No investments are to be made in tobacco, electronic cigarette, or tobacco-related products. • No new investments are to be made to support the direct production or drilling of fossil fuels. The City Treasurer shall periodically verify compliance with the guidelines either through direct contact with the company or with its Investors Responsibility Center. 21 V. INVESTMENT MATURITY In addition to the risks associated with the credit-worthiness of the financial institution and the security of the investment vehicle, the maturity period of investments is also a significant consideration in the management of the City's portfolio. In order to minimize the impact of market risk, it is intended that all investments will be held until maturity. In implementing this policy, the following guidelines will be used: 1. Projected cash flow requirements are the primary factor to be used in determining investment maturity terms. 2. After cash flow needs have been met, investments may be structured in longer-term securities within a disciplined investment program and process that is based on long-term expectations and is not speculative. 3. Investments may be sold before maturity for cash flow purposes or to rebalance the risk profile of the portfolio. 4. Council approval to make investments with terms in excess of 5 years is required at least three months prior to the initial investment. VIII. INVESTMENT REPORTING 22 To achieve a reasonable return on public funds, the following cash management practices will be followed: 1. Maintain maximum investment of all City funds not required to meet immediate cash flow needs while maintaining adequate compensating balances as required under the City's banking services agreement. 2. Pool resources available for investment from all City-administered funds, with interest earnings allocated to each of the funds in accordance with generally accepted accounting principles. 3. Maximize the City's cash flow through the immediate deposit of all cash receipts, use of direct deposits and wire transfers when available, and appropriate timing of payments to vendors. 4. Maximize the cash flow information available by using only one operating bank account. 23 VII. EVALUATION OF INVESTMENT PERFORMANCE As indicated in the Introduction section of this document, it is the City’s primary investment objective to achieve a reasonable rate of return on public funds while minimizing risks and preserving capital. In evaluating the performance of the City’s overall portfolio in achieving this objective, it is expected that yields on City investments will regularly meet or exceed the average return on three month U. S. Treasury Bills. It is also expected that the portfolio managed by the investment advisor will meet or exceed the BofA Merrill Lynch 0-to-5 year U.S. Treasury Bond Index. 24 VIII. INVESTMENT REPORTING Consistent with the guidance provided by California Government Code Section 53646and the City’s practice of reviewing the Financial Policies each year, the Finance Director/City Treasurer may submit the Investment Policy to the Council for consideration at a public meeting. This statement will generally be reviewed by the Council in conjunction with the Financial Plan review and approval process. In accordance with this Statement of Investment Policy, the City Treasurer is responsible for developing and maintaining this Investment Management Plan. Though optional, pursuant to California Government Code Section 53646 (b)(1), the Finance Director/City Treasurer will provide the Council and Investment Oversight Committee with a quarterly investment report providing the following information for each investment or security: 1. Issuer (financial institution) 2. Type of investment 3. Amount paid for the investment 4. The par amount of the investment, if applicable 5. Certificate or other reference number if applicable 6. Percentage yield on an annualized basis 7. Purchase date 8. Maturity date for each investment and the weighted average maturity of all the investments within the portfolio 9. Current book value 10. Current market value 11. Total cost and market value, including source of this valuation, of the City's portfolio 12. A description of the compliance with the Statement of Investment Policy 13. Information demonstrating that the City's expenditure requirements can be met in the following six months 14. Other information regarding the City's portfolio as appropriate The Investment Report shall include all investments as of the end of the quarter from all funds held in the City's portfolio, including funds held and invested by trustees exclusive of deferred compensation plan funds; and shall be issued within 30 days after the end of the quarterly reporting period. 25 IX. INVESTMENT MANAGEMENT PLAN REVIEW The Director/City Treasurer shall review the City's Statement of Investment Policy and Investment Management Plan on an ongoing basis to ensure its continued value in administering the City's portfolio. Additionally, the City shall maintain an Investment Oversight Committee whose membership shall consist of the City Administrative Officer, Assistant City Administrative Officer, Director/City Treasurer, Finance Operations Manager, the City's Independent Certified Public Accountant and a member of the public at large. The Investment Oversight Committee is responsible for: 1. Reviewing the City's portfolio at least quarterly to determine compliance with the Investment Management Plan; and 2. Reviewing and making recommendations as appropriate regarding the City's investment policies and practices at least annually. It is important to note the distinction between the committee's oversight responsibility in ensuring compliance with the policies and overall framework established in this plan, and the responsibility of the Director/City Treasurer in managing the City's investment portfolio in accordance with this plan. This distinction between management and oversight is especially important to make as it applies to the role of the City's independent auditors on this committee. The committee's oversight function is consistent with the scope of the auditor's engagement duties, which includes reviewing for compliance with City financial policies and procedures, and for making recommendations for improvements in the City's fiscal operations. However, in this oversight context, the auditors retain their independence from responsibility for managing any aspects of the City's operations; this responsibility lies solely with the City's elected leadership and staff. APPENDIX 29 APPENDIX INVESTMENT POLICY A. Responsibility. Investments and cash management is the responsibility of the City Treasurer or designee. It is the City’s policy to appoint the Director of Finance & Information Technology as the City’s Treasurer. B. Investment Objective. The City's primary investment objective is to achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default. Accordingly, the following factors will be considered in priority order in determining individual investment placements: 1. Safety 2. Liquidity 3. Yield C. Tax and Revenue Anticipation Notes: Not for Investment Purposes. There is an appropriate role for tax and revenue anticipation notes (TRANS) in meeting legitimate short-term cash needs within the fiscal year. However, many agencies issue TRANS as a routine business practice, not solely for cash flow purposes, but to capitalize on the favorable difference between the interest cost of issuing TRANS as a tax-preferred security and the interest yields on them if re-invested at full market rates. As part of its cash flow management and investment strategy, the City will only issue TRANS or other forms of short-term debt if necessary to meet demonstrated cash flow needs; TRANS or any other form of short- term debt financing will not be issued for investment purposes. As long as the City maintains its current policy of maintaining fund/working capital balances that are 25% of operating expenditures as reflected in the most recently adopted budget, it is unlikely that the City would need to issue TRANS for cash flow purposes except in very unusual circumstances. D. Selecting Maturity Dates. The City will strive to keep all idle cash balances fully invested through daily projections of cash flow requirements. To avoid forced liquidations and losses of investment earnings, cash flow and future requirements will be the primary consideration when selecting maturities. E. Diversification. As the market and the City's investment portfolio change, care will be taken to maintain a healthy balance of investment types and maturities. F. Authorized Investments. The City will invest only in those instruments authorized by the California Government Code.. The City will not invest in stock, will not speculate and will not deal in futures or options. The investment market is highly volatile and continually offers new and creative opportunities for enhancing interest earnings. Accordingly, the City will thoroughly investigate any new investment vehicles before committing City funds to them. G. Authorized Institutions. Current financial statements will be maintained for each institution in which cash is invested. Investments will be limited to 20% of the total net worth of any institution and may be reduced further or refused altogether if an institution's financial situation becomes unhealthy. APPENDIX 30 H. Consolidated Portfolio. In order to maximize yields from its overall portfolio, the City will consolidate cash balances from all funds for investment purposes, and will allocate investment earnings to each fund in accordance with generally accepted accounting principles. I. Safekeeping. Ownership of the City's investment securities will be protected through third-party custodial safekeeping. J. Investment Management Plan. The City Treasurer will develop and maintain an Investment Management Plan that addresses the City's administration of its portfolio, including investment strategies, practices and procedures. K. Investment Oversight Committee. 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 regarding investment management practices. Members include the City Administrative Officer, Assistant CAO, Director of Finance/City Treasurer, Revenue Manager and the City’s independent auditor. L. Reporting. The City Treasurer will develop and maintain a comprehensive, well-documented investment reporting system, which will comply with Government Code Section 53646. This reporting system will provide the Council and the Investment Oversight Committee with appropriate investment performance information. M. If the City has an investment advisor, the investment advisor may use its own list of authorized broker/dealers to conduct transactions on behalf of the City. N. Socially Responsible Investing. The City should prioritize investments that support community well-being and equal rights. The City will not continue to invest in entities involved to the tobacco industry, nor in direct producers and drillers of fossil fuels. 31 APPENDIX APPENDIX 32 Glossary Asset-backed securities (ABS) are securities whose income payments and hence value is derived from and collateralized (or "backed") by a specified pool of underlying assets which are receivables. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can comprise common payments credit cards, auto loans, mortgage loans, and other types of assets. Interest and principal is paid to investors from borrowers who are paying down their debt. Bankers’ Acceptances are short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at maturity. An acceptance is a high-grade negotiable instrument. Benchmark is a market index used as a comparative basis for measuring the performance of an investment portfolio. A performance benchmark should represent a close correlation to investment guidelines, risk tolerance and duration of the actual portfolio's investments. Bond is a financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the bond) a specified stream of future cash flows, including periodic interest payments and a principal repayment. Broker-Dealer is a person or a firm who can act as a broker or a dealer depending on the transaction. A broker brings buyers and sellers together for a commission. They do not take a position. A dealer acts as a principal in all transactions, buying and selling for his own account. Certificates of Deposit 1. Negotiable Certificates of Deposit are large-denomination CDs. They are issued at face value and typically pay interest at maturity, if maturing in less than 12 months. CDs that mature beyond this range pay interest semi-annually. Negotiable CDs are issued by U.S. banks (domestic CDs), U.S. branches of foreign banks (Yankee CDs), and thrifts. There is an active secondary market for negotiable domestic and Yankee CDs. However, the negotiable thrift CD secondary market is limited. Yields on CDs exceed those on U.S. treasuries and agencies of similar maturities. This higher yield compensates the investor for accepting the risk of reduced liquidity and the risk that the issuing bank might fail. State law does not require the collateralization of negotiable CDs. 2. Non-negotiable Certificates of Deposit are time deposits with financial