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11-06-2017 IOC Agenda Packet
CITY OF SAN LUIS OBISPO INVESTMENT OVERSIGHT COMMITTEE REGULAR QUARTERLY AGENDA November 6, 2017 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) regarding investment management practices. CALL TO ORDER: Finance Director/Treasurer/ Bradford ROLL CALL: Mayor Harmon; City Manager Johnson; Finance Director/Treasurer Xenia Bradford; Acting Assistant City Manager Greg Hermann; Accounting Manager Controller Rico Pardo; Steve Barasch, public member. OTHERS PRESENT: Al Eschenbach, Independent Auditor and ex-officio member; Monique Spyke, Managing Director for PFM Asset Management LLC; Izac Chyou, Senior Managing Consultant for PFM Asset Management LLC; Brandon Rake, Analyst for 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. Oath of Office of New Committee Member ( Hermann) 2. Review of Investment Oversight Committee meeting minutes of August 17, 2017. a. Recommend approval of the minutes 3. Presentation of the Quarterly Investment Report on Portfolio Performance a. Review and confirm investment policy compliance 4. Review investment policies and practices, follow-up item from August 17, 2017. Investment Oversight Committee Regular Quarterly Agenda for November 6, 2017 5. Review and make recommendations for investment allocation between City managed and PFM managed portfolios. 6. Items to be addressed at a future meeting. 7. Review Investment Oversight Committee calendar. 8. Adjourn to the next meeting to be held on February 15, 2018 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. Minutes Investment Oversight Committee Thursday, August 17, 2017 Regular Meeting of the Investment Oversight Committee CALL TO ORDER A Regular meeting of the Investment Oversight Committee was called to order on Thursday, August 17, 2017, at 1:30 p.m. in the Council Hearing Room at 990 Palm Street, San Luis Obispo, California, by Chair Johnson. ROLL CALL Present: Committee Members Steve Barasch, Derek Johnson, Katie Lichtig, Rico Pardo, and Chair Xenia Bradford Absent: Committee Member Heidi Harmon Others Present: Al Eschenbach, Independent Auditor and ex-officio member, Izac Chyou, PFM Asset Management LLC (City’s Investment Advisor); Monique Spyke, PFM Asset Management LLC; Kelly Medina, Finance Administrative Assistant & Recorder PUBLIC COMMENT ON ITEMS NOT ON THE AGENDA Leslie Halls 1. REVIEW OF INVESTMENT OVERSIGHT COMMITTEE MEETING MINUTES OF MAY 31, 2017 ACTION: MOTION BY COMMITTEE MEMBER JOHNSON, SECOND BY COMMITTEE MEMBER LICHTIG, CARRIED (COMMITTEE MEMBER HARMON ABSENT) 5-0, to approve the Investment Oversight Committee Meeting minutes of May 31, 2017. 2. PRESENTATION OF THE QUARTERLY INVESTMENT REPORT ON PORTFOLIO PERFORMANCE City Investment Advisors Monique Spyke and Izac Chyou reviewed the contents of the report and summarized the portfolio’s performance. Committee questions followed. City of San Luis Obispo, Title, Subtitle Minutes - Investment Oversight Committee Minutes of August 17, 2017 Page 2 Public Comment: None. ---End of Public Comment--- ACTION: MOTION BY COMMITTEE MEMBER BARASCH, SECOND BY COMMITTEE MEMBER PARDO, CARRIED 5-0, (COMMITTEE MEMBER HARMON ABSENT) to confirm the Quarterly Investment Report for the period ending June 30, 2017 is in compliance with the City’s Investment Policy. 3. REVIEW INVESTMENT POLICIES AND PRACTICES, FOLLOW-UP ITEM FROM MAY 31, 2017 Izac presented. Request from Katie to see a more in depth comparison with the 9 cities PFM provided as examples. Committee questions followed. Request from Barasch to see the projected spread of return difference between what we currently have now versus going to single A across the board. Public Comment: None. ---End of Public Comment--- 4. REVIEW INVESTMENT OVERSIGHT COMMITTEE ROLE AND DUTIES PER THE FINANCIAL MANAGEMENT MANUAL ACTION: MOTION BY COMMITTEE BARASCH, NOT CARRIED (COMMITTEE MEMBER HARMON ABSENT) 1-4, to expand scope of the committee by addressing fiscal policy, long term financial strategies/preservation, and adding more public members. Public Comment: Sharon Whitney and Cheryl McLean ---End of Public Comment--- City of San Luis Obispo, Title, Subtitle Minutes - Investment Oversight Committee Minutes of August 17, 2017 Page 3 5. ITEMS TO BE ADDRESSED AT A FUTURE MEETING Per Investment Mgmt. Plan: cash analysis and close of financials Further analysis of Investment Policy – in depth comparison with other 9 cities and projected return difference between current set up and single A. 6. DISCUSSION OF INVESTMENT OVERSIGHT COMMITTEE CALENDAR The next committee meeting is scheduled for November 9, 2017. Xenia announced today’s meeting will be the last for Committee member Lichtig. ADJOURNMENT The meeting was adjourned at 2:52 pm. APPROVED BY INVESTMENT OVERSIGHT COMMITTEE: XX/XX/2017 Quarterly Investment Report As of September 30, 2017 November 6, 2017 This report presents the City’s investment portfolio for the quarter ending September 30, 2017. It has been prepared to comply with regulations contained in California Government Code Section 53646. The report includes all investments managed by the City on its own behalf as well as for other third party agencies on a fiduciary basis such as the Whale Rock Commission. It also includes all City-related investments held by trustees for bond debt service obligations. As required, the report provides information on the investment type, issuer, maturity date, cost, and current market value for each security. The investment objectives of the City of San Luis Obispo are first, to provide safety of principal to ensure the preservation of capital in the overall portfolio; second, to provide sufficient liquidity to meet all operating requirements; and third, to earn a commensurate rate of return consistent with the constraints imposed by the safety and liquidity objectives. The City follows the practice of pooling cash and investments for all funds under its direct control. Funds held by outside fiscal agents under provisions of bond indentures are maintained separately. Interest earned on pooled cash and investments is allocated quarterly to the various funds based on the respective fund’s average quarterly cash balance. Interest earned from cash and investments with fiscal agents is credited directly to the related accounts. It is common for governments to pool the cash and investments of various funds to improve investment performance. By pooling funds, the city is able to benefit from economies of scale, diversification, liquidity, and ease of administration. The City uses the services of an investment advisor, PFM Asset Management, to manage a portion of the City’s portfolio. The City’s strategy is to retain approximately 25% of the portfolio to manage its day-to-day cash flow needs, while PFM’s focus is on longer-term investment management. In addition, the City has retained direct control of several investments that had been acquired before the City began to use investment advisors. All investments are held by the City in a safe keeping account with Bank of New York Mellon, except for investments held by trustees related to bond financings, which are held by either US Bank or Bank of New York Mellon. Investment Portfolio Benefits all Funds The City’s cash and investment portfolio represents money from all City funds, including the General Fund, enterprise funds, capital projects funds, and other funds which are restricted to specific purposes. In general, monies held by the city are either allocated by the City Council for spending or are purposefully retained in reserve. For example, the money in the Capital Outlay Fund has been identified to provide particular capital projects for the community and there is a plan for spending down the cash balance as the projects progress. In the General Fund, approximately $10 million is purposely held in reserve to meet the City’s reserve policy of 20% of operating expenditures. Quarterly Investment Report Current Cash and Investment Summary The following is a summary of the City’s cash and investments based on market value as of September 30, 2017 compared with the prior quarter: June 30, 2017 September 30, 2017 Percent of TotalCash and investments held by the City 43,051,653 37,027,087 31.43%Cash and investments managed by PFM 75,938,659 76,218,591 64.71%Cash and investments held by trustees 4,521,790 4,545,105 3.86%TOTAL 123,512,102 117,790,783 100% There are a number of factors which result in changes in cash and investment balances from month to month and quarter to quarter. Often they are the result of the receipt of revenues or a large disbursement. Some major City revenues are received on a periodic rather than a monthly basis. Property Tax, for example, is received in December, January, April and May of each year. Other revenues, such as Transient Occupancy Tax, are received monthly but vary considerably because they are seasonal. On the disbursement side, payments for bonded indebtedness or large capital projects can reduce the portfolio substantially in the quarter that they occur. Significant fluctuations of this type will be discussed in the following section of this report. Securities in the City’s portfolio are priced by IDC, an independent pricing service at the end of every month. In some cases, the City may have investments with a current market value that is greater or less than the recorded value. These changes in market value are due to fluctuations in the marketplace having no effect on yield, as the City does not intend to sell securities prior to maturity. Nevertheless, these market changes will impact the total value of the portfolio as reported. At September 30, 2017, the market value of the portfolio was $240,560 less than the cost basis. The portfolio’s yield on a market basis as of September 30, 2017 was 1.60%, and the yield on a cost basis was 1.52%. (These amounts do not reflect the returns on the assets held by the bond trustee.) As of September 30, 2017, the investment portfolio was in compliance with all State laws, the City's Statement of Investment Policy and the City’s Investment Management Plan. Summary of Activity for the Quarter and Future Liquidity Cash receipts and disbursements are generally consistent with past trends for the quarter. The cash management program contains enough liquidity to meet at least the next three months of expected expenditures by the City as well as by related parties, such as the Whale Rock Commission. Report Contents and Distribution. This report includes the following