institutions that earn interest at a specified rate for a specified term. Liquidation of the CD prior to maturity incurs a penalty. There is no secondary market for those instruments, therefore, they are not liquid. They are classified as public deposits and financial institutions are APPENDIX 33 required to collateralize them. Collateral may be waived for the portion of the deposits that are covered by FDIC insurance. Collateral refers to securities, evidence of deposits, or other property that a borrower pledges to secure repayment of a loan. It also refers to securities pledged by a bank to secure deposits. In California, repurchase agreements, reverse repurchase agreements, and public deposits must be collateralized. Commercial Paper is a short-term, unsecured, promissory note issued by a corporation to raise working capital. Corporate Note is a debt instrument issued by a corporation with a maturity of greater than one year and less than ten years. Delivery Versus Payment (“DVP”) is a settlement procedure in which securities are delivered versus payment of cash, but only after cash has been received. Most security transactions, including those through the Fed Securities Wire system and Depository Trust Company (“DTC”), are done DVP as a protection for both the buyer and seller of securities. Depository Trust Company (“DTC”) is a firm through which members can use a computer to arrange for securities to be delivered to other members without physical delivery of certificates. A member of the Federal Reserve System and owned mostly by the New York Stock Exchange, the Depository Trust Company uses computerized debit and credit entries. Most corporate securities, commercial paper, CDs, and BAs clear through DTC. Federal Agency Obligations are issued by U.S. Government Agencies or Government Sponsored Enterprises (“GSE”). Although they were created or sponsored by the U.S. Government, most Agencies and GSEs are not guaranteed by the United States Government. Examples of these securities are notes, bonds, bills and discount notes issued by Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”), the Federal Home Loan Bank system (“FHLB”), and Federal Farm Credit Bank (“FFCB”). The Agency market is a very large and liquid market, with billions traded every day. Investment Advisor is a company that provides professional advice managing portfolios, investment recommendations and/or research in exchange for a management fee. Issuer means any corporation, governmental unit, or financial institution that borrows money through the sale of securities. Liquidity refers to the ease and speed with which an asset can be converted into cash without loss of value. In the money market, a security is said to be liquid if the difference between the bid and asked prices is narrow and reasonably sized trades can be done at those quotes. Local Agency Investment Fund (“LAIF”) is a special fund in the State Treasury that local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum of $50 million for any California public Agency. It offers high liquidity because deposits can be converted to cash in twenty-four hours and no interest is lost. All interest is distributed to those APPENDIX 34 agencies participating on a proportionate share determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly via direct deposit to the Agency’s LAIF account. The State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter of one percent of the earnings. Market Value is the price at which a security is trading and could presumably be purchased or sold. Maturity is the date upon which the principal or stated value of an investment becomes due and payable. Medium-Term Notes are debt obligations issued by corporations and banks, usually in the form of unsecured promissory notes. These are negotiable instruments that can be bought and sold in a large and active secondary market. For the purposes of California Government Code, the phrase “Medium-Term” refers to a maximum remaining maturity of five years or less. They can be issued with fixed or floating-rate coupons, and with or without early call features, although the vast majority are fixed-rate and non-callable. Corporate notes have greater risk than Treasuries or Agencies because they rely on the ability of the issuer to make payment of principal and interest. Money Market Fund is a type of safe investment comprising a variety of short-term securities with high quality and high liquidity. The fund provides interest to shareholders and must strive to maintain a stable net asset value (“NAV”) of $1 per share. NRSRO is a “Nationally Recognized Statistical Rating Organization.” A designated rating organization that the SEC has deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank debt issues. Only ratings of a NRSRO may be used for the regulatory purposes of rating. Includes Moody’s, S&P, Fitch, and Duff & Phelps among others. Principal describes the original cost of a security. It represents the amount of capital or money that the investor pays for the investment. Repurchase Agreements are short-term investment transactions. Banks buy temporarily idle funds from a customer by selling him U.S. Government or other securities with a contractual agreement to repurchase the same securities on a future date at an agreed upon interest rate. Repurchase Agreements are typically for one to ten days in maturity. The customer receives interest from the bank. The interest rate reflects both the prevailing demand for Federal Funds and the maturity of the Repo. Repurchase Agreements must be collateralized. Supranational entities are formed by two or more central governments with the purpose of promoting economic development for the member countries. Supranational institutions finance their activities by issuing debt, such as supranational bonds. Examples of supranational institutions include the European Investment Bank and the World Bank. Similarly to the government bonds, the bonds issued by these institutions are considered direct obligations of the issuing nations and have a high credit rating. U.S. Treasury Issues are direct obligations of the United States Government. They are highly liquid and are considered the safest investment security. U.S. Treasury issues include: APPENDIX 35 1. Treasury Bills which are non-interest-bearing discount securities issued by the U.S. Treasury to finance the national debt. Bills are currently issued in one, three, six, and twelve month maturities. 2. Treasury Notes that have original maturities of one to ten years. 3. Treasury Bonds that have original maturities of greater than 10 years. Yield to Maturity is the rate of income return on an investment, minus any premium above par or plus any discount with the adjustment spread over the period from the date of the purchase to the date of maturity of the bond . INVESTMENT MANAGEMENT PLAN April May 20142015 2 INVESTMENT MANAGEMENT PLAN Katie Lichtig, City Manager Prepared by the Department of Finance & Information Technology Wayne Padilla, Finance Director/City Treasurer 3 INVESTMENT MANAGEMENT PLAN Table of Contents Introduction Purpose .................................................................................................................................................... 1 Primary Investment Objective ................................................................................................................ 1 Scope of Investment Management Plan ................................................................................................. 3 Use of State Guidelines ........................................................................................................................ 34 Preparation and Administration of the Plan ........................................................................................... 4 Investment Authority and Responsibilities Authorized Investment Officers ............................................................................................................. 5 Internal Controls ..................................................................................................................................... 5 Investment Management Resources ....................................................................................................... 5 Evaluation of Investment Officer Actions .............................................................................................. 6 Use of an Investment Advisor ................................................................................................................ 7 Capital Preservation and Risk Overview ................................................................................................................................................. 9 Portfolio Diversification Practices .......................................................................................................... 9 Eligible Financial Institutions Portfolio Diversification and Credit-Worthiness Standards ................................................................. 10 Certification and Reporting Requirements ........................................................................................... 10 Individual Placement of Investments ................................................................................................... 10 Individual Placement of Deposits ......................................................................................................... 11 Investment Vehicles State of California Limitations ........................................................................................................... 112 Suitable and Authorized Investments………………………………………………………………112 City Policies ........................................................................................................................................ 143 Authorized Investment Summary ......................................................................................................... 15 Investment Maturity ........................................................................................................................................ 16 Cash Management ............................................................................................................................................ 17 Evaluation of Investment Performance ......................................................................................................... 18 Investment Reporting ...................................................................................................................................... 19 Investment Management Plan Review ........................................................................................................... 20 Appendix Investment Policy ................................................................................................................................. 21 Resolution No. 8477 Appointing the Director of Finance as City Treasurer ....................................... 23 Resolution No. 8523 Approving the Investment Management Plan ................................................... 24 4 I. INTRODUCTION PURPOSE The purpose of the investment management plan is to establish strategies, practices and procedures to be used in administering the City's portfolio in accordance with the City's Statement of Investment Policy. Included in the Appendix is a copy of the City's most recently adopted Investment Policy., which was adopted by the Council in conjunction with their approval of the Financial Plan. PRIMARY INVESTMENT OBJECTIVE The City's primary investment objective is to achieve a reasonable rate of return on public funds while minimizing the potential for capital losses arising from market changes or issuer default. Although the generation of revenues through interest earnings on investments is an appropriate City goal, the primary consideration in the investment of City funds is capital preservation in the overall portfolio. As such, the City's yield objective is to achieve a reasonable rate of return on City investments rather than the maximum generation of income, which could expose the City to unacceptable levels of risk. In determining individual investment placements, the following factors shall be considered in priority order: 1. Safety 2. Liquidity 3. Yield. Safety Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, the City will diversify its investments so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. The objective is to mitigate credit risk and interest rate risk summarized as follows: Credit Risk. Credit risk is the risk that a security or a portfolio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay its debt. The City shall mitigate credit risk by adopting the following strategies: 1. Limiting investments to the safest types of securities. 2. Pre-qualifying the financial institutions, broker/dealers, intermediaries and advisors with which the City will do business. If the City has an investment advisor, the investment advisor may use its own list of authorized broker/dealers to conduct transactions on behalf of the City. 3. It is the intent of the City to diversify the investments within the portfolio to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturities. The asset allocation in the portfolio should, however, be flexible I. INTRODUCTION 5 depending upon the outlook for the economy, the securities market, and the City’s anticipated cash flow needs. 4. No more than 5% of the total portfolio may be invested in securities of any single issuer, other than the US Government, its agencies and instrumentalities (including Supranationals), approved local agency investment pools and money market funds. 5. The City may elect to sell a security prior to its maturity and record a capital gain or loss in order to improve the quality, liquidity or yield of the portfolio in response to market conditions or the City’s risk preferences. 6. If securities owned by the City are downgraded by either Moody’s or S&P to a level below the quality required by this Investment Management Plan, it shall be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. a. If a security is downgraded below the level required by this policy, the City Treasurer determine whether to sell or hold the security based on its current maturity, the economic outlook for the issuer, and other relevant factors. b. If a decision is made to retain a downgraded security in the portfolio, it will be monitored and reported monthly to the City Council. Interest Rate Risk. Interest rate risk is the risk that the portfolio will decline in value (or will not optimize its value) due to changes in the general level of interest rates. The City recognizes that, over time, longer-term portfolios achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The City will mitigate interest rate risk by providing adequate liquidity for short-term cash needs, and by making some longer-term investments only with funds that are not needed for current cash flow purposes. The City further recognizes that certain types of securities, including variable rate securities, securities with principal pay downs prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to interest rate risk: 1. The maximum stated final maturity of individual securities in the portfolio shall be five years, except that up to 10% of the portfolio can be invested in Treasury and GSE securities maturing over 5 years. as otherwise stated in this Investment Management Plan. 2. The City shall maintain a minimum of three months (20%) of budgeted operating expenditures in short term investments (90 days or less). The level of operating expenses shall be measured once per year and shall based on the most recently adopted budget. 3. The duration of that part of the portfolio that is not needed for liquidity purposes shall typically at all times be approximately equal to the duration of an index of US Treasury and I. INTRODUCTION 6 Federal Agency Securities with maturities which meet the Authority’s needs for cashflow and level of risk tolerance (the Benchmark Index) plus or minus 10%. Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same-day liquidity for short-term funds. Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Yield: Return on Investments The City’s investment portfolio shall be designed with the objective of attaining a market benchmark rate of return throughout budgetary and economic cycles, commensurate with the City’s investment risk constraints and the cash flow characteristics of the portfolio. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a reasonable return relative to the risk being assumed. Securities shall not be sold before maturity with the following exceptions: A declining credit security could be sold early to minimize loss of principal. A security swap would improve the quality, yield or target duration in the portfolio. Liquidity needs of the portfolio require that the security be sold. A capital gain would be realized that better positions the overall portfolio in achieving Investment Policy goals. SCOPE OF INVESTMENT MANAGEMENT PLAN Included in the scope of the City's investment management plan are the following major guidelines and practices to be used in achieving the City's primary investment objective: 1. Investment authority and responsibilities 2. Capital preservation and risk 3. Eligible financial institutions 4. Allowable investment vehicles 5. Investment maturity 6. Cash management 7. Evaluation of investment performance 8. Investment reporting 9. Investment management plan review I. INTRODUCTION 7 These guidelines apply to all cash-related assets included within the scope of the City's audited financial statements and held either directly by the City or held and invested by trustees or fiscal agents. The only exception is funds invested in the City's deferred compensation plan, which are controlled by federal law, specific provisions of the City's adopted plan and individual employee decisions. USE OF STATE GUIDELINES The California Government Code (including Ssections 16429.1-16429.4, 16481.2, 53601 53600- 53609, and 53630-5368634, 53635, 53635.2, 53635.3, 53635.8, 53637-53638 and 53684) of the State of California regulates the public agency investment and investment reporting practices. It is the policy of the City of San Luis Obispo to use the State's provisions for local government investments in the developing and implementing the City's investment policies and practices. PREPARATION AND ADMINISTRATION OF THE PLAN As set forth in the Statement of Investment Policy, the City Treasurer is responsible for developing and monitoring the Investment Management Plan. Under this direction, the City's first Investment Management Plan was prepared and issued by the City Treasurer in December of 1989. As it was originally viewed as an administrative “companion” to the Council adopted Investment Policy, the Council did not formally approve the Investment Management Plan at that time, although it was distributed to them. However, given legitimate public concerns regarding the stewardship of funds arising from the unprecedented losses recently experienced by the Orange County investment pool, formal approval of the Investment Management Plan by the Council is now recommended in order to provide a broader awareness and understanding of the strategic framework, policy guidelines and administrative practices followed in managing the City's investments. As required recommended by under Government Code Sections 16481.2 and 53646, the Council will review the Statement of Investment Policy annually. The Council will only formally review the Investment Management Plan at a public meeting when significant changes in strategies, practices or procedures are proposed. In the interim, the City Treasurer is responsible for keeping the Investment Management Plan up-to-date to reflect changes in legislation, organizational structure, and other policies and administrative procedures approved by the Council. 8 II. INVESTMENT AUTHORITY AND RESPONSIBILITIES AUTHORIZED INVESTMENT OFFICERS Authority to manage the investment portfolio is granted to the Director of Finance & Information Technology (Director/City Treasurer) pursuant to Resolution No. 8477. Responsibility for the day- to-day operation of the investment program is may be delegated to the Finance Operations Manager, who is responsible for carrying-out established written procedures and internal controls for the operation of the investment program consistent with this plan. These Pprocedures should include references to: safekeeping, delivery vs payment, investment accounting, repurchase agreements, wire transfer agreements, collateral/depository agreements and banking services contracts. Transactions Directed by City Staff. No person may engage in an investment transaction except as provided under the terms of this plan and the procedures established by the Director/City Treasurer. Although the Director/City Treasurer may delegate these duties to another official in the Department of Finance & Information Technology, every investment transaction must be reviewed and approved by the Director/City Treasurer. Additionally, the Director/City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. Transaction Directed by an Investment Advisor. The City may engage the services of an external investment adviser to assist in the management of the City’s investment portfolio in a manner consistent with the City’s objectives. The external investment adviser may be granted discretion to purchase and sell investment securities in accordance with the City’s Investment Policy and this Investment Management Plan. The investment adviser must be registered under the Investment Advisers Act of 1940. (The investment advisor shall be required to provide a certification that it has read and understands the applicable sections of the California Government Code relating to municipal investments, this Investment Management Plan and the City’s Investment Policy). INTERNAL CONTROLS The Director/City Treasurer is responsible for ensuring compliance with the City's Investment Policy as well as for establishing systems of internal control designed to prevent losses due to fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by City officers and employees. Additionally, the Director/City Treasurer is responsible for the physical security of City investments and shall use custodial safekeeping for negotiable and bearer instruments whenever possible. INVESTMENT MANAGEMENT RESOURCES The concept of reasonable assurance recognizes that the: 1. Cost of a control procedure should not exceed the benefits likely to be derived. 2. Valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Director/City Treasurer shall establish a process for annual independent review by an external auditor to assure compliance with policies and procedures. II. INVESTMENT AUTHORITY AND RESPONSIBILITIES 9 Internal controls shall address the following points: 1. Separating transaction authority from accounting and record keeping. By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved. 2. Custodial safekeeping. Securities purchased from any bank or dealer including appropriate collateral (as defined by State Law) shall be placed with an independent third party for custodial safekeeping as evidenced by safekeeping receipts in the City of San Luis Obispo’s name. 3. Avoiding physical delivery securities. Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities. 4. Delivery versus payment. All trades where applicable will be executed by delivery vs payment (DVP). This ensures that securities are deposited in the eligible financial institution before the release of funds. Securities will be held by a third party custodian as evidenced by safekeeping receipts. 5. Clearly delegating authority to subordinate staff members. Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities. 6. Confirming telephone transactions for investments and wire transfers in writing. Due to the potential for error and improprieties arising from telephone transactions, all telephone transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead or e-mail and the safekeeping institution has a list of authorized signatures. 7. Developing wire transfer agreements with the lead bank or third party custodian. This agreement should outline the various controls, security provisions, and delineate responsibilities of each party making and receiving wire transfers. EVALUATION OF INVESTMENT OFFICER ACTIONS The standard of prudence to be applied by the Director of Finance/City Treasurer shall be the "prudent investor" standard, as defined under Government Code Section 53600.3 which states: When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the CityAgency. Within the limitations of this II. INVESTMENT AUTHORITY AND RESPONSIBILITIES 10 section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law. Investment officers acting in accordance with written procedures and this Investment Management Plan, and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of securities are carried out in accordance with the terms of this plan. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. In accordance with Government Code Section 53607, the Treasurer shall prepare a report of monthly investment transactions for the City Council’s review. In addition, the City Council shall determine each year whether the delegation of investment authority to the Treasurer shall be renewed. USE OF AN INVESTMENT ADVISOR Background In September 2007, the Council approved the use of an investment advisor in more effectively managing the City’s portfolio. As noted at that time, there are three primary reasons for contracting with an investment advisor: 1. Expertise. By contracting for portfolio management services, the City benefits from specialized professional expertise, risk management and continuity in the investment function. With today's volatile market and complex investment instruments, a professional investment manager is best suited to achieving the City's investment goals while minimizing portfolio risk. The investment advisor's knowledge of securities and access to the market should also result in enhanced investment earnings. 