four schedules on the City’s portfolio as of September 30, 2017: summary of investments held or managed by the City, trustees or PFM; summary of investment portfolio liquidity; investment details; and detail of holdings for each investment. These schedules have not yet been reviewed by the City’s independent auditor. If you have any questions concerning this report, or require additional information, contact Xenia Bradford, Director of Finance at (805) 781-7125. DISTRIBUTION LIST City Council Heidi Harmon, Mayor Dan Rivoire, Vice Mayor Aaron Gomez, Council Member Andy Pease, Council Member Carlyn Christianson, Council Member Investment Oversight Committee Heidi Harmon, Mayor Derek Johnson, City Manager Xenia Bradford, Finance Director/Treasurer Rico Pardo, Accounting Manager/Controller Steven Barasch, Public Member Independent Auditor Allen E. Eschenbach, Glenn Burdette Attest Corporation PFM Asset Management Monique Skype, Portfolio Manager Izac Chyou, Senior Managing Consultant CITY OF SAN LUIS OBISPOSUMMARY OF INVESTMENTSAs of September 30, 2017 Percent of Current MarketPortfolio Yield Value Local Agency Investment Funds 61% 1.11% 22,525,424.82 Certificate of Deposit 3% 0.27% 1,000,000.00 Money Market Account 3% 0.25% 1,015,304.67 Checking Account 34% 0.25% 12,486,357.46 Treasury Issues 0% 0.00% 0.00 Total Investments Held by the City 100% 0.77% $37,027,086.95 Percent of CurrentPortfolio Yield Value Federal Agency Issues 43% 1.28% 32,563,992.57 Commercial Paper 8% 1.37% 5,788,008.30 Money Market Fund 0% 0.00% 41,165.44 US Corporate Notes 13% 1.82% 10,280,012.40 Negotiable CD 16% 1.86% 11,888,483.28 Treasury Issues 21% 1.63% 15,656,928.59 Total Investments Managed by Public Financial Management 100% 1.52% $76,218,590.58 Percent of Current MarketTrustee Portfolio Yield Value First American Treasury Funds 3.23% 0.00% 146,903.02 Other Money Market Accounts 0.23% 0.02% 10,236.23 Certificate of Deposit 0.00% 0.00% Guaranteed Investment Contracts 44.80% see below 2,036,093.55 Federal Agency Issues 17.61% 2.64% 800,462.65 Treasury Issues 34.13% Varies 1,551,409.65 Total Investments Held by Trustees 100% $4,545,105.10 Total of all Investments--Market Value $117,790,782.63 INVESTMENTS HELD AND MANAGED BY THE CITY INVESTMENTS OF THE CITY MANAGED BY PUBLIC FINANCIAL MANAGEMENT INVESTMENTS OF THE CITY HELD BY TRUSTEES FOR BOND DEBT SERVICE OBLIGATIONS TOTAL CASH AND INVESTMENTS CITY OF SAN LUIS OBISPOSUMMARY OF INVESTMENT PORTFOLIO LIQUIDITYAs of September 30, 2017 Managed Managed Percent of Marketby City by PFM Portfolio Value On Demand 36,027,086.95 41,165.44 32% 36,068,252.39 Within Six Months 1,000,000.00 6,619,818.24 7% 7,619,818.24 Six Months to One Year 3,527,014.78 3% 3,527,014.78 Within One to Five Years 0.00 66,030,592.11 58% 66,030,592.11 Over Five Years 0% 0.00 TOTAL 37,027,086.95 $76,218,590.58 100% $113,245,677.53 Percent of MarketPortfolio Value On Demand 3% 157,139.25 Within Six Months 0% 0.00 Six Months to One Year 0% 0.00 Within One to Five Years 24% 1,090,095.45 Over Five Years 73% 3,297,870.40 TOTAL 100% $4,545,105.10 Total of all Investments--Market Value $117,790,782.63 CITY OF SAN LUIS OBISPOINVESTMENT DETAILAs of September 30, 2017 Agency Investment Coupon Current Purchase Maturity Market(Broker)Description Rate Yield Date Date Value Local Agency Money Market Fund OnInvestment Fund City NA 1.11% Varies Demand 22,457,296.19 Local Agency Money Market Fund OnInvestment Fund CIB NA 1.11% Varies Demand 68,128.63Bank of Americaand OnJP Morgan Chase Checking Account NA 0.25% Varies Demand 12,486,357.46 CollateralizedHeritage Oaks Certificate of Deposit NA 0.27% 12/20/2013 12/20/2017 1,000,000.00 On Heritage Oaks Money Market Account NA 0.25%1/24/2012 Demand 1,015,304.67 TOTAL $37,027,086.95 INVESTMENTS HELD BY THE CITY AND THOSE MANAGED BY PUBLIC FINANCIAL MANAGEMENT (PFM) INVESTMENTS HELD BY TRUSTEES FOR BOND DEBT SERVICE OBLIGATIONS TOTAL CASH AND INVESTMENTS INVESTMENTS HELD AND MANAGED BY THE CITY CITY OF SAN LUIS OBISPOINVESTMENT DETAILAs of September 30, 2017 Agency Investment Coupon Current Purchase Maturity Market(Broker) Description Rate Yield Date Date Value2005 Refunding Lease Revenue Bonds U. S. Bank First AmericanCorporate Trust Services Treasury Fund N/A 0.00% Varies on demand 17,668.55 U. S. Bank United StatesCorporate Trust Services Treasury Bonds 6.00% 4.26% 6/26/96 2/15/26 757,373.40 2006 Lease Revenue Bonds U. S. Bank First AmericanCorporate Trust Services Treasury Fund N/A 0.00% Varies on demand 27,510.12 GuaranteedFSA Capital Investment ContractManagement Services LLC Treasury Fund 5.545% 5.545% 5/11/06 5/26/36 1,000,746.05 2006 Water Revenue Bonds U. S. Bank First AmericanCorporate Trust Services Treasury Fund N/A 0.00% Varies on demand 27,460.94 GuaranteedFSA Capital Investment ContractManagement Services LLC Treasury Fund 5.355% 5.355% 8/17/06 5/28/36 1,035,347.50 2009 Lease Revenue Bonds U. S. Bank First AmericanCorporate Trust Services Treasury Fund N/A 0.00% Varies on demand $74,263.41 U. S. Bank Fed Home Loan Mort. CorpCorporate Trust Services Medium term Note 0.75% 0.75% 11/25/2014 1/12/2018 $79,906.40 U. S. BankCorporate Trust Services U.S. Treasury Note 0.88% 0.88% 11/25/2014 1/31/2018 $69,932.10 U. S. Bank Federal Nat'l Mtge. Assoc.Corporate Trust Services Debenture 0.88% 0.88% 11/25/2014 2/8/2018 $79,893.60U. S. BankCorporate Trust Services Federal Home Loan Bank 1.38% 1.36% 11/25/2014 3/9/18 $70,060.90 U. S. BankCorporate Trust Services U.S. Treasury Note 1.38% 1.36% 11/25/2014 6/30/2018 $70,041.30 U. S. Bank Federal Nat'l Mtge. Assoc.Corporate Trust Services Debenture 1.88% 1.83% 11/25/2014 9/18/2018 $35,169.75 U. S. BankCorporate Trust Services U.S. Treasury Note 1.50% 1.49% 11/25/2014 2/28/2019 $70,065.80 U. S. BankCorporate Trust Services U.S. Treasury Note 1.13% 1.13% 11/25/2014 5/31/2019 $79,593.60 U. S. Bank Fed Home Loan Mort. CorpCorporate Trust Services Debenture 1.25% 1.26% 11/25/2014 8/1/2019 $79,620.00 U. S. BankCorporate Trust Services Federal Nat'l Mtge. Assoc. 1.75% 1.74% 11/25/2014 9/12/2019 $50,212.00 INVESTMENTS HELD BY TRUSTEES FOR BOND DEBT SERVICE OBLIGATIONS 2012 Water Revenue Refunding Bonds (Refunded 2002 Water Revenue Bonds) U. S. Bank U.S Bank MoneyCorporate Trust Services Market Account N/A 0.02% Varies on demand $10,098.32 U. S. Bank United StatesCorporate Trust Services Treasury Bond 2.00% 2.00% Varies 11/15/21 $226,739.25 U. S. Bank United StatesCorporate Trust Services Treasury Note 7.125% 5.150% Varies 2/15/23 $277,664.202012 Revenue Refunding Bonds (Refunded 2001 Revenue Refunding Bonds) U. S. Bank U.S Bank MoneyCorporate Trust Services Market Account NA 0.00% Varies on demand $137.91 U. S. BankCorporate Trust Services Federal Home Loan Bank 5.50%5.21%Varies 8/15/16 $405,600.00 TOTAL $4,545,105.10 CITY OF SAN LUIS OBISPOINVESTMENT DETAILAs of September 30, 2017 The City of San Luis Obispo maintains certain performance objectives for the investments that are managed by Public Financial Management. The overall performance objective for the portfolio is to earn a total rate of return over the market cycle that equals or exceeds the market index. In order to achieve this objective the portfolio invests in high-quality money market instruments, US Treasury securities, Agency securities, and high-grade corporate securities, with a maximum maturity of five years. To monitor the achievement of this objective, the City uses a “Benchmark” to compare to. The benchmark which is used is based on the BofA Merrill Lynch Index of 0-5 year Treasury securities. Below is a summary of the monthlyresults as compared to the benchmark. While the City strives to achieve this performance objective every month, the goal is assumed to be met on an annual basis. The City of San Luis Obispo is currently just under the benchmark goals inmost categories. We feel that through market trends and current investing adjustments, our performance will meet or exceed the benchmarks by the end of the fiscal year. Benchmark Comparison for the Quarter Ended 9/30/2017 Benchmark 9/30/2017 Portfolio 3/31/2017 PortfolioAverage Maturity (yrs)2.32 2.21 2.21Modified Duration 2.23 2.14 2.13Average Purchase Yield N/A 1.52%1.46%Average Market Yield 1.47%1.60%1.52%Average Quality AA+AA/Aa1 AA+/Aa1Total Market Value -$ 76,903,086$ 76,623,297$ The following pages provide a summary of the portfolio under management by Public Financial Management (PFM) as well asa detailed holding report for the month. MANAGED BY PUBLIC FINANCIAL MANAGEMENT © PFM City of San Luis Obispo Investment Report For the Quarter Ended September 30, 2017 PFM Asset Management LLC www.pfm.com 50 California Street Suite 2300 San Francisco, CA 94111 415-982-5544 Monique Spyke, Managing Director spykem@pfm.com Izac Chyou, Senior Managing Consultant chyoui@pfm.com © PFM Table of Contents I.Market Update II.Portfolio Review III.Appendix A.Consolidated Portfolio Information B.Portfolio Holdings C.Quarterly Transactions © PFM I. Market Update © PFM 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Fed Rate Hike Fed Rate HikeFed Rate Hike Presidential Election 2-Year Treasury Yields September 30, 2016 –September 30, 2017 Interest Rate Update Source: Bloomberg, as of 9/30/17. •Two-year Treasury yields moved modestly higher towards the end of the quarter, possibly due to heightened expectations of another rate hike and a tax overhaul that could increase government borrowing. 1 © PFM Short-Term Yields Higher but Curve Flatter in Third Quarter Yield Curve History Source: Bloomberg, as of 9/30/17. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3 m 6 m 1 y 2 y 3 y 5 y U.S. Treasury Yield Curve September 30, 2017 June 30, 2017 September 30, 2016 Maturity 6/30/17 9/30/17 Change 3-Mo.1.01 1.05 0.04 6-Mo.1.13 1.19 0.06 1-Yr.1.23 1.29 0.06 2-Yr.1.38 1.49 0.11 3-Yr.1.55 1.62 0.07 5-Yr.1.89 1.94 0.05 10-Yr.2.31 2.33 0.02 20-Yr.2.61 2.60 -0.01 30-Yr.2.84 2.86 0.02 •Treasury yields are substantially higher compared to a year ago. Short -term yields continue to rise in response to the Fed raising rates in their efforts to normalize policy. Longer-term yields still remain relatively low in response to lower inflation and growth expectations. 2 © PFM Economic Growth Source: Bloomberg, as of 9/30/17. SAAR is seasonally adjusted annualized rate. Orange dashes denotes four-quarter averages •Gross domestic product (GDP) increased at an annualized rate of 3.1% in the second quarter of 2017. •The acceleration in second quarter GDP reflected positive contributions from personal consumption, nonresidential private investments, exports, and federal government spending, offset by negative contributions from residential fixed investments, imports, and state and local government spending. 