2. Portfolio Diversification. Prior to contracting with an investment, the City's portfolio was primarily invested in the State of California Local Agency Investment Fund (LAIF). Over the past couple of years, because of staffing resource limitations and competing priorities, as portfolio investments matured, the proceeds were largely placed in LA1F rather than reinvested in other instruments. While LAIF is a secure investment that was yielding market earnings at the time that met the City's investment yield objective, a concentration of the City's portfolio in LAIF did not meet the diversification objective of the Investment Management Plan. Turning to the expertise of an outside professional allows the City to better diversity its portfolio, using various investment strategies and instruments as appropriate. II. INVESTMENT AUTHORITY AND RESPONSIBILITIES 11 3. More Effective Use of Staff Resources. Contracting with an investment advisor frees-up City staff to perform functions where they can better use their expertise and add value. Additionally, in times of staffing turnover, continuity in the investment function is better assured. The Council approved issuing a comprehensive request for proposals (RFP) to a broad range of qualified investment advisors and authorized the City Administrative Officer (CAO) to award the contract most qualified proposer. Following a detailed review of the ten proposals received response to the City’s RFP, the CAO awarded the contract to Chandler Asset Management in December 2007. Investment Advisor Authority As set forth in the RFP approved by the Council, the Investment Advisor has discretionary authority over the portfolio that it manages on behalf of the City, subject to the following restrictions: 1. Compliance with the Investment Management Plan. As set forth above under “Authorized Investment Officers,” the investment advisor must act in accordance with the City’s primary investment objectives and within the guidelines set forth in the Investment Management Plan. 2. Transition Plan. Based on detailed analysis of cash flow needs, the City will retain about 15% of its portfolio in LAIF and other short-term investments. The City will also retain control over investments for debt service reserve requirements, certificates of deposit and the U.S. Treasury Bond maturing in 2016 (market value of $1.4 million). The balance of the City’s portfolio (about $50 million in April 2008) will be managed by the Investment Advisor. The initial configuration of the portfolio will be approved by the Director/City Treasurer before placement. 3. Sale of Investments with a Capital Loss. The investment advisor will consult with the Director/City Treasurer before selling investments at a capital loss, which may be appropriate in repositioning the portfolio for better gains in the future in meeting the City’s performance goals. 12 III. CAPITAL PRESERVATION AND RISK OVERVIEW Some level of risk is inherent in any investment transaction. Losses may be incurred due to issuer default, market price changes or technical cash flow complications such as investments in non- marketable certificates of deposit. Diversification of the City's portfolio by institution, investment vehicle and maturity term is the primary tool available to the City in minimizing investment risk and capital losses by safeguarding the overall portfolio from any individual loss. PORTFOLIO DIVERSIFICATION PRACTICES The following sections summarize the City's major portfolio diversification practices and guidelines in determining: 1. Eligible financial institutions 2. Investment vehicles 3. Investment maturity Portfolio limitations included in these guidelines are to be based on the portfolio composition and Investment Management Plan policies in effect at the time of placement; the actual composition of the City's investments may vary over time from plan limitations due to overall portfolio changes from when the individual placement was made as well as changes in the City's Investment Management Plan.. Credit criteria listed in these guidelines refer to the credit rating at the time the security is purchased. If an investment’s credit rating falls below the minimum rating required at the time of purchase, the Finance Director/City Treasurer will consult with the Investment Advisor and perform a timely review to decide whether to sell or hold the investment. 13 IV. INVESTMENT VEHICLES PORTFOLIO DIVERSIFICATION AND CREDIT-WORTHINESS STANDARDS The following general criteria relating to portfolio diversification and credit-worthiness will be used in selecting depositories and broker/dealers (financial institutions) in the placement of City investments: 1. The financial capacity and credit-worthiness of the financial institution shall be considered before the placement of City investments. 2. Current financial statements shall be maintained for each institution in which or through which cash is invested. 3. No more than 5% of the City's portfolio (exclusive of Treasury obligations, federal agency securities, government sponsored enterprise (GSE) securitiesgovernment agency issues, or LAIF, local government investment pools, Supranationals, and and money market funds, and the City’s main financial institution) shall be placed with any financial institution. 4. No more than 25% of the City's portfolio shall be invested in collateralized certificates of deposit issued by savings and loan institutions. 5. Certificates of deposit (negotiable and collateralized) placed by the City shall not constitute more than 15% of the total assets of the institution;; and negotiable certificates of deposit will only be placed with and the institutions must have with total assets in excess of $200 million. and that maintain a ratio of equity to total assets of at least 5%. 5. CERTIFICATION AND REPORTING REQUIREMENTS Unless the City has engaged an investment advisor, tThe City shall establish a list of qualified securities dealers based on a certification submitted by all financial institutions with which the City has an investment relationship. The certification shall state that the institution has reviewed the City's Investment Management Plan and that it will: 1. Exercise due diligence in monitoring the activities of its officers and employees engaged in transactions with the City. 2. Ensure that all of its officers and employees offering investments to the City are trained in the precautions appropriate to public sector investments. 3. Submit audited financial statements prepared by an independent certified public accountant to the City on an annual basis within 180 days after the end of the institution's fiscal year. INDIVIDUAL PLACEMENT OF INVESTMENTS IV. INVESTMENT VEHICLES 14 A list will be maintained of financial institutions and depositories authorized to provide investment services. In addition, a list will be maintained of approved security broker/dealers selected by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at least five years of operation). These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate: 1. Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines 2. Proof of National Association of Securities Dealers (NASD) certification (not applicable to Certificate of Deposit counterparties) 3. Proof of state registration 4. Certification of having read and understood and agreeing to comply with the applicable sections of the California Government Code Section 53600 et seq. and the City’s Investment Policy and that all securities recommended shall be suitable for the City of San Luis Obispo. The investment advisor (or City staff if applicable) will strive to obtain competitive bids from at least three brokers or financial institutions on all purchases and sales of investment instruments whenever possible. INDIVIDUAL PLACEMENT OF DEPOSITS Individual placement of negotiable, collateralized and other time certificates of deposit with eligible financial institutions shall be based on the following practices and procedures: 1. Deposits shall only be placed with financial institutions maintaining offices within the City of San Luis Obispo. 2. Unless collateralized by eligible securities as provided in Sections 53651 and 53652 of the Government Code, the maximum amount of Certificates of Deposit to be placed with any single institution is the amount up to the Federal Deposit Insurance Corporation (FDIC) limit$100,000. 3. Reasonable efforts will be made to place deposits of less than the FDIC limit $100,000 with each eligible institution. Any deposits in excess of this amount shall be awarded based on competitive bids. Documentation relating to rate quotes shall be maintained by Finance for six months. 4. Within the context of the City's policies regarding competitive bidding and portfolio limitations, deposits shall be distributed as evenly as possible between financial institutions. IV. INVESTMENT VEHICLES 15 STATE OF CALIFORNIA LIMITATIONS As provided in Sections 53601, 53635, and 16429.1the applicable sections of the Government Code, the State of California limits the investment vehicles available to local agencies. SUITABLE AND AUTHORIZED INVESTMENTS City funds may be invested in the following subject to the following restrictions: 1. No more than 5% of the total portfolio may be invested in securities of any single issuer, other than the US Government, its agencies and instrumentalities (including Supranationals), approved local agency investment pools and money market funds. 2. The maximum stated final maturity of individual securities in the portfolio shall be five years, except that up to 10% of the portfolio can be invested in Treasury, municipal, and GSE securities maturing over 5 years. 3. The City shall maintain a minimum of three months of budgeted operating expenditures in short term investments The level of operating expenses shall be measured once per year and shall be based on the most recently adopted budget. 4. The duration of that part of the portfolio that is not needed for liquidity purposes shall typically be approximately equal to the duration of an index of US Treasury and Federal Agency Securities with maturities which meet the Authority’s needs for cashflow and level of risk tolerance (the Benchmark Index) plus or minus 10%. 16 IV. INVESTMENT VEHICLES 1. Treasury Obligations: Treasury bills, Treasury notes, Treasury bonds and Treasury STRIPS with maturities not exceeding five years from the date of purchase. 2. Federal Agency or Government Sponsored Enterprise (GSE) Securities: Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises with maturities not exceeding five years from the date of purchase.Debentures, discount notes, global securities, callable securities and stripped principal or coupons with maturities not exceeding five years from the date of purchase issued by the following: Federal National Mortgage Association (FNMA), Federal Farm Credit Banks (FFCB), Federal Home Loan Banks (FHLB), and Federal Home Loan Mortgage Corporation (FHLMC). For the purposes of this paragraph, a "weighted average life" will not constitute a stated final maturity. To be approved, GSE securities must be rated AAA by either Moody’s or Standard & Poor’s. 3. Municipal Securities: include obligations of the City, the State of California, any of the other 49 states, and any local agency within the State of California, provided that the securities are rated “A” or higher by at least one nationally recognized statistical rating organization. No more than 30% of the portfolio may be invested in these securities and no more than 5% of the portfolio may be invested in any issuer. The maximum maturity does not exceed five years. 4. Commercial Paper: With “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a NRSRO. The entity that issues the commercial paper must meet all of the following conditions in either paragraph a or paragraph b: a) The entity meets the following criteria: (i) is organized and operating in the United States as a general corporation, (ii) has total assets in excess of five hundred million dollars ($500,000,000), and (iii) has debt other than commercial paper, if any, that is rated “A” or higher by a NRSRO. b) The entity meets the following criteria: (i) is organized within the United States as a special purpose corporation, trust, or limited liability company, (ii) has program-wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond, and (iii) has commercial paper that is rated “A-1” or higher, or the equivalent, by a NRSRO. Eligible commercial paper will have a maximum maturity of 270 days or less. No more than 40% of the City’s portfolio may be invested in commercial paper. The City may purchase no more than 10% of the outstanding commercial paper of any single issuer. Issued by a corporation organized and operating in the U.S. and having assets in excess of $500,000,000. The paper must be denominated in U.S. currency with a maturity not exceeding 270 days from the date of purchase. It must be rated at least A-1/P-1/F-1 by one or more nationally recognized statistical-rating organizations (NRSRO). If the commercial paper issuer has issued long-term debt it must be rated “A”. At the time of purchase, no more than 25% of the City’s surplus funds may be invested in commercial paper and no more than 5% of the City’s surplus funds may be invested in any one issuer. IV. INVESTMENT VEHICLES 17 4.5.Medium Term Notes: Issued by corporations organized and operating in the U.S. or by depository institutions licensed by the U.S. or any state and operating within the U.S., except financial institutions shall not be considered. At the time of purchase, the notes must mature within five years and must be rated in the “AA” category or better by one two or more nationally recognized statistical-rating organizations (NRSRO). If the notes are issued by a financial institution they must be rated in the “AA” category or better by one or more NRSRO. At the time of purchase, no more than 30% of the City’s surplus fundsportfolio may be invested in medium term notes and no more than 5% of the City’s surplus fundsportfolio may be invested in any one issuer. 5.6.Bankers’ Acceptances: Not exceeding 180 days to maturity. At the time of purchase, no more than 40% of the City’s surplus funds may be invested in bankers’ acceptances and no more than 5% of the City’s surplus funds may be invested in bankers’ acceptances from any one bank. 6.7.Repurchase Agreements: With a term of the agreement not exceeding one year, collateralized by U.S. Treasury and agency securities listed in items 1 and 2 above. The value of the collateral underlying the agreement shall be 102%. The market value of the collateral shall be marked-to-the-market at least weekly based on the bid price and adjustments made when the value falls below 102%. Collateral shall be held in the City’s custodial bank as safekeeping agent. Repurchase Agreements shall be entered into only with dealers who have executed a Master Repurchase Agreement with the City and who are recognized as Primary Dealers with the Market Reports Division of the Federal Reserve Bank of New York. There are no limitations on the amount that can be invested in repurchase agreements. No more than 25% of the portfolio can be invested with any one financial institution. 8. Local Agency Investment Fund (LAIF): A local government investment pool established by the State Treasurer of California for the benefit of California local agencies. City funds can be invested in LAIF up to the maximum permitted by State Law. 9. Negotiable Certificates of Deposit: Issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally- or state-licensed branch of a foreign bank. At the time of purchase, the maturity of the certificate may not exceed five years, must be rated at least “AA” or “A-1” by one or more NRSRO, no more than 30% of the City’s surplus funds may be invested in certificates of deposit and no more than 5% of the City’s surplus funds may be invested in certificates from any one bank. 10. Collateralized Bank Deposits: Shall be evaluated in term of Federal Deposit Insurance Corporation (FDIC) coverage. For deposits in excess of the FDIC insured limitmaximum of $100,000, approved collateral at the percentage above market value as specified by California Government Code, Sections 53651 et seq. and Sections 53652 et seq. shall be required. No more than 25% (5%) of the portfolio can be placed with any one financial institution. This limit may be exceeded if necessary to allow the City to meet its short term operational needs. IV. INVESTMENT VEHICLES 18 10. 11. Money Market Mutual Funds: Shall be registered under the Investment Company Act of 1940. To be eligible for investment pursuant to this subdivision, these companies will either: (i) attain the highest ranking letter or numerical rating provided by at least two NRSROs or (ii) have retained an investment advisor registered or exempt from registration with the Securities and Exchange Commission with not less than five years of experience managing money market mutual funds and with assets under management in excess of $500,000,000. which: 12. 13. Are “no-load” (no commission fee shall be charged on purchases or sales of shares) 14. Have a policy to strive to maintain a constant daily net asset value per share 15. Limit assets of the fund to those securities authorized in this Investment Management Plan 16. Have a maximum stated maturity and weighted average maturity in accordance with Federal Securities Regulation 2A-7 17.11. e rated in the highest ranking or the highest letter and numerical rating provided by not less than two NRSRO’s. At the time of purchase, no more than 20% of the City’s surplus funds may be invested in money market mutual funds and no more than 10% of the City’s surplus funds may be invested in any one fund. 12. Local Government Investment Pools: Shares of beneficial interest issued by a joint powers authority (Local Government Investment Pools) organized pursuant to Government Code Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (o) of California Government Code Section 53601, inclusive. Each share will represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. The Pool will be rated in a rating category “AAA” or its equivalent by a NRSRO. To be eligible under this section, the shares will maintain a stable net asset value (NAV) and the joint powers authority issuing the shares will have retained an investment adviser that meets all of the following criteria: a) The adviser is registered or exempt from registration with the Securities and Exchange Commission. b) The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (o) Government Code Section 53601, inclusive. c) The adviser has assets under management in excess of five hundred million dollars ($500,000,000). 13. Asset-Backed Securities (ABS): Securities such as a mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable- backed bond of a maximum of five years' maturity. ABS eligible for investment shall be issued by an issuer having an "A" or higher rating for the issuer's debt as provided by an NRSRO andwhile the security acquired is rated in a rating category of "AA" or its equivalent or better by an NRSRO. No more than 20% of the City’s surplus funds may be invested in ABS and no more than 5% may be invested in any issuer. IV. INVESTMENT VEHICLES 19 14. Supranationals: United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Obligations issues by supranationals will be rated in a rating category "AA" or better by an NRSRO. No more than 30% of the City’s surplus funds may be invested in supranationals. Investments in Local Financial Institutions Community Banks Provided that the requirements of these guidelines and California Code sections 53630-53653 are adhered to, funds may be invested in community banks within the San Luis Obispo County service area under the following criteria: a) 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. b) As indicated by Government Code Section 53635.2 the bank must receive an overall rating of not less than “satisfactory” from the appropriate federal supervisory agency for meeting the criteria specified in Section 2906 of Title 12 of the U.S. Code (Community Reinvestment Act of 1977). c) The bank must provide certification and supporting information that indicates at least 25% in loans is invested within the City of San Luis Obispo. d) 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 investment; e) Participating banks shall make a presentation to the City of San Luis Obispo Investment Oversight Committee about their community involvement at least once per year., or one month prior to maturity of any certificates of deposit held. f) Upon the Investment Oversight Committee’s review of community involvement, the existing investment will be evaluated for renewal by City finance staff. CITY POLICIES Debt Reserve Funds Reserve funds from the proceeds of debt issues may shall be invested by the Director/City Treasurer in government agency securities with terms exceeding five (5) years if the maturity of such investments arematurity of such investments is made to coincide as nearly as practicable with the life of the debt issue. In all other cases, Council approval to make investments with terms in excess IV. INVESTMENT VEHICLES 20 of 5 years is required on a case-by-case basis at least three (3) months prior to investmentaccordance with bond covenants. Deferred Compensation These policies do not apply to deferred compensation plans. Individual investment policies are adopted by each deferred compensation plan and approved independently by Council. Further, individual investments are directed solely by the employee. Allowed Investments But Use Unlikely The City is allowed to invest in state and local government bonds or other indebtedness. However, given their tax exempt status (which is not of economic value to the City), their use in meeting the City’s investment objectives is unlikely. However, there may be policy circumstances where their use may be warranted. In these cases, Council approval is required. Prohibited Investment Vehicles and Practices 1. State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to, mutual funds (other than government money market funds as described above in No. 10), unregulated and/or unrated investment pools or trusts, collateralized mortgage obligations and futures and options. 2. In accordance with Government Code Section 53601.6, investment in inverse floaters, range notes or mortgage derived interest-only strips is prohibited. 3. Investment in any security that could result in a zero interest accrual if held to maturity is prohibited. 4. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. 5. Purchasing or selling securities on margin is prohibited. 6. The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited without Council approval. 7. IWhile the City is allowed to invest in financial futures or option contracts, these are excluded in accordance with the City's overall objective of achieving reasonable yields on public funds while minimizing risk and capital losses. Although the potential exists for greater interest yields with these vehicles, their potential level of risk exceeds their benefits except in very limited circumstances. Accordingly, Council approval is required on a case- by-case for any investments in financial futures or option contracts. 7. The City is allowed to invest in mortgage pass-through and asset-backed securities, provided that such securities have a maximum stated final maturity of five years and are rated AA by Standard & Poor’s or Aa by Moody’s; and that purchase of such securities does not exceed 20% IV. INVESTMENT VEHICLES 21 of the portfolio. However, given the “melt-down” in these types of securities in 2007 – even when rated “AAA/Aaa” by NRSRO’s – the City will not invest in these securities until such time as the Director/City Treasurer is confident that adequate regulatory reform has taken place that would make these securities consistent with the City’s primary investment objective. 8. AUTHORIZED INVESTMENTS SUMMARY Investment Type Government Code Maximum Maturity Maximum % of Portfolio Quality Requirements San Luis Obispo Maximum Maturity Maximum % of Portfolio Quality Requirements 1. Treasury Obligations 5 Years None None 5 Yearsa None None 2. GSE Securities 5 Years None None 5 Yearsa None None 3. Municipal Securitiesb 5 years None None 5 yearsa 30% per type; 5% per issuer “A” or better 3.4. Commercial Paper 270 Days 25% per type; none per issuer; 10% per issuer A-1/P-1/F-1; Long-term “A” 270 Days 25% per type; 510% per issuer A-1/P-1/F-1; Long-term “A” 4.5. Medium Term Notes 5 Years 30% per type; none per issuer “A” 5 Years 30% per type; 5% per issuer “AA” or better “AA” or better for financial issuers 5.6. Bankers’ Acceptances 180 Days 40% per type; 30% per issuer None 180 Days 40% per type; 5% per issuer None 6.7. Repurchase Agreement 1 Year None None 1 Year None per type; 25% per counterparty Primary Dealers/ Collateralization requirements 7.8. LAIF N/A None None N/A NoneLimit per Gov’t Code None 8.9. Negotiable CDs 5 Years 30% per type; none per issuer None 5 Years 30% per type; 5% per issuer “AA” or “A-1” None 9.10.Collateralized Bank Deposits 5 Years None None 5 Years Non per type; 25% per institution None 10.11.Money Market Mutual N/A N/A IV. INVESTMENT VEHICLES 22 Funds 20% per type; 10% per issuer Highest rating of at least two NRSRO 20% per type; 10% per issuer Highest rating of at least two NRSRO 12. Local Government Investment Pools (LGIPs) N/A N/A Advisor requirements N/A N/A Advisor requirements/“AAA” 13. Supranationals 5 Years 30% per type; none per issuer “AA” 5 Years 30% per type; none per issuer “AA” 11.14.Asset-Backed Securities (ABS) including Mortgage Pass-Throughs 5 Years 20% per type; none per issuer “AA” for issue; “A” for issuer 5 Years 20% per type; 5% per issuer “AA” for issue; “A” for issuer Not authorized unless market reforms confirmed by Treasurer. a. Up to 10% of the portfolio can be invested in Treasury and GSE securities maturing over 5 years. This includes municipal obligations. b. Includes State Obligations, City of San Luis Obispo obligations and California Local Agency obligations SOCIALLY RESPONSIBLE INVESTING City funds should be guided by the following provisions when investing in securities of non- governmental entities: • Priority shall be given to investments in entities that support community well-being through safe and environmentally sound practices and fair labor practices. • Priority shall be given to investments in entities that promote equality of rights regardless of race, religion, color, ancestry, age, national origin, gender, marital status, sexual orientation, disability or place of birth. • Priority shall be given to investments in entities that promote community economic development. In addition the direct investment of City funds is restricted as follows: • No investments are to be made in tobacco, electronic cigarette, or tobacco-related products. • No new investments are to be made to support the direct production or drilling of fossil fuels. The City Treasurer shall periodically verify compliance with the guidelines either through direct contact with the company or with its Investors Responsibility Center. 