3.1% -2% -1% 0% 1% 2% 3% 4% 5% 6%Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q42013 2014 2015 2016 2017 U.S. Real GDP QoQ, SAAR Bloomberg Survey of Economists 2.7%2.7% 2.0%1.9% 3 © PFM Hurricane Disruption Hurricane Harvey estimates are preliminary and shown in the chart at the high end of the estimated range. Source: The Economi c Impact of Hurricane Harvey, Moody’s Analytics, 9/5/17. •Hurricane Harvey is expected to be the second most destructive natural disaster over the last three decades. •Destruction to property caused by Hurricane Harvey is estimated to range from $77 to $97 billion. The lost economic output is forecasted to be $9 –$11 billion. $108 $16 $73 $13 $175 $17 $110 $45 $19 $61 $20 $24 $0 $50 $100 $150 $200 Hurricane HarveyHurricane MatthewSuperstorm SandyHurricane IreneHurricane KatrinaHurricane Ivan9/11Los AngelesNorthridge QuakeMidwest FloodsHurricane AndrewLoma Prieta QuakeHurricane HugoTotal Economic Loss Due to Disasters (Billions of Today's Dollars) Destruction Lost Output 4 © PFM Labor Market Remains Strong Despite the Impact of Hurricanes Source: Bloomberg, as of September 2017. •The U.S. labor market lost 33,000 jobs in September. The first decline in U.S. nonfarm payrolls in seven years. •Despite the impact of the hurricanes on the September job numbers, the headline unemployment rate ticked down to 4.2%, hitting the lowest level in more than 16 years. The U6 unemployment rate also decreased slightly from 8.6% in June to 8.3% in September, while the labor force participation rate ticked up from 62.8% in June to 63.1% in September. •Average hourly earnings—an important gauge of wage growth—grew 2.9% over the past 12 months. -100k 0k 100k 200k 300k 400k Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Sep '17 Monthly Change in Nonfarm Payrolls Nonfarm Payrolls 12-Month Moving Average 7.8% 7.2% 5.9% 5.0%4.9% 4.2% 4% 5% 6% 7% 8% 9% Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Sep '17 Unemployment Rate 5 © PFM Inflation Steadies but Outlook Remains Weak Source: Bloomberg, as of 9/30/17. Inflation expectations based on yield difference between 5 -year Treasury note and 5-year Treasury Inflation Protected Securities (TIPS). •Inflation pressures have declined from levels at the beginning of the year. The core personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, slipped to 1.3% year -over-year in August. While some Fed officials expect this weakness to be transitory, the prospect for another rate hike in 2017 may be diminished should this trend continue. •Although inflation expectations jumped following the U.S. election, the outlook has since softened, reflecting doubts in the administration’s ability to implement its agenda. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Aug '12 Aug '13 Aug '14 Aug '15 Aug '16 Aug '17 Inflation Measures (YoY) Core CPI Core PCE Fed's Long Term Inflation Target 0.5% 1.0% 1.5% 2.0% 2.5% Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Sep '17 Expectations for Average Inflation Rate Over Next 5 Years 6 © PFM U.S. Recession Indicators: Low Risk in the Near-Term Source: Bloomberg, as of 8/31/17. SA is seasonally adjusted. -30% -20% -10% 0% 10% 20%200020012002200320042005200620072008200920102011201220132014201520162017Conference Board Leading Indicators (SA, YoY) 0 200 400 600 800 200020012002200320042005200620072008200920102011201220132014201520162017Initial Jobless Claims (4-week average, in thousand) -200 -100 0 100 200 300 400 500 20002001200220032004200520062007200820092010201120122013201420152016201710 Year –3 Month Treasury Yield Spread (in bps) -20% -10% 0% 10%200020012002200320042005200620072008200920102011201220132014201520162017Industrial Production (YoY) Yield Curve Inverts 7 © PFM Probability of Fed Rate Hike at the December Meeting Source: Bloomberg, as of 9/30/2017. •The probability of a third rate hike in 2017 at the FOMC’s December meeting increased following their September meeting. •The FOMC will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans in October. 22% 70% 0% 15% 30% 45% 60% 75%Jun '30Jul '07Jul '14Jul '21Jul '28Aug '04Aug '11Aug '18Aug '25Sep '01Sep '08Sep '15Sep '22Sep '29Historical Probability of December Rate Hike Probability of Fed Rate Hike Meeting Probability (25bps) 12/13/2017 70% 1/31/2018 68% 3/21/2018 54% 5/2/2018 54% 6/13/2018 43% 8 © PFM II. Portfolio Review © PFM Securities and funds in the internal portfolio are not rated. 1.Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price for each 1% cha nge in interest rates. Modified duration is a similar risk measure but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes , MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e., if interest rates fall and a callable bond is more l ikely to be called prior to its final maturity, the effective duration will decrease). Portfolio Characteristics —Internal For the Quarter Ended September 30, 2017 Portfolio Review 9/30/2017 6/30/2017 Average Maturity (yrs)0.01 0.01 Effective Duration1 0.01 0.01 Average Market Yield 0.69%0.72% Total Market Value 37,027,087 43,051,652 9 © PFM * Issuer is Pacific Premier Bank. Percentages based on market values excluding accrued interest. Sector Distribution —Internal For the Quarter Ended September 30, 2017 Portfolio Review LAIF Money Market Rate Account Negotiable CDs*Cash 9/30/2017 60.8%2.7%2.7%33.7% 6/30/2017 63.8%2.4%2.3%31.5% 0% 10% 20% 30% 40% 50% 60% 70% 10 © PFM Objectives Investment Objectives The investment objectives of the City of San Luis Obispo are first, to provide safety of principal to ensure the preservation of capital in the overall portfolio; second, to provide sufficient liquidity to meet all operating requirements; and third, to earn a commensurate rate of return consistent with the constraints imposed by the safety and liquidity objectives. Performance Objectives The performance objective for the portfolio is to earn a total rate of return over a market cycle that equals or exceeds the market index, the Bank of America Merrill Lynch Index of 0 -5 Year Treasury securities. Strategy In order to achieve this objective, the portfolio invests in high-quality money market instruments, U.S. Treasury securities, Federal Agency securities, and high-grade corporate securities, with a maximum maturity of five years. For the Quarter Ended September 30, 2017 Portfolio Review 11 © PFM Third Quarter 2017 Recap Policy challenges in the U.S., combined with escalating tensions on the geopolitical front, led to bouts of uncertainty which triggered periods of “risk-off” and ”risk-on” during the third quarter. Nonetheless, volatility remained low and equities continued to book new record highs, reflective of investor complacency. After three rate hikes since December 2016, the Federal Reserve (Fed) shifted gears and announced the beginning of their program to reduce the central bank’s enormous balance sheet. The plan is to gradually reduce the Fed's securities holdings by decreasing its reinvestment of the principal payments on its large holdings of Treasury and agency mortgage-backed securities. This had little impact on our strategy as the process was telegraphed well in advance and will be gradual and predictable. Strong investor appetite for high-quality bonds generally caused the yield spreads on investment-grade fixed income sectors (relative to U.S. Treasuries) to tighten over the quarter, resulting in strong relative performance for corporate, securities. •The yield spreads on federal agency securities vs. comparable-maturity Treasuries narrowed to historic lows, in some cases near zero, leading to diminished value of the agency sector. •Corporate yield spreads also tightened to multi-year lows as investors reaching for yield piled into a limited market supply of investment-grade securities. Without a clear trend in the direction of interest rates, we maintained the portfolio duration in line with the benchmark to minimize return volatility. For the Quarter Ended September 30, 2017 Portfolio Review 12 © PFM •Performance is for the City of San Luis Obispo’s Operating Funds. •Performance on trade-date basis, gross (i.e., before fees), in accordance with the CFA Institute’s Global Investment Performance Standards (GIPS). •Performance for periods one year and greater are presented on an annualized basis. •Bank of America Merrill Lynch Indices provided by Bloomberg Financial Markets. •Inception date is December 31, 2014. Total Rate of Return For the Quarter Ended September 30, 2017 Portfolio Review +0.07%+0.16%+0.43%+0.18%Difference: 3 Months 6 Months 1 Year Since Inception City of San Luis Obispo 0.36%0.79%0.54%1.17% 0-5 Yr. Treasury Index 0.29%0.63%0.11%0.99% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 13 © PFM Earnings for the City of San Luis Obispo’s Operating Funds. Portfolio Earnings For the Quarter Ended September 30, 2017 Portfolio Review Market Value Basis Accrual (Amortized Cost) Basis Beginning Value (6/30/2017)$75,891,095 $76,117,602 Net Purchases/Sales $293,664 $293,664 Change in Value ($7,334)($14,068) Ending Value (9/30/2017)$76,177,425 $76,397,198 Interest Earned $281,412 $281,412 Portfolio Earnings $274,078 $267,344 14 © PFM Category Standard In Compliance Treasury Obligations 5 year maximum maturity Yes Government Sponsored Enterprise (GSE) Securities 5 year maximum maturity Yes Corporate Notes 5 year maximum maturity At least two “A” rating; at least one “AA” for financials 30% maximum,5% per issuer Yes Local Government Investment Pool (LAIF)Up to maximum permitted by State Law Yes Negotiable Certificates of Deposit 5 year maximum maturity At least a “AA” or “A-1” 30% maximum,5% per issuer Yes Commercial Paper 270 day maximum maturity At least one “A-1” rating 40% maximum,10% per issuer Yes Collateralized Bank Deposits 25% maximum, 5% per issuer Yes Money Market Mutual Funds Highest rating category by 2 NRSROs 20% maximum,10% per issuer Yes Maximum maturity 10 years; 10% maximum of portfolio in Treasury and GSE obligations with maturity >5 years Yes Duration limit Duration of portfolio equal duration of benchmark plus or minus 10%Yes Social responsibility No investments in companies involved in tobacco, electronic cigarettes, or the direct production or drilling of fossil fuels Yes Applies to aggregate portfolio. Source: City of San Luis Obispo Investment Management Plan, June 2015. Portfolio Compliance The portfolio complies with California Government Code and the City of San Luis Obispo’s Investment Policy in regards to credit quality, maturity, sector, and issuer limits. For the Quarter Ended September 30, 2017 Portfolio Review 15 © PFM 1.The City of San Luis Obispo’s current benchmark is the Bank of America Merrill Lynch (BAML) 0 -5 Year U.S. Treasury Index. 