23 V. INVESTMENT MATURITY In addition to the risks associated with the credit-worthiness of the financial institution and the security of the investment vehicle, the maturity period of investments is also a significant consideration in the management of the City's portfolio. In order to minimize the impact of market risk, it is intended that all investments will be held until maturity. Under this practice, a minimum of 20% of the portfolio will be invested in securities maturing in one year or less. Up to 80% of the portfolio can be invested in securities with a maturity over one year with no more than 10% of the portfolio invested in securities with a maturity over five years. In implementing this policy, the following guidelines will be used: 1. Projected cash flow requirements are the primary factor to be used in determining investment maturity terms. 2. After cash flow needs have been met, investments may be structured in longer-term securities within a disciplined investment program and process that is based on long-term expectations and is not speculative. 3. Investments may be sold before maturity for cash flow purposes or to rebalance the risk profile of the portfolio. 3.4.Council approval to make investments with terms in excess of 5 years is required at least three months prior to the initial investment. VIII. INVESTMENT REPORTING 24 To achieve a reasonable return on public funds, the following cash management practices will be followed: 1. Maintain maximum investment of all City funds not required to meet immediate cash flow needs while maintaining adequate compensating balances as required under the City's banking services agreement. 2. Pool resources available for investment from all City-administered funds, with interest earnings allocated to each of the funds in accordance with generally accepted accounting principles. 3. Maximize the City's cash flow through the immediate deposit of all cash receipts, use of direct deposits and wire transfers when available, and appropriate timing of payments to vendors. 4. Maximize the cash flow information available by using only one operating bank account. 25 VII. EVALUATION OF INVESTMENT PERFORMANCE As indicated in the Introduction section of this document, it is the City’s primary investment objective to achieve a reasonable rate of return on public funds while minimizing risks and preserving capital. In evaluating the performance of the City’s overall portfolio in achieving this objective, it is expected that yields on City investments will regularly meet or exceed the average return on three month U. S. Treasury Bills. It is also expected that the portfolio managed by the investment advisor will meet or exceed the BofA Merrill Lynch 0-to-5 year U.S. Treasury Bond Index. 26 VIII. INVESTMENT REPORTING Consistent with the guidance provided by California Government Code Sections 16481.2 and 53646 of the Government Codeand the City’s practice of reviewing the Financial Policies each year, the Finance Director/City Treasurer shall may submit an annual Statement of the Investment Policy to the Council for consideration at a public meeting. This statement will generally be reviewed by the Council in conjunction with the Financial Plan review and approval process. In accordance with this Statement of Investment Policy, the City Treasurer is responsible for developing and maintaining this Investment Management Plan. In addition to the submittal of an annual Statement of Investment Policy and the preparation of an Investment Management Plan, tThough optional, pursuant to California Government Code Section 53646 (b)(1), Tthe Finance Director/City Treasurer shall will provide the Council and Investment Oversight Committee with a monthly quarterly investment report providing the following information for each investment or security: 1. Issuer or broker/dealer (financial institution) 2. Type of investment 3. Amount paid for the investment 4. The par amount of the investment, if applicable 2.5. Certificate or other reference number if applicable 3.6. Percentage yield on an annualized basis 4.7. Purchase date 5.8. Maturity date for each investment and the weighted average maturity of all the investments within the portfolio 6.9. Current book value 7.10. Current market value 8.11. Total cost and market value, including source of this valuation, of the City's portfolio 9.12. A description of the compliance with the Statement of Investment Policy 10.13. Information demonstrating that the City's expenditure requirements can be met in the following six months 11.14. Other information regarding the City's portfolio as appropriate The Monthly Investment Report shall include all investments as of the end of the quartermonth from all funds held in the City's portfolio, including funds held and invested by trustees exclusive of VIII. INVESTMENT REPORTING 27 deferred compensation plan funds; and shall be issued within 30 days after the end of the monthly quarterly reporting period. 28 IX. INVESTMENT MANAGEMENT PLAN REVIEW The Director/City Treasurer shall review the City's Statement of Investment Policy and Investment Management Plan on an ongoing basis to ensure its continued value in administering the City's portfolio. Additionally, the City shall form maintain an Investment Oversight Committee whose membership shall consist of the City Administrative Officer, Assistant City Administrative Officer, Director/City Treasurer, Finance Operations Manager, and the City's Independent Certified Public Accountant and a member of the public at large. The Investment Oversight Committee is responsible for: 1. Reviewing the City's portfolio at least quarterly to determine compliance with the Investment Management Plan; and 2. Reviewing and making recommendations as appropriate regarding the City's investment policies and practices at least annually. It is important to note the distinction between the committee's oversight responsibility in ensuring compliance with the policies and overall framework established in this plan, and the responsibility of the Director/City Treasurer in managing the City's investment portfolio in accordance with this plan. This distinction between management and oversight is especially important to make as it applies to the role of the City's independent auditors on this committee. The committee's oversight function is consistent with the scope of the auditor's engagement duties, which includes reviewing for compliance with City financial policies and procedures, and for making recommendations for improvements in the City's fiscal operations. However, in this oversight context, they the auditors retain their independence from responsibility for managing any aspects of the City's operations; this responsibility lies solely with the City's elected leadership and staff. APPENDIX 29 APPENDIX INVESTMENT POLICY Excerpt from the 2007-09 Financial Plan A. Responsibility. Investments and cash management is the responsibility of the City Treasurer or designee. It is the City’s policy to appoint the Director of Finance & Information Technology as the City’s Treasurer. B. Investment Objective. The City's primary investment objective is to achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default. Accordingly, the following factors will be considered in priority order in determining individual investment placements: 1. Safety 2. Liquidity 3. Yield C. Tax and Revenue Anticipation Notes: Not for Investment Purposes. There is an appropriate role for tax and revenue anticipation notes (TRANS) in meeting legitimate short-term cash needs within the fiscal year. However, many agencies issue TRANS as a routine business practice, not solely for cash flow purposes, but to capitalize on the favorable difference between the interest cost of issuing TRANS as a tax-preferred security and the interest yields on them if re-invested at full market rates. As part of its cash flow management and investment strategy, the City will only issue TRANS or other forms of short-term debt if necessary to meet demonstrated cash flow needs; TRANS or any other form of short- term debt financing will not be issued for investment purposes. As long as the City maintains its current policy of maintaining fund/working capital balances that are 2025% of operating expenditures as reflected in the most recently adopted budget, it is unlikely that the City would need to issue TRANS for cash flow purposes except in very unusual circumstances. D. Selecting Maturity Dates. The City will strive to keep all idle cash balances fully invested through daily projections of cash flow requirements. To avoid forced liquidations and losses of investment earnings, cash flow and future requirements will be the primary consideration when selecting maturities. E. Diversification. As the market and the City's investment portfolio change, care will be taken to maintain a healthy balance of investment types and maturities. F. Authorized Investments. The City will invest only in those instruments authorized by the California Government Code. Section 53601. The City will not invest in stock, will not speculate and will not deal in futures or options. The investment market is highly volatile and continually offers new and creative opportunities for enhancing interest earnings. Accordingly, the City will thoroughly investigate any new investment vehicles before committing City funds to them. G. Authorized Institutions. Current financial statements will be maintained for each institution in which cash is invested. Investments will be limited to 20% percent of the total net worth of any institution and may be reduced further or refused altogether if an institution's financial situation becomes unhealthy. APPENDIX 30 H. Consolidated Portfolio. In order to maximize yields from its overall portfolio, the City will consolidate cash balances from all funds for investment purposes, and will allocate investment earnings to each fund in accordance with generally accepted accounting principles. I. Safekeeping. Ownership of the City's investment securities will be protected through third-party custodial safekeeping. J. Investment Management Plan. The City Treasurer will develop and maintain an Investment Management Plan that addresses the City's administration of its portfolio, including investment strategies, practices and procedures. K. Investment Oversight Committee. 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 regarding investment management practices. Members include the City Administrative Officer, Assistant CAO, Director of Finance/City Treasurer, Revenue Manager and the City’s independent auditor. L. Reporting. The City Treasurer will develop and maintain a comprehensive, well-documented investment reporting system, which will comply with Government Code Section 5360753646. This reporting system will provide the Council and the Investment Oversight Committee with appropriate investment performance information. M. If the City has an investment advisor, the investment advisor may use its own list of authorized broker/dealers to conduct transactions on behalf of the City. L.N.Socially Responsible Investing. The City should prioritize investments that support community well-being and equal rights. The City will not continue to invest in entities involved to the tobacco industry, nor in direct producers and drillers of fossil fuels. 31 APPENDIX APPENDIX 32 Glossary Asset-backed securities (ABS) are securities whose income payments and hence value is derived from and collateralized (or "backed") by a specified pool of underlying assets which are receivables. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can comprise common payments credit cards, auto loans, mortgage loans, and other types of assets. Interest and principal is paid to investors from borrowers who are paying down their debt. Bankers’ Acceptances are short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at maturity. An acceptance is a high-grade negotiable instrument. Benchmark is a market index used as a comparative basis for measuring the performance of an investment portfolio. A performance benchmark should represent a close correlation to investment guidelines, risk tolerance and duration of the actual portfolio's investments. Bond is a financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the bond) a specified stream of future cash flows, including periodic interest payments and a principal repayment. Broker-Dealer is a person or a firm who can act as a broker or a dealer depending on the transaction. A broker brings buyers and sellers together for a commission. They do not take a position. A dealer acts as a principal in all transactions, buying and selling for his own account. Certificates of Deposit 1. Negotiable Certificates of Deposit are large-denomination CDs. They are issued at face value and typically pay interest at maturity, if maturing in less than 12 months. CDs that mature beyond this range pay interest semi-annually. Negotiable CDs are issued by U.S. banks (domestic CDs), U.S. branches of foreign banks (Yankee CDs), and thrifts. There is an active secondary market for negotiable domestic and Yankee CDs. However, the negotiable thrift CD secondary market is limited. Yields on CDs exceed those on U.S. treasuries and agencies of similar maturities. This higher yield compensates the investor for accepting the risk of reduced liquidity and the risk that the issuing bank might fail. State law does not require the collateralization of negotiable CDs. 2. Non-negotiable Certificates of Deposit are time deposits with financial institutions that earn interest at a specified rate for a specified term. Liquidation of the CD prior to maturity incurs a penalty. There is no secondary market for those instruments, therefore, they are not liquid. They are classified as public deposits and financial institutions are APPENDIX 33 required to collateralize them. Collateral may be waived for the portion of the deposits that are covered by FDIC insurance. Collateral refers to securities, evidence of deposits, or other property that a borrower pledges to secure repayment of a loan. It also refers to securities pledged by a bank to secure deposits. In California, repurchase agreements, reverse repurchase agreements, and public deposits must be collateralized. Commercial Paper is a short-term, unsecured, promissory note issued by a corporation to raise working capital. Corporate Note is a debt instrument issued by a corporation with a maturity of greater than one year and less than ten years. Delivery Versus Payment (“DVP”) is a settlement procedure in which securities are delivered versus payment of cash, but only after cash has been received. Most security transactions, including those through the Fed Securities Wire system and Depository Trust Company (“DTC”), are done DVP as a protection for both the buyer and seller of securities. Depository Trust Company (“DTC”) is a firm through which members can use a computer to arrange for securities to be delivered to other members without physical delivery of certificates. A member of the Federal Reserve System and owned mostly by the New York Stock Exchange, the Depository Trust Company uses computerized debit and credit entries. Most corporate securities, commercial paper, CDs, and BAs clear through DTC. Federal Agency Obligations are issued by U.S. Government Agencies or Government Sponsored Enterprises (“GSE”). Although they were created or sponsored by the U.S. Government, most Agencies and GSEs are not guaranteed by the United States Government. Examples of these securities are notes, bonds, bills and discount notes issued by Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”), the Federal Home Loan Bank system (“FHLB”), and Federal Farm Credit Bank (“FFCB”). The Agency market is a very large and liquid market, with billions traded every day. Investment Advisor is a company that provides professional advice managing portfolios, investment recommendations and/or research in exchange for a management fee. Issuer means any corporation, governmental unit, or financial institution that borrows money through the sale of securities. Liquidity refers to the ease and speed with which an asset can be converted into cash without loss of value. In the money market, a security is said to be liquid if the difference between the bid and asked prices is narrow and reasonably sized trades can be done at those quotes. Local Agency Investment Fund (“LAIF”) is a special fund in the State Treasury that local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum of $50 million for any California public Agency. It offers high liquidity because deposits can be converted to cash in twenty-four hours and no interest is lost. All interest is distributed to those APPENDIX 34 agencies participating on a proportionate share determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly via direct deposit to the Agency’s LAIF account. The State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter of one percent of the earnings. Market Value is the price at which a security is trading and could presumably be purchased or sold. Maturity is the date upon which the principal or stated value of an investment becomes due and payable. Medium-Term Notes are debt obligations issued by corporations and banks, usually in the form of unsecured promissory notes. These are negotiable instruments that can be bought and sold in a large and active secondary market. For the purposes of California Government Code, the phrase “Medium-Term” refers to a maximum remaining maturity of five years or less. They can be issued with fixed or floating-rate coupons, and with or without early call features, although the vast majority are fixed-rate and non-callable. Corporate notes have greater risk than Treasuries or Agencies because they rely on the ability of the issuer to make payment of principal and interest. Money Market Fund is a type of safe investment comprising a variety of short-term securities with high quality and high liquidity. The fund provides interest to shareholders and must strive to maintain a stable net asset value (“NAV”) of $1 per share. NRSRO is a “Nationally Recognized Statistical Rating Organization.” A designated rating organization that the SEC has deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank debt issues. Only ratings of a NRSRO may be used for the regulatory purposes of rating. Includes Moody’s, S&P, Fitch, and Duff & Phelps among others. Principal describes the original cost of a security. It represents the amount of capital or money that the investor pays for the investment. Repurchase Agreements are short-term investment transactions. Banks buy temporarily idle funds from a customer by selling him U.S. Government or other securities with a contractual agreement to repurchase the same securities on a future date at an agreed upon interest rate. Repurchase Agreements are typically for one to ten days in maturity. The customer receives interest from the bank. The interest rate reflects both the prevailing demand for Federal Funds and the maturity of the Repo. Repurchase Agreements must be collateralized. Supranational entities are formed by two or more central governments with the purpose of promoting economic development for the member countries. Supranational institutions finance their activities by issuing debt, such as supranational bonds. Examples of supranational institutions include the European Investment Bank and the World Bank. Similarly to the government bonds, the bonds issued by these institutions are considered direct obligations of the issuing nations and have a high credit rating. U.S. Treasury Issues are direct obligations of the United States Government. They are highly liquid and are considered the safest investment security. U.S. Treasury issues include: APPENDIX 35 1. Treasury Bills which are non-interest-bearing discount securities issued by the U.S. Treasury to finance the national debt. Bills are currently issued in one, three, six, and twelve month maturities. 2. Treasury Notes that have original maturities of one to ten years. 3. Treasury Bonds that have original maturities of greater than 10 years. Yield to Maturity is the rate of income return on an investment, minus any premium above par or plus any discount with the adjustment spread over the period from the date of the purchase to the date of maturity of the bond APPENDIX 36 . INVESTMENTS A. Responsibility. Finding that the City’s Investment Portfolio has been managed in accordance with the requirements of the City’s investment policy and Financial Management Plan, the City Council delegates the responsibility for making investments and managing the City’s cash for the upcoming year to the City Treasurer. It is the City’s policy to appoint the Director of Finance and Information Technology as the City’s Treasurer. B. Investment Objective. The City's primary investment objective is to achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default. Accordingly, the following factors will be considered in priority order in determining individual investment placements: 1. Safety 2. Liquidity 3. Yield C. Tax and Revenue Anticipation Notes: Not for Investment Purposes. There is an appropriate role for tax and revenue anticipation notes (TRANS) in meeting legitimate short-term cash needs within the fiscal year. However, many agencies issue TRANS as a routine business practice, not solely for cash flow purposes, but to capitalize on the favorable difference between the interest cost of issuing TRANS as a tax-preferred security and the interest yields on them if re-invested at full market rates. As part of its cash flow management and investment strategy, the City will only issue TRANS or other forms of short-term debt if necessary to meet demonstrated cash flow needs; TRANS or any other form of short-term debt financing will not be issued for investment purposes. As long as the City maintains its current policy of maintaining fund/working capital balances that equal to three months of operating expenditures based on the adopted budget, it is unlikely that the City would need to issue TRANS for cash flow purposes except in very unusual circumstances. D. Selecting Maturity Dates. The City will strive to keep all idle cash balances fully invested through daily projections of cash flow requirements. To avoid forced liquidations and losses of investment earnings, cash flow and future requirements will be the primary consideration when selecting maturities. E. Diversification. As the market and the City's investment portfolio change, care will be taken to maintain a healthy balance of investment types and maturities. F. Authorized Investments. The City will invest only in those instruments authorized by the California Government Code. The City will not invest in stock, will not speculate and will not deal in futures or options. The investment market is highly volatile and continually offers new and creative opportunities for enhancing interest earnings. Accordingly, the City will thoroughly investigate any new investment vehicles before committing City funds to them. G. Authorized Institutions. Current financial statements will be maintained for each institution in which cash is invested. Generally, investments will be limited to 5% percent of the portfolio and may be reduced further or refused altogether if an institution's financial situation becomes unhealthy. As provided in the Financial Management Plan, certain investments are exempt from this restriction. H. Consolidated Portfolio. In order to maximize yields from its overall portfolio, the City will consolidate cash balances from all funds for investment purposes, and will allocate investment earnings to each fund in accordance with generally accepted accounting principles. I. Safekeeping. Ownership of the City's investment securities will be protected through third-party custodial safekeeping. J. Investment Management Plan. The City Treasurer will develop and maintain an Investment Management Plan that addresses the City's administration of its portfolio, including investment strategies, practices and procedures. K. Investment Oversight Committee. 