2.Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price for each 1% cha nge in interest rates. Modified duration is a similar risk measure but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callab le notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e., if interest rates fall and a callable bond is more l ikely to be called prior to its final maturity, the effective duration will decrease). Portfolio Characteristics —PFM Managed For the Quarter Ended September 30, 2017 Portfolio Review Portfolio Benchmark2 Average Maturity (yrs)2.21 2.32 Effective Duration1 2.14 2.23 Average Purchase Yield 1.52%N/A Average Market Yield 1.60%1.47% Average Quality AA/Aa1 AA+ Total Market Value 76,903,086 9/30/2017 16 © PFM Sector distribution based on market value and excludes accrued interest. Sector Distribution —PFM Managed For the Quarter Ended September 30, 2017 Portfolio Review U.S. Treasury Federal Agency Negotiable CDs Commercial Paper Corporate Notes Money Market Fund 9/30/2017 20.7%42.9%15.5%7.5%13.4%0.1% 6/30/2017 21.1%45.4%11.8%10.2%11.6%0.1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 17 © PFM Credit Industry Exposure —PFM Managed For the Quarter Ended September 30, 2017 Portfolio Review Issuer Industry*% Toyota Motor Credit Corp Automotive 6.6% American Honda Finance Automotive 1.6% Bank of Tokyo Mitsubishi Banking 11.4% BNP Paribas NY Banking 5.0% Bank of Montreal Chicago Banking 7.8% BNY Mellon Banking 7.8% Svenska Handelsbanken NY Banking 7.8% Canadian Imperial Bank Banking 6.3% Nordea Bank Banking 6.3% Bank of Nova Scotia Banking 6.3% JP Morgan Banking 0.0% Rabobank Banking 4.2% Wells Fargo & Company Banking 4.2% Credit Agricole Banking 3.8% Royal Bank of Canada NY Banking 3.5% John Deere Capital Goods 0.8% Unilever Consumer Goods 0.4% Berkshire Hathaway Insurance 1.8% Apple Inc Technology 4.4% Microsoft Corp Technology 4.2% IBM Technology 3.2% Burlington North Transportation 2.2% Total 100.0% * Issuer’s industry as defined by Bloomberg.Detail may not add to total due to rounding. Automotive 8.3% Technology 11.9% Banking 74.6% Insurance 1.8% Transportation 2.2% Capital Goods 0.8% Consumer Goods 0.4% Industry Exposure 18 © PFM Ratings by Standard & Poor’s. Credit Quality —PFM Managed For the Quarter Ended September 30, 2017 Portfolio Review AAA AA A A-1 NR 9/30/2017 1.4%75.5%14.5%8.6%0.0% 6/30/2017 1.4%75.9%12.6%10.2%0.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 19 © PFM Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although t hey may be called prior to maturity. * Benchmark is composed of the Merrill Lynch 0-5 Year U.S. Treasury Index. Data from Bloomberg. Maturity Distribution —PFM Managed Portfolio vs. Benchmark For the Quarter Ended September 30, 2017 Portfolio Review 0-1 Year 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years Portfolio 13.8%39.4%20.1%14.8%11.9% Benchmark*24.4%24.9%21.7%17.9%11.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 20 © PFM Issuer Name Investment Type % of Portfolio S&P Moody's FNMA Federal Agency 24.4%AA+Aaa U.S. Treasury U.S. Treasury 21.5%AA+Aaa FHLB Federal Agency 11.2%AA+Aaa FHLMC Federal Agency 8.8%AA+Aaa Bank of Tokyo Mitsubishi Commercial Paper 3.6%A-1 P-1 Bank of Montreal Chicago Negotiable CD 2.5%A+A1 BNY Mellon Corporate Note 2.5%A A1 Svenska Handelsbanken NY Corporate Note 2.5%AA-Aa2 Toyota Motor Credit Corp Corporate Note 2.1%AA-Aa3 Nordea Bank Negotiable CD 2.0%AA-Aa3 Canadian Imperial Bank Negotiable CD 2.0%A+A1 Bank of Nova Scotia Corporate Note 2.0%A+A1 General Electric Corporate Note 1.9%AA-A1 BNP Paribas NY Commercial Paper 1.6%A-1 P-1 Apple Inc Corporate Note 1.4%AA+Aa1 Microsoft Corp Corporate Note 1.4%AAA Aaa Rabobank Commercial Paper 1.3%A-1 P-1 Wells Fargo & Company Corporate Note 1.3%A A2 Credit Agricole Commercial Paper 1.2%A-1 P-1 Royal Bank of Canada NY Negotiable CD 1.1%A-1+P-1 IBM Corporate Note 1.0%A+A1 Burlington North Corporate Note 0.7%A A3 Berkshire Hathaway Corporate Note 0.6%AA Aa2 American Honda Finance Corporate Note 0.5%A+A1 John Deere Corporate Note 0.2%A A2 Unilever Corporate Note 0.1%A+A1 Dreyfus Prime Cash Management Fund Money Market Fund 0.1%AAAm Aaa 100.00%AA Aa1Total / Average Issuer Distribution —PFM Managed For the Quarter Ended September 30, 2017 Portfolio Review Ratings by Standard & Poor’s and Moody’s. * Financial securities rated “A” by S&P are rated “AA” by Fitch and /or Egan-Jones Rating Company. 21 © PFM Current Outlook and Strategy For the Quarter Ended September 30, 2017 Portfolio Review Although current low inflation is a conundrum, recent signaling from Fed officials boosted expectations for another rate hike this year, raising the market-implied probability of a December hike from 30% mid-third quarter to over 70%. With 2-year Treasury yields at the highest level since 2008, we plan to maintain the portfolio duration generally in line with the benchmark. However, the significant flattening of the yield curve since the beginning of the year has reduced the benefit of some maturity extensions, so we will carefully assess value along the yield curve. As we near the end of Janet Yellen’s term as Chair of the Federal Reserve, which will expire early next year, we will assess the market implications of all new appointees to the Fed (there will be a total of 4 openings on the Fed’s 7 - member Board of Governors). Our prevailing economic theme includes moderate growth expectations in the U.S. and abroad, further improvements in the tightening U.S. labor market, healthy consumer demand, and a stable corporate backdrop. The impact from the recent Gulf Coast hurricanes will likely manifest itself in weaker economic data for September and early fourth quarter. However, history shows that the effects of weather-related events are typically short-lived and may be smoothed over by the subsequent recovery and rebuilding activity. On the policy front, the potential for tax reform is worth watching, as will be the debt ceiling debate, which will resurface in December. 22 © PFM III. Appendix © PFM A. Consolidated Portfolio Information © PFM 1.Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price for e ach 1% change in interest rates. Modified duration is a similar risk measure but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callab le notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e., if interest rates fall and a callable bond is more l ikely to be called prior to its final maturity, the effective duration will decrease). Portfolio Characteristics —Consolidated For the Quarter Ended September 30, 2017 Portfolio Review 9/30/2017 6/30/2017 Average Maturity (yrs)1.49 1.42 Effective Duration1 1.44 1.37 Average Purchase Yield 1.25%1.19% Average Market Yield 1.30%1.23% Average Quality AA/Aa1 AA+/Aa1 Total Market Value 113,930,173 119,674,949 23 © PFM Sector distribution based on market value and excludes accrued interest. Sector Distribution —Consolidated For the Quarter Ended September 30, 2017 Portfolio Review U.S. Treasury Federal Agency Comm. Paper Corporate Notes Negotiable CDs Money Market Fund Money Market Rate Account LAIF Cash 9/30/2017 13.3%27.5%4.8%8.6%10.7%0.0%0.8%22.9%11.3% 6/30/2017 13.5%29.0%6.5%7.4%8.4%0.0%0.8%22.9%11.3% 0% 5% 10% 15% 20% 25% 30% 35% 24 © PFM Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although t hey may be called prior to maturity. Maturity Distribution —Consolidated For the Quarter Ended September 30, 2017 Portfolio Review Overnight - 3 Months 3 - 6 Months 6 Months - 1 Year 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years 9/30/2017 35.5%3.1%3.2%26.6%13.6%10.0%8.1% 6/30/2017 39.7%2.8%6.0%19.2%14.5%9.4%8.5% 0% 10% 20% 30% 40% 50% 25 © PFM Issuer Distribution —Consolidated For the Quarter Ended September 30, 2017 Portfolio Review Issuer Name Investment Type % of Portfolio LAIF LAIF 20.6% FNMA Federal Agency 16.6% U.S. Treasury U.S. Treasury 14.6% Cash Cash 11.4% FHLB Federal Agency 7.6% FHLMC Federal Agency 6.0% Bank of Tokyo Mitsubishi Commercial Paper 2.5% BNY Mellon Corporate Note 1.7% Svenska Handelsbanken NY Corporate Note 1.7% Toyota Motor Credit Corp Corporate Note 1.4% Nordea Bank Negotiable CD 1.4% Canadian Imperial Bank Negotiable CD 1.4% Bank of Nova Scotia Corporate Note 1.4% General Electric Corporate Note 1.3% BNP Paribas NY Commercial Paper 1.1% Apple Inc Corporate Note 1.0% Pacific Premier Bank Money Market Rate Account 0.9% Microsoft Corp Corporate Note 0.9% Pacific Premier Bank Negotiable CD 0.9% Rabobank Commercial Paper 0.9% Wells Fargo & Company Corporate Note 0.9% Credit Agricole Commercial Paper 0.8% Royal Bank of Canada NY Negotiable CD 0.8% IBM Corporate Note 0.7% Burlington North Corporate Note 0.5% Berkshire Hathaway Corporate Note 0.4% American Honda Finance Corporate Note 0.4% John Deere Corporate Note 0.2% Unilever Corporate Note 0.1% Dreyfus Prime Cash Management Fund Money Market Fund 0.0% Toyota Motor Credit Corp Commercial Paper 0.0% Total 100.0% 26 © PFM B. Portfolio Holdings City of San Luis Obispo Holdings ReportFor the Quarter Ending September 30, 2017Security DescriptionSettle DateYTM at Cost Par Cost Value Amortized CostYTM at Market Market Value* Accrued Interest% of PortfolioUnreal G/LAmort CostS&P/Moody'sYears to Maturity DurationLAIFLOCAL AGENCY INVESTMENT FUND Various 0.98% 22,525,424.82 22,525,424.82 22,525,424.82 0.98% 22,525,424.82 - 19.77%- NRNR0.00 0.00Total LAIF0.98% 22,525,424.82 22,525,424.82 22,525,424.82 0.98% 22,525,424.82 - 19.77%- NRNR0.00 0.00Money Market FundDREYFUS PRIME CASH MANAGEMNT MONEY MARKET FUNDVarious 0.00% 41,165.44 41,165.44 41,165.44 0.00%41,165.44 - 0.04%- AAAAaa0.00 0.00Total Money Market Fund0.00%41,165.44 41,165.44 41,165.44 0.00%41,165.44 - 0.04%- AAAAaa0.00 0.00CashCASH ACCOUNT Various 0.25% 12,486,357.46 12,486,357.46 12,486,357.46 0.25% 12,486,357.46 - 10.96%- NRNR0.00 0.00CASH Pacific Premier Bank MONEY MARKET RATE ACCOUNTVarious 0.25% 1,015,304.67 1,015,304.67 1,015,304.67 0.25%1,015,304.67 - 0.89%- NRNR0.00 0.00Total Cash0.25% 13,501,662.13 13,501,662.13 13,501,662.13 0.25% 13,501,662.13 - 11.85%- NRNR0.00 0.00U.S. Treasury Bond/NoteAMERICAN HONDA FINANCE CORP NOTES02665WBA8 1.70% Due 2/22/20192/23/2016 1.71% 390,000.00 389,922.00 389,963.26 1.73%389,839.32 718.25 0.34% (123.94) A+A11.40 1.37APPLE INC BONDS037833CK4 1.90% Due 2/7/20202/9/2017 1.92% 1,050,000.00 1,049,485.50 1,049,593.43 1.75%1,053,620.40 2,992.50 0.92% 4,026.97 AA+Aa12.36 2.29BNY MELLON CORP NOTE (CALLABLE)06406HDD8 2.60% Due 8/17/20206/8/2016 1.81% 960,000.00 990,316.80 980,871.18 2.07%974,234.88 3,050.67 0.86% (6,636.30) AA12.88 2.69BONY MELLON CORP NOTE (CALLABLE)06406HDF3 2.45% Due 11/27/20208/18/2016 1.70% 865,000.00 891,564.15 884,658.92 2.11%874,054.82 7,299.640.77% (10,604.10) AA13.16 2.96BANK OF NOVA SCOTIA HOUSTON LT CD06417GUE6 1.91% Due 4/5/20194/6/2017 1.91% 1,500,000.00 1,500,000.00 1,500,000.00 1.38%1,498,048.50 14,165.83 1.31% (1,951.50) A+A11.51 1.50BANK OF MONTREAL CHICAGO CERT DEPOS06427KRC3 1.88% Due 2/7/20192/9/2017 1.90% 1,850,000.00 1,850,000.00 1,850,000.00 1.54%1,857,505.45 5,217.00 1.63% 7,505.45 A+A11.36 1.35BANK OF TOKYO MITSUBISHI UFJ COMM PAPER06538BX32 0.00% Due 10/3/20174/3/2017 1.41% 500,000.00 496,441.67 499,961.11 1.55%499,935.50 - 0.44%(25.61) A-1P-10.01 0.01BANK OF TOKYO MITSUBISHI COMM PAPER06538BZ48 0.00% Due 12/4/20176/5/2017 1.38% 1,000,000.00 993,073.89 997,564.44 1.30%997,664.00 - 0.88%99.56 A-1P-10.18 0.18BANK OF TOKYO MITSUBISHI COMM PAPER06538CA35 0.00% Due 1/3/20187/3/2017 1.41% 1,200,000.00 1,191,413.33 1,195,613.33 1.36%1,195,712.40 - 1.05%99.07 A-1P-10.26 0.26BERKSHIRE HATHAWAY INC NOTES084664CG4 1.70% Due 3/15/20193/15/2016 1.73% 195,000.00 194,851.80 194,927.15 1.57%195,377.52 147.33 0.17%450.37 AAAa21.45 1.43BERKSHIRE HATHAWAY INC CORPORATE NOTES084664CK5 1.30% Due 8/15/20198/15/2016 1.33% 240,000.00 239,767.20 239,853.65 1.69%238,284.96 398.67 0.21% (1,568.69) AAAa21.87 1.84BNP PARIBAS NY BRANCH COMM PAPER09659CA32 0.00% Due 1/3/20187/3/2017 1.42% 1,200,000.00 1,191,352.00 1,195,582.00 1.32%1,195,820.40 - 1.05%238.40 A-1P-10.26 0.26BURLINGTON NRTH CORP12189TBC7 4.70% Due 10/1/20196/8/2016 1.48% 500,000.00 551,950.00 531,661.27 1.83%528,057.00 11,750.000.46% (3,604.27) AA32.00 1.88CANADIAN IMPERIAL BANK NY CD13606A5Z7 1.76% Due 11/30/201812/5/2016 1.78% 1,500,000.00 1,498,830.00 1,499,314.14 1.52%1,503,781.50 8,873.33 1.32% 4,467.36 A+A11.17 1.15COOPERATIEVE RABOBANK U.A. COMM PAPER21687AXP3 0.00% Due 10/23/20172/17/2017 1.29% 1,000,000.00 991,182.22 999,217.78 1.27%999,191.00 - 0.88%(26.78) A-1P-10.06 0.06CREDIT AGRICOLE CIB NY COMM PAPER22533TXA9 0.00% Due 10/10/20174/10/2017 1.32% 900,000.00 894,006.75 899,705.25 1.26%899,685.00 - 0.79%(20.25) A-1P-10.03 0.03JOHN DEERE CAPITAL CORP NOTES24422ETS8 1.95% Due 6/22/20206/22/2017 1.97% 180,000.00 179,890.20 179,900.02 1.91%180,181.80 965.25 0.16%281.78 AA22.73 2.63FEDERAL HOME LOAN BANKS AGCY3130A8BD4 0.88% Due 6/29/20186/6/2016 0.87% 3,045,000.00 3,045,152.25 3,045,054.17 1.25%3,036,513.59 6,808.96 2.67% (8,540.58) AA+Aaa0.75 0.74FHLB GLOBAL NOTE3130A9AE1 0.88% Due 10/1/20188/26/2016 0.91% 1,100,000.00 1,099,252.00 1,099,640.75 1.32%1,095,173.20 4,812.50 0.96% (4,467.55) AA+Aaa1.00 0.99Total U.S. Treasury Bond/Note1.48% 19,175,000.00 19,238,451.76 19,233,081.85 1.48% 19,212,681.24 67,199.93 16.86% (20,400.61) AAAa21.13 1.09Federal Agency Bond/NoteFHLB NOTES3130AA3R7 1.38% Due 11/15/201911/17/2016 1.38% 1,395,000.00 1,394,679.15 1,394,771.02 1.54% 1,390,163.54 7,246.25 1.22% (4,607.48) AA+Aaa2.13 2.08FHLB NOTES3130AAE46 1.25% Due 1/16/201912/8/2016 1.25% 1,530,000.00 1,529,938.80 1,529,959.23 1.44%1,526,271.39 3,984.38 1.34% (3,687.84) AA+Aaa1.30 1.28 PFM Asset Management LLC27 City of San Luis Obispo Holdings ReportFor the Quarter Ending September 30, 2017Security DescriptionSettle DateYTM at Cost Par Cost Value Amortized CostYTM at Market Market Value* Accrued Interest% of PortfolioUnreal G/LAmort CostS&P/Moody'sYears to Maturity DurationFEDERAL HOME LOAN BANK AGENCY NOTES3130ABF92 1.38% Due 5/28/20195/12/2017 1.47% 455,000.00 454,140.05 454,301.26 1.47%454,278.83 2,415.61 0.40%(22.43) AA+Aaa1.66 1.63FEDERAL HOME LOAN BANK AGENCY NOTES3130ABF92 1.38% Due 5/28/20195/16/2017 1.40% 735,000.00 734,661.90 734,724.68 1.47%733,835.03 3,902.14 0.64% (889.65) AA+Aaa1.66 1.63FNMA NOTES3135G0A78 1.63% Due 1/21/20204/30/2015 1.54% 580,000.00 582,233.00 581,111.82 1.57%580,731.38 1,832.64 0.51% (380.44) AA+Aaa2.31 2.25FNMA BENCHMARK NOTE3135G0H63 1.38% Due 1/28/20191/8/2016 1.40% 1,440,000.00 1,439,107.20 1,439,606.81 1.45%1,438,557.12 3,465.00 1.26% (1,049.69) AA+Aaa1.33 1.31FNMA BENCHMARK NOTE3135G0H63 1.38% Due 1/28/20192/16/2016 0.96% 335,000.00 339,043.45 336,830.10 1.45%334,664.33 806.09 0.29% (2,165.77) AA+Aaa1.33 1.31FNMA NOTES3135G0J20 1.38% Due 2/26/20215/19/2016 1.42% 520,000.00 518,850.80 519,174.53 1.75%513,597.76 695.14 0.45% (5,576.77) AA+Aaa3.41 3.31FNMA BENCHMARK NOTE3135G0J53 1.00% Due 2/26/20195/16/2016 0.96% 375,000.00 375,420.00 375,214.03 1.46%372,612.38 364.58 0.33% (2,601.65) AA+Aaa1.411.39FNMA BENCHMARK NOTE3135G0J53 1.00% Due 2/26/20196/2/2016 1.11% 305,000.00 304,112.45 304,541.76 1.46%303,058.07 296.53 0.27% (1,483.69) AA+Aaa1.41 1.39FNMA BENCHMARK NOTE3135G0J53 1.00% Due 2/26/20196/6/2016 0.96% 3,980,000.00 3,984,338.20 3,982,255.43 1.46%3,954,659.34 3,869.443.47% (27,596.09) AA+Aaa1.41 1.39FNMA BENCHMARK NOTE3135G0N33 0.88% Due 8/2/20198/2/2016 0.93% 2,350,000.00 2,346,052.00 2,347,570.95 1.53%2,322,291.15 3,369.972.04% (25,279.80) AA+Aaa1.84 1.81FNMA NOTES3135G0N82 1.25% Due 8/17/20218/19/2016 1.33% 1,045,000.00 1,040,767.75 1,041,689.83 1.83%1,022,542.95 1,596.530.90% (19,146.88) AA+Aaa3.88 3.76FNMA NOTES3135G0N82 1.25% Due 8/17/20218/19/2016 1.32% 325,000.00 323,888.18 324,130.47 1.83%318,015.75 496.53 0.28% (6,114.72) AA+Aaa3.88 3.76FNMA NOTES3135G0N82 1.25% Due 8/17/20219/2/2016 1.38% 1,000,000.00 993,880.00 995,179.76 1.83%978,510.00 1,527.780.86% (16,669.76) AA+Aaa3.883.76FANNIE MAE AGENCY NOTES3135G0S38 2.00% Due 1/5/20226/29/2017 1.85% 2,235,000.00 2,249,281.65 2,248,506.17 1.94%2,240,679.14 10,678.33 1.97% (7,827.03) AA+Aaa4.27 4.05FNMA NOTES3135G0T29 1.50% Due 2/28/20202/28/2017 1.52% 885,000.00 884,433.60 884,543.33 1.60%882,895.47 1,216.88 0.77% (1,647.86) AA+Aaa2.41 2.36FNMA NOTES3135G0T60 1.50% Due 7/30/20208/1/2017 1.60% 1,465,000.00 1,460,561.05 1,460,802.92 1.70%1,456,992.31 3,662.50 1.28% (3,810.61) AA+Aaa2.83 2.75FNMA NOTES3135G0ZE6 1.75% Due 6/20/201910/2/2014 1.77% 500,000.00 499,630.00 499,863.36 1.49%502,220.00 2,454.86 0.44% 2,356.64 AA+Aaa1.72 1.68FNMA NOTES3135G0ZE6 1.75% Due 6/20/20198/5/2014 1.74% 350,000.00 350,227.50 350,083.31 1.49%351,554.00 1,718.40 0.31% 1,470.69 AA+Aaa1.72 1.68FNMA NOTES3135G0ZE6 1.75% Due 6/20/201911/21/2014 1.71% 100,000.00 100,157.00 100,060.55 1.49%100,444.00 490.97 0.09%383.45 AA+Aaa1.72 1.68FNMA NOTES3135G0ZG1 1.75% Due 9/12/20192/9/2015 1.36% 260,000.00 264,505.80 261,945.43 1.53%261,102.40 240.14 0.23% (843.03) AA+Aaa1.95 1.91FREDDIE MAC NOTES3137EADG1 1.75% Due 5/30/20193/3/2017 1.46% 1,000,000.00 1,006,440.00 1,004,804.88 1.48%1,004,345.00 5,881.94 0.88% (459.88) AA+Aaa1.66 1.63FREDDIE MAC GLOBAL NOTES3137EADK2 1.25% Due 8/1/20199/15/2014 1.88% 1,050,000.00 1,019,077.50 1,038,050.12 1.51%1,045,012.50 2,187.50 0.92% 6,962.38 AA+Aaa1.84 1.80FREDDIE MAC GLOBAL NOTES3137EADM8 1.25% Due 10/2/201912/30/2015 1.65% 700,000.00 689,857.00 694,515.56 1.54%695,990.40 4,350.69 0.61% 1,474.84 AA+Aaa2.01 1.96FREDDIE MAC NOTES3137EADZ9 1.13% Due 4/15/20193/21/2016 1.14% 810,000.00 809,732.00 809,863.60 1.46%805,886.01 4,201.88 0.71% (3,977.59) AA+Aaa1.54 1.51FREDDIE MAC NOTES3137EADZ9 1.13% Due 4/15/20193/29/2016 1.12%70,000.00 70,004.90 70,002.46 1.46%69,644.47 363.13 0.06% (357.99) AA+Aaa1.54 1.51FHLMC REFERENCE NOTE3137EAEB1 0.88% Due 7/19/20197/20/2016 0.96% 1,275,000.00 1,271,914.50 1,273,136.65 1.53%1,260,239.33 2,231.251.11% (12,897.32) AA+Aaa1.801.78FHLMC AGENCY NOTES3137EAEF2 1.38% Due 4/20/20204/20/2017 1.49% 1,165,000.00 1,161,015.70 1,161,598.68 1.63%1,157,577.79 7,163.94 1.02% (4,020.89) AA+Aaa2.56 2.48FREDDIE MAC NOTES3137EAEH8 1.38% Due 8/15/20197/19/2017 1.45% 355,000.00 354,478.15 354,528.34 1.54%353,933.94 976.25 0.31% (594.40) AA+Aaa1.87 1.84GENERAL ELECTRIC CO CORPORATE NOTE36962G2T0 5.55% Due 5/4/20209/27/2017 1.83% 1,300,000.00 1,422,486.00 1,421,977.70 1.87%1,420,541.20 29,461.25 1.25% (1,436.50) AA-A12.59 2.39IBM CORP BONDS459200JQ5 2.50% Due 1/27/20222/3/2017 2.45% 750,000.00 751,575.00 751,378.31 2.26%757,364.25 3,333.33 0.66% 5,985.94 A+A14.33 4.06MICROSOFT CORP NOTE594918AY0 1.85% Due 2/12/20204/13/2015 1.58% 1,000,000.00 1,012,570.00 1,006,273.63 1.65%1,004,548.00 2,518.06 0.88% (1,725.63) AAAAaa2.37 2.30NORDEA BANK FINLAND NY CD65558LWA6 1.76% Due 11/30/201812/5/2016 1.74% 1,500,000.00 1,500,000.00 1,500,000.00 0.78%1,503,781.50 9,093.33 1.32% 3,781.50 AA-Aa31.17 1.16ROYAL BANK OF CANADA NY CD78009NZZ2 1.70% Due 3/9/20183/15/2016 1.69% 830,000.00 830,000.00 830,000.00 1.46%831,145.40 862.28 0.73% 1,145.40 A-1+P-10.44 0.44 PFM Asset Management LLC28 City of San Luis Obispo Holdings ReportFor the Quarter Ending September 30, 2017Security DescriptionSettle DateYTM at Cost Par Cost Value Amortized CostYTM at Market Market Value* Accrued Interest% of PortfolioUnreal G/LAmort CostS&P/Moody'sYears to Maturity DurationSKANDINAV ENSKILDA BANKEN NY CD83050FXT3 1.84% Due 8/2/20198/4/2017 1.85% 1,500,000.00 1,499,415.00 1,499,461.61 1.72% 1,498,635.00 4,446.67 1.32% (826.61) A+Aa31.84 1.81SVENSKA HANDELSBANKEN NY LT CD86958JHB8 1.89% Due 1/10/20191/12/2017 1.91% 1,850,000.00 1,850,000.00 1,850,000.00 1.38%1,844,070.75 8,061.38 1.62% (5,929.25) AA-Aa21.28 1.27 PFM Asset Management LLC29 City of San Luis Obispo Holdings ReportFor the Quarter Ending September 30, 2017Security DescriptionSettle DateYTM at Cost Par Cost Value Amortized CostYTM at Market Market Value* Accrued Interest% of PortfolioUnreal G/LAmort CostS&P/Moody'sYears to Maturity DurationTOYOTA MOTOR CREDIT CORP NOTES89236TBP9 2.13% Due 7/18/20192/15/2017 1.80% 1,075,000.00 1,083,299.00 1,081,188.03 1.73% 1,082,508.88 4,632.20 0.95% 1,320.85 AA-Aa31.80 1.75TOYOTA MOTOR CREDIT CORP89236TCP8 1.55% Due 7/13/20187/13/2015 1.58% 490,000.00 489,583.50 489,889.41 1.48%490,276.36 1,645.58 0.43%386.95 AA-Aa30.78 0.78Total Federal Agency Bond/Note 1.47% 38,885,000.00 38,991,357.78 39,003,535.73 1.57% 38,865,177.12 147,741.35 34.11% (138,358.61) AA+Aa12.09 2.03Negotiable CDPacific Premier Bank YANKEE CD0.25% Due 12/20/201612/20/2015 0.27% 1,000,000.00 1,000,000.00 1,000,000.00 0.27% 1,000,000.00 166.67 0.88%- NRNR0.22 0.22UNILEVER CAPITAL CORP BONDS904764AV9 1.80% Due 5/5/20205/5/2017 1.91% 105,000.00 104,665.05 104,709.26 1.84%104,904.66 766.50 0.09%195.40 A+A12.60 2.51US TREASURY NOTES912828B90 2.00% Due 2/28/202110/5/2016 1.15% 1,700,000.00 