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. Members include the City Manager, Assistant City Manager, Director of Finance & Information Technology/City Treasurer, Finance Operations Manager, the City’s independent auditor, one City Council member, and one member of the public. The member of the public shall be appointed by the City Council in accordance with the City’s process for appointing advisory body members. L. Reporting. The City Treasurer will develop and maintain a comprehensive, well-documented investment reporting system, which will comply with Government Code Section 53607. This reporting system will provide the Council and the Investment Oversight Committee with appropriate investment performance information. Carlos Oblites, Director PFM Asset Management LLC 50 California Street, Suite 2300 San Francisco, CA 94111 415-982-5544 May 14, 2015 City of San Luis Obispo Portfolio Review Investment Oversight Committee © PFM Asset Management LLC Economic Outlook © PFM Asset Management LLC •Yields declined in March following the release of the FOMC’s policy statement which reduced expectations for a mid‐year rate hike. Interest Rate Update 0.20% 0.40% 0.60% 0.80% Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 2-Year Treasury Yield March 1, 2014 - March 31, 2015 1.50% 2.00% 2.50% 3.00% Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 10-Year Treasury Yield March 1, 2014 - March 31, 2015 Source: Bloomberg 1 © PFM Asset Management LLC 0% 1% 2% 3% 4% 5% 6% 7% 8% Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Mar '11 Mar '12 Mar '13 Mar '14 Mar '15 Sovereign Bond Yields (10-Yr Maturities) Germany Italy Spain U.S. Global Rate Environment •The European Central Bank (ECB) began its program of Quantitative Easing (“QE”) during the first quarter as it began buying approximately 60 billion euros in assets per month. As a result, European sovereign bond yields have reached record low levels. •Remarkably, Spanish and Italian bond yields are now at or below the level of the U.S. 10-year Treasury. Source: Bloomberg 2 © PFM Asset Management LLC Central Bank Policies Driving Global Markets Source: Bloomberg U.S. Federal Reserve (Fed) •Bond purchase program (QE3) ended •Reinvestment of maturities will continue •The FOMC removed the phrasing “patient” from their talks about tightening monetary policy European Central Bank (ECB) •ECB has stepped up as euro economy faltered •Asset purchases (QE) began in March 2015 and will last at least until September 2016 Bank of Japan •Expansion of monetary base continues •Increased asset purchase program, including government bonds (JGBs), but also Japanese equity exchange-traded funds (ETFs) and real estate investment trusts (REITs) $0.0$1.0$2.0$3.0$4.0$5.0 Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 Tr i l l i o n s U.S. Federal Reserve €0.0 €1.0 €2.0 €3.0 €4.0 Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 Tr i l l i o n s European Central Bank ¥0 ¥100 ¥200 ¥300 ¥400 Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 Tr i l l i o n s Bank of Japan 3 © PFM Asset Management LLC Interest Rates Fall in 2- to 5-Year Range 4 © PFM Asset Management LLC 12/31/14 3/31/15 3 Month 0.04% 0.02% 6 Month 0.12% 0.14% 1 Year 0.22% 0.23% 2 Year 0.67% 0.56% 3 Year 1.15% 0.94% 5 Year 1.65% 1.37% U.S. Treasury Yield Curve 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 3 M 6 M 1 Y 2 Y 3 Y 5 Y Yi e l d Maturity December 31, 2014 March 31, 2015 Source: Bloomberg •The portion of the yield curve 1-year and under remained relatively unchanged during the quarter as short-term rates are anchored by Federal Reserve policy. •Yields on securities with maturities 2 years and over fell moderately. -2.1% 4.6% 5.0% 2.2% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 2015 Qo Q % C h a n g e ; S e a s o n a l l y A d j u s t e d A n n u a l i z e d R a t e U.S. Real GDP April 29 Release: 0.2% U.S. Economic Growth Slows in 4th Quarter •U.S. fourth quarter GDP was revised down to 2.2%; solid consumer spending helped offset declines in business investment, exports, and government spending. •Market expectations for growth in 2015 range from 2.5%-3.0%. Source: Bureau Of Economic Analysis, as of 4/17/2015. Bloomberg Survey of Economists 5 © PFM Asset Management LLC 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Yo Y % C h a n g e Inflation Measures: Consumer Price Index vs Personal Consumption Expenditures Core CPI Core PCE Fed's Long-Term Inflation Target Fed's "Easy Money" Inflation Resistance Point Inflation Remains Lower than Fed Target 6 © PFM Asset Management LLC Source: Bloomberg •The personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of core inflation, continues to be below the 2% target; it showed price increases of just 1.4% year-over-year through February. •Falling energy prices and lack of wage pressure are helping to keep inflation low. $0 $20 $40 $60 $80 $100 $120 $140 $160 Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 WTI Price per Barrel Inflation Indicators Source: Bloomberg 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Fe b ' 0 5 Fe b ' 0 6 Fe b ' 0 7 Fe b ' 0 8 Fe b ' 0 9 Fe b ' 1 0 Fe b ' 1 1 Fe b ' 1 2 Fe b ' 1 3 Fe b ' 1 4 Fe b ' 1 5 CPI vs PCE (YoY) Core CPI Core PCE 0 250 500 750 1,000 1,250 1,500 1,750 2,000 Ma r - 0 5 Ma r - 0 6 Ma r - 0 7 Ma r - 0 8 Ma r - 0 9 Ma r - 1 0 Ma r - 1 1 Ma r - 1 2 Ma r - 1 3 Ma r - 1 4 Ma r - 1 5 Gold Price 60 70 80 90 100 110 120 130 140 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 Stronger US$ US$ per Euro (Left)Yen per US$ (Right) 7 © PFM Asset Management LLC Price and Inflation Indicators -0.1% -10.6% -11.3% 1.8% -0.1% -0.8% -0.1% -12% -10% -8% -6% -4% -2% 0% 2% 4% Go l d WT I C r u d e O i l US $ p e r E u r o Av g . H o u r l y E a r n i n g s US C P I US P P I Eu r o C P I 2015 YTD Price Change Source: Bloomberg. YTD 2015 is as of 3/31/2015. -28.3% 7.2% 4.2% 2.2% 1.5% 1.1% 0.8% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% Go l d WT I C r u d e O i l US $ p e r E u r o Av g . H o u r l y E a r n i n g s US C P I US P P I Eu r o C P I 2013 Price Change -1.4% -45.9% -12.0% 1.9% 0.8% 1.1% -0.2% -50% -40% -30% -20% -10% 0% 10% Go l d WT I C r u d e O i l US $ p e r E u r o Av g . H o u r l y E a r n i n g s US C P I US P P I Eu r o C P I 2014 Price Change 8 © PFM Asset Management LLC • Th e U . S . L a b o r m a r k e t a d d e d 5 9 1 , 0 0 0 j ob s d u r i n g t h e f i r s t q u a r t e r o f 2 0 1 5 . T he M a r c h j o b g r o w t h o f 1 2 6 , 0 0 0 b r o k e a tw e l v e - m o n t h s t r e a k o f m on t h l y j o b g r o w t h o v e r 2 0 0 , 0 0 0 . • Th e u n e m p l o y m e n t r a t e m o v e d d o w n 0 . 1 % f r o m 5 . 6 % t o 5. 5 % . T h e U - 6 u n e m p l o y m e n t r a t e , c o m m o n l y c a l l e d t h e un d e r e m p l o y m e n t r a t e , d e c l i n e d f r o m 1 1 . 2 % t o 1 0 . 9 % . • Ca l i f o r n i a e m p l o y m e n t c o n t i n u e d t o l a g t h e n a t i o n a l av e r a g e . C a l i f o r n i a s t a t e u n e m p l o y m e n t e n d e d t h e q u a r t e r a t 6. 5 % . La b o r M a r k e t S h o w s M i x e d N u m b e r s 9 © P F M A s s e t M a n a g e m e n t L L C Ch a n g e i n N o n f a r m P a y r o ll s a n d U n e m p l o y m e n t R a t e Ma r c h 2 0 1 0 – M a r c h 2 0 1 5 So u r c e : B u r e a u o f L a b o r S t a t i s t i c s 0%2%4%6%8%10%12%14% -2 0 0 K -1 0 0 K 0K 10 0 K 20 0 K 30 0 K 40 0 K 50 0 K 60 0 K Ma r - 1 0 S e p - 1 0 M a r - 1 1 S e p - 11 M a r - 1 2 S e p - 1 2 M a r - 1 3 S e p- 1 3 M a r - 1 4 S e p - 1 4 M a r - 1 5 Ch a n g e i n N o n - F a r m P a yr o l l s ( l e f t a x i s ) U. S . U n e m p l o y m e n t R a t e ( r i g h t a x i s ) CA U n e m p l o y m e n t R a te (right axis) Employment Indicators 60% 61% 62% 63% 64% 65% 66% 67% Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 Labor Force Participation Rate 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 U-6 Underemployment Rate 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Ma r ' 0 5 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 Average Hourly Earnings Growth (YoY ) 33.2 33.4 33.6 33.8 34.0 34.2 34.4 34.6 34.8 Ma r ' 0 6 Ma r ' 0 7 Ma r ' 0 8 Ma r ' 0 9 Ma r ' 1 0 Ma r ' 1 1 Ma r ' 1 2 Ma r ' 1 3 Ma r ' 1 4 Ma r ' 1 5 Total Private Sector Average Weekly Hours Source: Bureau of Labor Statistics 10 © PFM Asset Management LLC FOMC Guidance . . . A Moving Target Source: Federal Reserve December 2008: “for some time” August 2011: “at least through mid-2013” January 2012: “at least through late 2014” September 2012: “at least through mid-2015” December 2012: “as long as the unemployment rate remains above 6.5%” December 2013: “for a considerable time after the asset purchase program ends” “well past the time that the unemployment rate declines below 6.5%” January 2015: “can be patient in beginning to normalize the stance of monetary policy” March 2015: “reasonably confident that inflation will move back to its 2% objective” 11 © PFM Asset Management LLC FOMC “Dot Plot” from March Meeting 12 © PFM Asset Management LLC Source: Federal Reserve, Fed Funds Futures as of 3/31/2015 2014 2015 2016 2017 Longer Term 0% 1% 2% 3% 4% 5% Sep-14 Median Dec-14 Median Mar-15 Median Fed Funds Futures Individual Forecasts Mar-15 •The average opinion of FOMC members still projects the first Fed Funds rate hike in 2015, but the average expectations for the year-end rates are much lower than they were after the September and December meetings. Forecasts for Year-End Fed Funds Rate Cash Flow Analysis & Benchmark Discussion © PFM Asset Management LLC •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) Modeling the City’s Use of Cash 13 © PFM Asset Management LLC $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Mi l l i o n s Historical Balances and Seasonal Factors 14 San Luis Obispo Total Portfolio Balance December 2011 – June 2014 Month Average Monthly Balance Historical Factor Average 71,548,864 100.00% January 71,970,385 100.59% February 72,828,217 101.79% March 74,428,657 104.02% April 77,846,068 108.80% May 77,098,912 107.76% June 75,762,304 105.89% July 63,945,565 89.37% August 66,876,998 93.47% September 67,043,774 93.70% October 71,959,118 100.57% November 70,010,625 97.85% December 68,815,743 96.18% © PFM Asset Management LLC •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. Portfolio Components 15 © PFM Asset Management LLC •The liquidity cushion provides a certain additional level of short-term funds for the lowest projected liquidity balance over the next 12 months. Impact of Various Liquidity Cushions 16 © PFM Asset Management LLC Total Balances Funds Needed Liquid Funds Available for Investment in Securities Historical Average: 15% Cushion $13,736,536 $58,390,013 Current Value: 10% Cushion $12,366,619 $75,248,920 Current Value: 15% Cushion $16,747,396 $70,868,143 Current Value: 20% Cushion $21,128,173 $66,487,366 Current Value: 25% Cushion $25,508,950 $62,106,589 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Mi l l i o n s •If the City experiences zero growth over the next two years, the core portfolio will decrease to $66.0 million. •The liquid portion of the City’s funds will fluctuate between $13.1 and $24.0 million. Projected Balances – Zero Growth 17 Historical Balances and Projected Balances with Zero Growth December 31, 2011 – July 31, 2016 Note: Assumes a 15% cushion for additional liquidity. Historical Core Projected Liquidity Projected Core Historical Liquidity 12/31/14 Balance: 93,628,615 12/31/14 Portfolio: 46,009,620 © PFM Asset Management LLC •Setting the target duration of the portfolio is a critical component of the investment strategy. •Duration is likely to be the greatest determinant of the expected rate of return and volatility in PERMA’s portfolio. Investment Strategy Considerations Duration Sector Allocation Issue Selection © PFM Asset Management LLC 18 •Serve as a guide to achieving investment objectives. •Measure and evaluate relative investment performance. •Provide for comparison of risk and return. •Evaluate effectiveness of investment strategy. Performance Benchmark 19 © PFM Asset Management LLC •Yield –Percentage rate that expresses annualized rate of return at a point in time. –Forward-looking number. –Assumes no changes in cash flow, and reinvestment at the same rate. •Total Return –Percentage rate that expresses annualized rate of return over a specified period. –Backward-looking number. –Takes into account all changes in the portfolio, including market value changes, reinvestment rates, and all cash flows. Understanding Total Return – Yield vs. Total Return © PFM Asset Management LLC 20 0% 1% 2% 3% 4% 5% 6% Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Impact of Changes in Interest Rates on Returns 21 Merrill Lynch Treasury Index Annual Returns 2-Year U.S. Treasury Note Yield History 2005–2014 Sources: Bloomberg, Bank of America Merrill Lynch 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 10-Year Return 1-3 Year 1.67% 3.96% 7.32% 6.61% 0.78% 2.35% 1.55% 0.43% 0.36% 0.62% 2.54% 0-5 Year 1.79% 4.07% 7.41% 7.21% 0.30% 3.03% 2.69% 0.75% -0.11% 1.00% 2.77% 1-5 Year 1.39% 3.81% 8.16% 8.73% 0.23% 3.61% 3.36% 0.91% -0.19% 1.24% 3.08% © PFM Asset Management LLC Risk/Return of Various Benchmarks 10 Years Ended December 31, 2014 Merrill Lynch Treasury Index Duration (years) Annualized Total Return Cumulative Value of $50 Million Quarters With 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 6 out of 40 0-5 Year 2.23 2.77% $65,720,025 9 out of 40 1-5 Year 2.69 3.08% $67,736,348 11 out of 40 3-5 Year 3.84 3.96% $73,747,054 13 out of 40 Strategy Should Reflect Objectives, Cash flow Needs and Risk Tolerance Sources: Bloomberg, Bank of America Merrill Lynch © PFM Asset Management LLC 22 6% 53% 41% 0% 0% 24% 24% 20% 16% 16% 3% 31% 25% 20% 21% 0% 10% 20% 30% 40% 50% 60% Less than 1 Year 1 to 2 Years 2-3 Years 3-4 Years 4-5 Years 1-3 Year U.S. Treasury 0-5 Year U.S. Treasury 1-5 Year U.S. Treasury Maturity Distribution of Indexes 23 •Sources: Bloomberg, Bank of America Merrill Lynch •As of December 31, 2014 © PFM Asset Management LLC Index Portfolio Duration (years) Interest Rates Rise 0.25% Interest Rates Rise 0.50% City of San Luis Obispo 1.78 $222,500 $445,000 1-3 Year Treasury Index 1.89 $236,250 $472,500 0-5 Year Treasury Index 2.23 $278,750 $557,500 1-5 Year Treasury 2.69 $336,250 $672,500 Long-Term Investments Are More Sensitive than Short- Term Investments 24 Market Value Loss on $50 Million Portfolio Due to Instantaneous Change in Interest Rates Durations as of December 31, 2014 © PFM Asset Management LLC -10% -5% 0% 5% 10% 15% 20% Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 •While longer-term portfolios have historically provided higher returns, they have greater volatility from quarter to quarter. Longer Portfolios Are More Volatile Annualized Quarterly Returns 10 Years Ended December 31, 2014 Source: Bloomberg An n u a l i z e d T o t a l R e t u r n Treasury Index Past 10-Year Annualized Total Return 1-3 Year 2.54% 1-5 Year 3.08% 0-5 Year 2.77% © PFM Asset Management LLC 25