1,761,890.63 1,748,264.33 1.71%1,716,335.30 2,911.601.51% (31,929.03) AA+Aaa3.42 3.29US TREASURY NOTES912828D72 2.00% Due 8/31/202112/5/2016 1.92% 1,575,000.00 1,580,537.11 1,579,628.44 1.79%1,587,551.18 2,697.51 1.39% 7,922.74 AA+Aaa3.92 3.75US TREASURY NOTES912828F96 2.00% Due 10/31/20211/5/2017 1.95% 1,000,000.00 1,002,226.56 1,001,909.11 1.82%1,007,188.00 8,369.57 0.88% 5,278.89 AA+Aaa4.09 3.88US TREASURY NOTES912828F96 2.00% Due 10/31/20214/5/2017 1.86% 1,145,000.00 1,152,111.52 1,151,386.19 1.82%1,153,230.26 9,583.15 1.01% 1,844.07 AA+Aaa4.09 3.88FHLB NOTES313378A43 1.38% Due 3/9/201811/25/2014 1.20%70,000.00 70,393.40 70,053.43 1.18%70,061.11 58.82 0.06%7.68 AA+Aaa0.44 0.44Total Negotiable CD1.46% 6,595,000.00 6,671,824.27 6,655,950.76 1.54%6,639,270.51 24,553.82 5.83% (16,680.25) AA13.23 3.09Commercial PaperFANNIE MAE GLOBAL NOTES3135G0TG8 0.88% Due 2/8/201811/25/2014 1.14% 80,000.00 79,335.84 79,925.74 1.25%79,893.92 103.06 0.07%(31.82) AA+Aaa0.36 0.35FANNIE MAE GLOBAL NOTES3135G0YM9 1.88% Due 9/18/201811/25/2014 1.39%35,000.00 35,626.29 35,161.47 1.37%35,169.68 23.70 0.03%8.21 AA+Aaa0.97 0.96FNMA NOTES3135G0ZG1 1.75% Due 9/12/201911/25/2014 1.73%50,000.00 50,034.65 50,014.60 1.53%50,212.00 46.18 0.04%197.40 AA+Aaa1.95 1.91FREDDIE MAC GLOBAL NOTES3137EADK2 1.25% Due 8/1/201911/25/2014 1.70%80,000.00 78,388.80 79,354.39 1.51%79,620.00 166.67 0.07%265.61 AA+Aaa1.84 1.80FHLMC NOTES3137EADN6 0.75% Due 1/12/201811/25/2014 1.11%80,000.00 79,123.36 79,920.31 1.16%79,906.48 131.67 0.07%(13.83) AA+Aaa0.28 0.28US TREASURY NOTES912828C24 1.50% Due 2/28/201911/25/2014 1.43%70,000.00 70,188.91 70,064.11 1.43%70,065.66 89.92 0.06%1.55 AA+Aaa1.41 1.40US TREASURY NOTES912828J43 1.75% Due 2/28/20223/17/2017 2.14% 365,000.00 358,270.31 358,970.89 1.87%363,203.47 547.00 0.32% 4,232.58 AA+Aaa4.42 4.22US TREASURY NOTES912828K58 1.38% Due 4/30/20202/3/2016 1.25% 1,125,000.00 1,130,932.62 1,128,653.45 1.57%1,119,375.00 6,473.34 0.98% (9,278.45) AA+Aaa2.58 2.51Total Commercial Paper1.45% 1,885,000.00 1,881,900.78 1,882,064.96 1.59%1,877,446.21 7,581.54 1.65% (4,618.75) AA+Aaa2.62 2.54Corporate NoteUS TREASURY NOTES912828N89 1.38% Due 1/31/20216/7/2016 1.25% 1,235,000.00 1,241,995.12 1,240,057.88 1.70% 1,221,926.29 2,860.971.07% (18,131.59) AA+Aaa3.34 3.24US TREASURY NOTES912828R77 1.38% Due 5/31/20217/7/2017 1.81% 1,480,000.00 1,456,123.44 1,457,521.46 1.76%1,459,996.32 6,838.93 1.28% 2,474.86 AA+Aaa3.67 3.54US TREASURY NOTES912828SX9 1.13% Due 5/31/201911/25/2014 1.50%80,000.00 78,684.64 79,504.86 1.43%79,593.76 302.46 0.07%88.90 AA+Aaa1.67 1.64US TREASURY NOTES912828UJ7 0.88% Due 1/31/201811/25/2014 1.06%70,000.00 69,603.75 69,958.15 1.17%69,931.96 103.19 0.06%(26.19) AA+Aaa0.34 0.33US TREASURY NOTES912828V72 1.88% Due 1/31/20227/11/2017 1.90% 1,545,000.00 1,543,370.51 1,543,453.90 1.86%1,545,784.86 4,880.60 1.36% 2,330.96 AA+Aaa4.34 4.13US TREASURY NOTES912828VF4 1.38% Due 5/31/202012/4/2015 1.56% 600,000.00 595,195.31 597,109.08 1.58%596,788.80 2,772.54 0.52% (320.28) AA+Aaa2.67 2.60US TREASURY NOTES912828VK3 1.38% Due 6/30/201811/25/2014 1.21%70,000.00 70,407.66 70,086.14 1.30%70,041.02 243.24 0.06%(45.12) AA+Aaa0.75 0.74US TREASURY NOTES912828WL0 1.50% Due 5/31/201911/14/2016 1.06%95,000.00 96,039.06 95,682.83 1.44%95,089.11 478.89 0.08% (593.72) AA+Aaa1.67 1.63US TREASURY N/B912828WY2 2.25% Due 7/31/202111/23/2016 1.78% 685,000.00 699,556.25 696,992.44 1.78%696,800.50 2,596.67 0.61% (191.94) AA+Aaa3.84 3.65US TREASURY NOTES912828XM7 1.63% Due 7/31/20203/30/2016 1.27% 985,000.00 999,775.00 994,738.25 1.60%985,538.80 2,696.71 0.87% (9,199.45) AA+Aaa2.84 2.75 PFM Asset Management LLC30 City of San Luis Obispo Holdings ReportFor the Quarter Ending September 30, 2017Security DescriptionSettle DateYTM at Cost Par Cost Value Amortized CostYTM at Market Market Value* Accrued Interest% of PortfolioUnreal G/LAmort CostS&P/Moody'sYears to Maturity DurationUS TREASURY NOTES912828XQ8 2.00% Due 7/31/20229/1/2017 1.74% 2,100,000.00 2,126,003.91 2,125,591.38 1.92% 2,108,120.70 7,076.091.85% (17,470.68) AA+Aaa4.84 4.57WELLS FARGO & COMPANY NOTES94974BGR5 2.55% Due 12/7/20206/8/2016 2.02% 975,000.00 997,191.00 990,911.07 2.17%986,218.35 7,873.13 0.87% (4,692.72) AA23.19 3.02WESTPAC BANKING CORP NY CD96121T4A3 2.05% Due 8/3/20208/7/2017 2.05% 1,345,000.00 1,345,000.00 1,345,000.00 1.83%1,351,515.18 4,135.88 1.19% 6,515.18 AA-Aa32.84 2.82 0.00% Due 1/0/19001/0/1900 0.00%-- - 0.00%-- 0.00%- 0.00 0.00Total Corporate Note1.71% 11,265,000.00 11,318,945.65 11,306,607.44 1.81% 11,267,345.65 42,859.30 9.89% (39,261.79) AAAa13.62 3.47Total Portfolio 1.25% 113,873,252.39 114,170,732.63 114,149,493.13 1.30%113,930,173.12 289,935.94 100.00% (219,320.01) AAAa11.49 1.44Total Market Value Plus Accrued114,220,109.06 *Generally, PFM’s market prices are derived from closing bid prices as of the last business day of the month as supplied by Interactive Data, Bloomberg or Telerate. Where prices are not available from generally recognized sources the securities are priced using a yield-based matrix system to arrive at an estimated market value. Prices that fall between data points are interpolated. Non-negotiable FDIC-insured bank certificates of deposit are priced at par. Although PFM believes the prices to be reliable, the values of the securities do not always represent the prices at which the securities could have been bought or sold. PFM Asset Management LLC31 © PFM C. Quarterly Transactions CITY OF SAN LUIS OBISPO OPERATING FUNDS For the Quarter Ended September 30, 2017 Portfolio Activity Quarterly Portfolio Transactions Trade Date Settle Date Maturity DatePar ($) CUSIP Security Description Transact Amt ($) Yield at Market Realized G/L (BV)Coupon BUY 7/3/17 7/3/17 1,200,000 06538CA35 BANK OF TOKYO MITSUBISHI COMM PAPER 1/3/18 1,191,413.33 1.41%0.00% 7/3/17 7/3/17 1,200,000 09659CA32 BNP PARIBAS NY BRANCH COMM PAPER 1/3/18 1,191,352.00 1.42%0.00% 7/6/17 7/7/17 1,480,000 912828R77 US TREASURY NOTES 5/31/21 1,458,180.68 1.81%1.37% 7/6/17 7/11/17 1,545,000 912828V72 US TREASURY NOTES 1/31/22 1,556,254.40 1.90%1.87% 7/18/17 7/19/17 355,000 3137EAEH8 FREDDIE MAC NOTES 8/15/19 354,478.15 1.45%1.37% 7/28/17 8/1/17 1,465,000 3135G0T60 FNMA NOTES 7/30/20 1,460,561.05 1.60%1.50% 8/3/17 8/7/17 1,345,000 96121T4A3 WESTPAC BANKING CORP NY CD 8/3/20 1,345,000.00 2.05%2.05% 8/3/17 8/4/17 1,500,000 83050FXT3 SKANDINAV ENSKILDA BANKEN NY CD 8/2/19 1,499,415.00 1.85%1.84% 8/30/17 9/1/17 2,100,000 912828XQ8 US TREASURY NOTES 7/31/22 2,129,656.08 1.74%2.00% 9/25/17 9/27/17 1,300,000 36962G2T0 GENERAL ELECTRIC CO CORPORATE NOTE 5/4/20 1,451,145.58 1.83%5.55% 13,490,000 13,637,456.27Total BUY INTEREST 7/5/17 7/5/17 2,235,000 3135G0S38 FANNIE MAE AGENCY NOTES 1/5/22 21,853.33 2.00% 7/5/17 7/5/17 0 MONEY0002 MONEY MARKET FUND 111.48 7/10/17 7/10/17 1,850,000 86958JHB8 SVENSKA HANDELSBANKEN NY LT CD 1/10/19 17,385.38 1.89% 7/13/17 7/13/17 490,000 89236TCP8 TOYOTA MOTOR CREDIT CORP 7/13/18 3,797.50 1.55% 7/16/17 7/16/17 1,530,000 3130AAE46 FHLB NOTES 1/16/19 9,562.50 1.25% 7/18/17 7/18/17 1,075,000 89236TBP9 TOYOTA MOTOR CREDIT CORP NOTES 7/18/19 11,421.88 2.12% 7/19/17 7/19/17 1,275,000 3137EAEB1 FHLMC REFERENCE NOTE 7/19/19 5,578.13 0.87% 7/21/17 7/21/17 580,000 3135G0A78 FNMA NOTES 1/21/20 4,712.50 1.62% 7/27/17 7/27/17 750,000 459200JQ5 IBM CORP BONDS 1/27/22 9,375.00 2.50% 7/28/17 7/28/17 1,440,000 3135G0H63 FNMA BENCHMARK NOTE 1/28/19 9,900.00 1.37% 7/28/17 7/28/17 335,000 3135G0H63 FNMA BENCHMARK NOTE 1/28/19 2,303.13 1.37% PFM Asset Management LLC 32 CITY OF SAN LUIS OBISPO OPERATING FUNDS For the Quarter Ended September 30, 2017 Portfolio Activity Trade Date Settle Date Maturity DatePar ($) CUSIP Security Description Transact Amt ($) Yield at Market Realized G/L (BV)Coupon 7/31/17 7/31/17 1,235,000 912828N89 US TREASURY NOTES 1/31/21 8,490.63 1.37% 7/31/17 7/31/17 985,000 912828XM7 US TREASURY NOTES 7/31/20 8,003.13 1.62% 7/31/17 7/31/17 1,545,000 912828V72 US TREASURY NOTES 1/31/22 14,484.38 1.87% 7/31/17 7/31/17 685,000 912828WY2 US TREASURY N/B 7/31/21 7,706.25 2.25% 8/1/17 8/1/17 1,050,000 3137EADK2 FREDDIE MAC GLOBAL NOTES 8/1/19 6,562.50 1.25% 8/2/17 8/2/17 2,350,000 3135G0N33 FNMA BENCHMARK NOTE 8/2/19 10,281.25 0.87% 8/2/17 8/2/17 0 MONEY0002 MONEY MARKET FUND 186.27 8/7/17 8/7/17 1,850,000 06427KRC3 BANK OF MONTREAL CHICAGO CERT DEPOS 2/7/19 17,196.78 1.88% 8/7/17 8/7/17 1,050,000 037833CK4 APPLE INC BONDS 2/7/20 9,864.17 1.90% 8/12/17 8/12/17 1,000,000 594918AY0 MICROSOFT CORP NOTE 2/12/20 9,250.00 1.85% 8/15/17 8/15/17 240,000 084664CK5 BERKSHIRE HATHAWAY INC CORPORATE NOTES 8/15/19 1,560.00 1.30% 8/17/17 8/17/17 960,000 06406HDD8 BNY MELLON CORP NOTE (CALLABLE)8/17/20 12,480.00 2.60% 8/17/17 8/17/17 1,045,000 3135G0N82 FNMA NOTES 8/17/21 6,531.25 1.25% 8/17/17 8/17/17 325,000 3135G0N82 FNMA NOTES 8/17/21 2,031.25 1.25% 8/17/17 8/17/17 1,000,000 3135G0N82 FNMA NOTES 8/17/21 6,250.00 1.25% 8/22/17 8/22/17 390,000 02665WBA8 AMERICAN HONDA FINANCE CORP NOTES 2/22/19 3,315.00 1.70% 8/26/17 8/26/17 375,000 3135G0J53 FNMA BENCHMARK NOTE 2/26/19 1,875.00 1.00% 8/26/17 8/26/17 305,000 3135G0J53 FNMA BENCHMARK NOTE 2/26/19 1,525.00 1.00% 8/26/17 8/26/17 520,000 3135G0J20 FNMA NOTES 2/26/21 3,575.00 1.37% 8/26/17 8/26/17 3,980,000 3135G0J53 FNMA BENCHMARK NOTE 2/26/19 19,900.00 1.00% 8/28/17 8/28/17 885,000 3135G0T29 FNMA NOTES 2/28/20 6,637.50 1.50% 8/31/17 8/31/17 1,575,000 912828D72 US TREASURY NOTES 8/31/21 15,750.00 2.00% 8/31/17 8/31/17 365,000 912828J43 US TREASURY NOTES 2/28/22 3,193.75 1.75% 8/31/17 8/31/17 1,700,000 912828B90 US TREASURY NOTES 2/28/21 17,000.00 2.00% 9/5/17 9/5/17 0 MONEY0002 MONEY MARKET FUND 139.24 9/9/17 9/9/17 830,000 78009NZZ2 ROYAL BANK OF CANADA NY CD 3/9/18 7,055.00 1.70% 9/12/17 9/12/17 260,000 3135G0ZG1 FNMA NOTES 9/12/19 2,275.00 1.75% 9/15/17 9/15/17 195,000 084664CG4 BERKSHIRE HATHAWAY INC NOTES 3/15/19 1,657.50 1.70% PFM Asset Management LLC 33 CITY OF SAN LUIS OBISPO OPERATING FUNDS For the Quarter Ended September 30, 2017 Portfolio Activity Trade Date Settle Date Maturity DatePar ($) CUSIP Security Description Transact Amt ($) Yield at Market Realized G/L (BV)Coupon 38,260,000 300,776.68Total INTEREST MATURITY 7/3/17 7/3/17 1,400,000 09659BU32 BNP PARIBAS NY BRANCH COMM PAPER 7/3/17 1,400,000.00 0.00 0.00% 7/3/17 7/3/17 1,000,000 06538BU35 BANK TOKYO-MIT UFJ NY COMM PAPER 7/3/17 1,000,000.00 0.00 0.00% 9/1/17 9/1/17 1,000,000 46640PW17 JP MORGAN SECURITIES LLC COMM PAPER 9/1/17 1,000,000.00 0.00 0.00% 9/1/17 9/1/17 1,000,000 09659BW14 BNP PARIBAS NY BRANCH COMM PAPER 9/1/17 1,000,000.00 0.00 0.00% 4,400,000 4,400,000.00 0.00Total MATURITY SELL 7/6/17 7/11/17 80,000 912828UR9 US TREASURY NOTES 2/28/18 79,988.72 1.20%(70.90)0.75% 7/6/17 7/11/17 680,000 912828UR9 US TREASURY NOTES 2/28/18 679,904.14 1.20% 528.95 0.75% 7/6/17 7/7/17 1,485,000 3135G0K69 FNMA BENCHMARK NOTE 5/6/21 1,460,138.21 1.76% (33,115.68)1.25% 7/6/17 7/11/17 800,000 3137EADN6 FHLMC NOTES 1/12/18 801,167.33 1.20% 209.57 0.75% 7/18/17 7/19/17 355,000 912828WL0 US TREASURY NOTES 5/31/19 356,766.82 1.34% (1,804.83)1.50% 7/28/17 8/1/17 1,460,000 912828XH8 US TREASURY NOTES 6/30/20 1,467,138.82 1.50% 8,140.28 1.62% 8/2/17 8/3/17 900,000 3137EADP1 FREDDIE MAC GLOBAL NOTES 3/7/18 901,357.75 1.22%(90.91)0.87% 8/2/17 8/3/17 450,000 3130A8BD4 FEDERAL HOME LOAN BANKS AGCY 6/29/18 448,769.88 1.27% (1,611.73)0.87% 8/3/17 8/7/17 300,000 912828VF4 US TREASURY NOTES 5/31/20 300,133.58 1.45% 892.42 1.37% 8/3/17 8/7/17 1,045,000 912828XH8 US TREASURY NOTES 6/30/20 1,051,243.73 1.47% 6,671.65 1.62% 9/25/17 9/27/17 1,300,000 912828ND8 US TREASURY NOTES 5/15/20 1,383,672.05 1.50% 278.24 3.50% 8,855,000 8,930,281.03 -19,972.94Total SELL PFM Asset Management LLC 34 © PFM Important Disclosures This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. •Market values which include accrued interest, are derived from closing bid prices as of the last business day of the month as supplied by Interactive Data, Bloomberg or Telerate. Where prices are not available from generally recognized sources the securities are priced using a yield based matrix system to arrive at an estimated market value. •In accordance with generally accepted accounting principles, information is presented on a trade date basis; forward settling purchases are included in the monthly balances and forward settling sales are excluded. •Performance is presented in accordance with the CFA Institute’s Global Investment Performance Standards (GIPS). Unless otherwise noted, performance is shown gross of fees. Quarterly returns are presented on an unannualized basis. Returns for periods greater than one year are presented on an annualized basis. Past performance is not indicative of future returns. •Bank of America/Merrill Lynch Indices provided by Bloomberg Financial Markets. •Money market fund/cash balances are included in performance and duration computations. •Standard & Poor’s is the source of the credit ratings. Distribution of credit rating is exclusive of money market fund/LGIP holdings. •Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although they may be called prior to maturity. •MBS maturities are represented by expected average life. 35 © PFM Glossary •ACCRUED INTEREST: Interest that is due on a bond or other fixed income security since the last interest payment was made. •AGENCIES: Federal agency securities and/or Government-sponsored enterprises. •AMORTIZED COST: The original cost of the principal of the security is adjusted for the amount of the periodic reduction of any discount or pr emium from the purchase date until the date of the report. Discount or premium with respect to short term securities (those with less than one year to maturity at t ime of issuance) is amortized on a straight line basis. Such discount or premium with respect to longer term securities is amortized using the constant yield basis. •BANKERS’ ACCEPTANCE: A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the insurer. •COMMERCIAL PAPER: An unsecured obligation issued by a corporation or bank to finance its short -term credit needs, such as accounts receivable and inventory. •CONTRIBUTION TO DURATION: Represents each sector or maturity range’s relative contribution to the overall duration of the portfolio measured as a percentage weighting. Since duration is a key measure of interest rate sensitivity, the contribution to duration measures the relative amount or contribu tion of that sector or maturity range to the total rate sensitivity of the portfolio. •DURATION TO WORST: A measure of the sensitivity of a security’s price to a change in interest rates, stated in years, computed from cash flows t o the maturity date or to the put date, whichever results in the highest yield to the investor. •EFFECTIVE DURATION: A measure of the sensitivity of a security’s price to a change in interest rates, stated in years. •EFFECTIVE YIELD: The total yield an investor receives in relation to the nominal yield or coupon of a bond. Effective yield takes into account the power of compounding on investment returns, while nominal yield does not. •FDIC: Federal Deposit Insurance Corporation. A federal agency that insures bank deposits to a specified amount . •INTEREST RATE: Interest per year divided by principal amount, expressed as a percentage. •MARKET VALUE: The value that would be received or paid for an investment in an orderly transaction between market participants at the measu rement date. •MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. •NEGOTIABLE CERTIFICATES OF DEPOSIT: A CD with a very large denomination, usually $1 million or more that can be traded in secondary markets. •PAR VALUE: The nominal dollar face amount of a security. 36 © PFM Glossary •PASS THROUGH SECURITY: A security representing pooled debt obligations that passes income from debtors to its shareholders. The most common type is the mortgage-backed security. •REPURCHASE AGREEMENTS: A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. •SETTLE DATE: The date on which the transaction is settled and monies/securities are exchanged. If the settle date of the transaction occur s on a non- business day (i.e. coupon payments and maturity proceeds), the funds are exchanged on the next business day. •TRADE DATE: The date on which the transaction occurred however the final consummation of the security transaction and payment has not yet taken place. •UNSETTLED TRADE: A trade which has been executed however the final consummation of the security transaction and payment has not yet taken plac e. •U.S. TREASURY: The department of the U.S. government that issues Treasury securities. •YIELD: The rate of return based on the current market value, the annual interest receipts, maturity value and the time period remain ing until maturity, stated as a percentage, on an annualized basis. •YTM AT COST: The yield to maturity at cost is the expected rate of return, based on the original cost, the annual interest receipts, matur ity value and the time period from purchase date to maturity, stated as a percentage, on an annualized basis. •YTM AT MARKET: The yield to maturity at market is the rate of return, based on the current market value, the annual interest receipts, matur ity value and the time period remaining until maturity, stated as a percentage, on an annualized basis. 37 © PFM Thank You © PFM 0 City of San Luis Obispo Cash Flow Analysis PFM Asset Management LLC www.pfm.com 50 California Street Suite 2300 San Francisco, CA 94111 415-982-5544 Izac Chyou, Senior Managing Consultant chyoui@pfm.com © PFM 1 Review of the City’s Funds Analyzed City’s historical balances to determine optimal allocation between operating portfolio and liquid funds Analysis shows the City can move liquid funds into operating portfolio •Amount to move will depend on City’s comfort level with liquidity cushion Recommendation on process to employ, to determine when to move funds and in what amount Going forward, recommend an annual review of portfolio allocation to maintain optimal allocation © PFM 2 Historical Balances The City’s balances have grown over past five years •Fluctuations in LAIF have largely contributed to an enhanced growth rate $0 $20 $40 $60 $80 $100 $120 $140 Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17MillionsCity's Historical Balances December 2011 -September 2017 Historical Annual Growth Rate of 12.5% © PFM 3 Actual Core and Liquidity Balances Actual core = Securities portfolio Actual liquidity = Cash + LAIF + Bank Accounts + MMF/CD* $0 $20 $40 $60 $80 $100 $120 $140 Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17MillionsCity's Historical Balances December 2011 -September 2017 Actual Liquidity Actual Core 33% 67% * MMF/CD includes balances for the Heritage Oaks money market fund and Mission certificates of deposits. © PFM 4 Seasonal Factors Month Average Monthly Balance*Historical Factor Average 89,821,858 100% January 89,574,928 100% February 90,775,873 101% March 91,492,876 102% April 94,370,864 105% May 94,138,241 105% June 89,180,094 99% July 87,721,747 98% August 89,991,447 100% September 89,288,144 99% October 88,120,348 98% November 87,042,165 97% December 86,165,572 96% We have analyzed the City’s historical seasonal spending patterns: Low points during the fall and high points during the spring *This analysis represents 5 year averages which include lower balances of prior years. © PFM 5 Actual Core and Liquidity Balances The liquidity cushion provides an additional level of short-term funds for the lowest projected liquidity balance over the next 12 months The City currently has a 33% liquidity cushion of $37.1 million Excess liquidity may be reinvested in a long-term portfolio to optimize the portfolio’s performance (in millions)Modeled Average Liquidity Modeled Core 10% Cushion $11.3 $102.0 15% Cushion $17.0 $96.3 20% Cushion $22.7 $90.6 25% Cushion $28.3 $85.0 © PFM 6 Projected Balances –Continued Growth The City’s historical annual growth rate over the analytical period was 12.5% If the City’s overall balances increase at an average annual growth of 5% over the next two years, the core portfolio will increase from $102.1 million as of September 2017 to $112.1 million as of September 2019 The model uses a 15% liquidity cushion Excess Liquidity — projected at $35.9 million $0 $20 $40 $60 $80 $100 $120 $140 $160 Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17Dec-17Mar-18Jun-18Sep-18Dec-18Mar-19Jun-19Sep-19MillionsModeled Balance Analysis December 2011 -September 2019 Modeled Liquidity Modeled Core Projected Liquidity Projected Core Actual Portfolio © PFM City of San Luis Obispo Investment Policy Recommendations PFM Asset Management LLC www.pfm.com 50 California Street Suite 2300 San Francisco, CA 94111 415-982-5544 spykem@pfm.com chyoui@pfm.com Presented by: Monique Spyke, Managing Director Izac Chyou, Senior Managing Consultant © PFM Investment Policy Recommendations We recommend the following changes to the City’s Investment Policy (the Policy) 1.Require all corporate notes to be rated “A” or better by one NRSRO a)Down from two NRSROs b)Remove the additional “AA” credit rating requirement for financial institutions 2.Change the credit rating requirement of negotiable CDs from “AA” to “A” 3.Allow a 15% allocation to asset-backed securities (ABS) 1 © PFM PFM California Client -Investment Policies The tables below show the sample percentages of our California clients who have adopted the recommended changes to the City’s Policy. Corporate notes rated "A" by one NRSRO Negotiable CDs rated "A" 85%79% ABS rated "AAA" ABS rated "AA" 16%84% ABS Allowed 52% Corporate notes rated "A" by one NRSRO Negotiable CDs rated "A" 88%76% ABS rated "AAA" ABS rated "AA" 15%85% ABS Allowed 52% California Clients with Policy Changes California City Clients with Policy Changes Information in the tables above represent estimated percentages based on California clients as of June 2017. 2 © PFM Allow Corporate Notes Rated “A” by One NRSRO Increases the investable opportunity set and enables investments in split-rated issues. Source: BAML 1-5 Year U.S. Corporate Index, as of 12/31/2016. Top 10 Issuers # of Issues Amount Outstanding (millions) % of Corp Index Moody’s S&P Fitch J.P. Morgan Chase 19 $44,850 1.93%A3 A-A+ Morgan Stanley 19 $42,485 1.86%A3 BBB+A Goldman Sachs 17 $38,750 1.69%A3 BBB+A Bank of America 14 $33,964 1.48%Baa1 BBB+A Citigroup 16 $27,350 1.15%Baa1 BBB+A Wells Fargo 11 $24,950 1.05%A2 A AA- Cisco Systems 11 $18,100 0.77%A1 AA-- Toyota 16 $16,850 0.71%Aa3 AA-A Daimler Finance 16 $15,950 0.66%A2 A A- Sumitomo Mitsui 14 $14,500 0.60%A1 A A Split-Rated Issuers 3 © PFM Allow Corporate Notes Rated “A” by One NRSRO 23.2% of the 1-5 Year Corporate Index is composed of “A” rated financial issuers Source: BAML 1-5 Year U.S. Corporate Index, as of 12/31/2016. Composition of the 1-5 Year Corporate Universe Financial Industrial Utilities Total AAA 0.2%0.9%0.0%1.1% AA 8.7%6.5%0.4%15.5% A 23.2%18.4%2.0%43.6% BBB 7.6%29.3%2.7%39.5% Total 39.6%55.1%5.1%100% 4 © PFM 5 From\To:Aaa Aa A Baa Ba B Caa Ca-C Default Withdrawn Aaa 87.6%8.1%0.6%0.1%0.0%0.0%---3.7% Aa 0.8%85.2%8.4%0.4%0.1%0.0%0.0%0.0%0.0%5.0% A 0.1%2.5%86.7%5.4%0.5%0.1%0.0%0.0%0.1%4.6% Baa 0.0%0.1%4.2%85.5%3.9%0.7%0.2%0.0%0.2%5.2% Ba 0.0%0.0%0.4%6.1%76.2%7.2%0.7%0.1%0.9%0.8% B 0.0%0.0%0.1%0.5%4.8%73.5%6.6%0.5%3.4%10.6% Caa -0.0%0.0%0.1%0.4%6.7%67.4%2.8%8.4%14.1% Ca-C --0.1%-0.6%2.5%8.8%39.5%25.6%22.9% Legend: Upgrades Downgrades to Investment Grade Downgrades to Non-Investment Grade Defaults Letter Rating Migration Rates Source: Moody’s Annual Default Study: Corporate Default and Recovery Rates, 1920-2016. From\To:Aaa Aa A Baa Ba B Caa Ca-C Default Withdrawn Aaa 100.0%--------- Aa 0.3%91.7%5.6%------2.6% A -0.7%89.8%5.7%0.1%----3.8% Baa --1.3%87.1%6.7%0.8%0.2%--3.8% Ba ---5.2%77.6%8.6%1.0%0.3%0.1%7.4% B ---0.2%4.5%71.9%10.0%0.2%1.4%11.8% Caa -----5.5%70.3%4.4%6.2%13.6% Ca-C -----1.1%1.1%42.0%44.3%11.4% 2016 One-Year Letter Rating Migration Rates Average One-Year Letter Rating Migration Rates, 1970-2016 5 © PFM Historical Default Rates Source: Moody’s Annual Default Study: Corporate Default and Recovery Rates. Annual Corporate Default Rates by Letter Rating 2006 –2016 Year Aaa Aa A Baa Ba B Caa-C 2006 ----0.2%1.1%5.9% 2007 ------5.0% 2008 -0.5%0.4%1.0%2.3%4.0%10.7% 2009 --0.2%0.9%1.8%7.2%25.9% 2010 --0.2%0.1%-0.4%8.5% 2011 -0.2%-0.4%0.2%0.3%5.9% 2012 ---0.1%0.1%0.5%7.8% 2013 --0.1%0.1%0.6%0.9%6.2% 2014 --0.1%-0.1%0.5%4.6% 2015 ----0.3%2.2%6.8% 2016 ----0.1%1.5%9.1% 6 © PFM Change Negotiable CDs Rating Requirement From “AA” to “A” This rating requirement change in the Policy would allow the portfolio manager to Access a larger opportunity set Further diversify the City’s portfolio Add incremental yield Source: BAML 1-5 Year U.S. Corporate Index by face value, as of 12/31/2016. Composition of the 1-5 Year Corporate Universe Financial Industrial Utilities Total AAA 0.2%0.9%0.0%1.1% AA 8.7%6.5%0.4%15.5% A 23.2%18.4%2.0%43.6% BBB 7.6%29.3%2.7%39.5% Total 39.6%55.1%5.1%100% 7 © PFM ABS Recommendation We recommend the City authorize a 15% allocation to ABS. This allocation to ABS is more conservative than the Code’s maximum allocation limit of 20%. The addition of ABS may benefit the City’s portfolio in the following ways: Increased portfolio diversification away from traditional government and corporate debt Opportunity to seek enhanced return Favorable credit profile –AAA-rated ABS maintain credit ratings that are higher than bonds issued by the U.S. Treasury and federal agencies while providing higher yields. Investment decisions will be based on our extensive credit process. Period Ended 09/30/2017 0-5 Year Index Effective Duration Yield 3 Month 1 Year 3 Years 5 Years U.S. Treasury 2.15 1.50% 0.29% 0.11%1.03% 0.73% ABS 1.34 1.71% 0.40% 1.07% 1.39% 1.11% Source: BAML Indices as of 9/30/2017. Unrebalanced effective duration and yield are shown. 8 © PFM 9 Characteristics of ABS An ABS derives its value from a pool of underlying assets. The security represents ownership rights to the cash flow from these assets. We purchase asset-backed securities backed by credit card loans, auto loans, and equipment loans. The sponsoring company creates a separate trust to ensure investors have access to the cash flows from the assets held as collateral. Issuer: Sponsoring company/trust Credit: Rated by NRSROs Credit enhancements: Some combination of subordination and credit tranching, over-collateralization, reserve accounts, excess spread, letter of credit, and insurance Maturity:Typically up to 10 years Liquidity:Moderate Yield: Higher than U.S. Treasury and Federal Agency obligations 9 © PFM Credit Enhancement To lower credit risk for investors, ABS may be enhanced through: Subordination (tranches) −Loans sorted into several tranches based on credit quality −The senior tranche (usually rated “AAA”) has the rights to first cash flows Reserve Account –Used to reimburse the investors for losses up to the amount allocated for the reserve Over-Collateralization –ABS are required to be over-collateralized –Collateral is made up of high quality assets and is part of the credit research process Excess Spread –Difference between the yield on the underlying collateral and the coupon on the ABS Source: BAML Indices as of 6/30/2017. 10 © PFM Going Beyond Credit Ratings Issuer Analysis Macro Analysis •Balance sheet analysis •Earnings: Actual and projections •Asset quality and impairments •Corporate governance •Price movement of fixed income and equity securities •Monitor credit default swap levels •Trading volume •Analysts’ recommendations •Industry trends •Competitive environment •Business cycle •Regulatory environment •Rating agency actions •Sovereign credit developments 11 © PFM 12 PFM’s Credit Screening Process Credit Committee focuses on sectors with positive macro characteristics. Independent research is conducted to identify issuers that may benefit from macro trends. Once a potential issuer is identified, a thorough review of the company is conducted. Credit committee action: approve the issuer, request more data or decline. •Minimum rating requirements •Availability of supply •Relative value analysis Universe of Potential Issuers Preliminary Screen •Improving or stable ratings •Diversity of revenue/profits •Capital structure •Strength of financial position •Industry leadership •Superior product •Management team Issuer Screen •Economic outlook •Outlook for industry growth •Geographic exposure •Changes in regulatory environment Industry Screen Information Sources: •Independent research •Company releases •Sell side analysis •News releases •Company financials •Ratings reports •Security valuation Approved Issuer List •Bloomberg •MarketAxess •TradeWeb 12 © PFM 13 C R E D I T C O M M I T TE E M E M B E R S F U N C T I O N & R E S P O N S I B I L I T I E S •Chief Credit Officer, Chief Investment Officer, and Senior Portfolio Managers •Traders and analysts provide research •Chief Compliance Officer observes •Manage credit risk •Formal monthly meetings to review macro events and independently generated credit reports •Monitor credit rating actions •Primary credit risk management tool includes short-term and long-term views •Portfolio managers and traders restricted by approved list via integration into trading and compliance systems AP P R O V E D C R E D I T L I S T Credit Committee 13 © PFM Corporate Long-Term Ratings Definitions Source: Moody’s Investor Services, Standards and Poor’s, Fitch Ratings. S&P Moody’s Fitch Definitions (by Moody’s) AAA Aaa AAA Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk. AA Aa AA Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. A A A Obligations rated A are considered upper-medium grade and are subject to low credit risk. BBB Baa BBB Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics. BB Ba BB Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk. B B B Obligations rated B are considered speculative and are subject to high credit risk. CCC Caa CCC Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk. CC Ca CC Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. C C C Obligations rated C are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest. Investment Grade14 © PFM Important Disclosures This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. Market values which include accrued interest, are derived from closing bid prices as of the last business day of the month as supplied by Interactive Data, Bloomberg or Telerate. Where prices are not available from generally recognized sources the securities are priced using a yield based matrix system to arrive at an estimated market value. In accordance with generally accepted accounting principles, information is presented on a trade date basis; forward settling purchases are included in the monthly balances and forward settling sales are excluded. Performance is presented in accordance with the CFA Institute’s Global Investment Performance Standards (GIPS). Unless otherwise noted, performance is shown gross of fees. Quarterly returns are presented on an unannualized basis. Returns for periods greater than one year are presented on an annualized basis. Past performance is not indicative of future returns. Bank of America/Merrill Lynch Indices provided by Bloomberg Financial Markets. Money market fund/cash balances are included in performance and duration computations. Standard & Poor’s is the source of the credit ratings. Distribution of credit rating is exclusive of money market fund/LGIP holdings. Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although they may be called prior to maturity. MBS maturities are represented by expected average life. 15 © PFM Thank You