California Debt and Investment Advisory Commission Short-term and Interim Financing Strategies Seminar Jeffrey Thiemann Charles Schwab Investment Management January 12, 2011

2 Money Market Funds: A Few Key Facts Money market funds are governed by Rule 2a-7 of the Investment Company Act of Rule 2a-7 imposes limits on money market funds for credit quality, diversification, and maturity.  Funds may invest only in high quality “eligible securities”  Exposures to a single issuer generally limited to no more than 5% of total fund assets  Maturity limits on both individual securities and of the overall weighted average portfolio

3 Money Market Funds: A Few Key Facts Credit Quality  Eligible securities limited to securities rated in the two highest short-term rating categories by Moody’s, S&P, and Fitch, or if unrated, that are of comparable credit quality.  At least 97% of assets must be “First Tier” securities, which are defined as securities that are rated in the highest short-term rating category by these agencies (e.g., MIG1, SP-1 or SP-1+, and F1 or F1+), or if unrated, of comparable credit quality.  Regardless of ratings, the fund’s investment advisor must independently determine that these investments present “minimal credit risk”.

4 Money Market Funds: A Few Key Facts Diversification  Requirements vary depending on type of fund (taxable, national tax-exempt and single state tax exempt).  For taxable and national tax-exempt funds, investment in securities issued by an issuer is limited to 5% of total fund assets. For single state funds, that 5% limitation applies to 75% of the fund’s total assets.  The rule includes additional diversification requirements for securities with demand features and guarantees (e.g., bond insurance and letters of credit). Maturity  Securities must have a remaining maturity of 397 days or less (i.e., 13 months).  Securities with a nominal maturity date in excess of 397 days may be eligible under some circumstances. Bonds that are subject to a demand feature (e.g., variable rate demand obligations) may be “deemed” to mature on the date in which the principal amount must be paid through the demand feature.  Rule 2a-7 limits the dollar-weighted average portfolio maturity (WAM) to 60 calendar days.

5 California Tax and Revenue Anticipation Notes (TRANs) Minimal credit risk standard for investment in money market funds. Other investment considerations:  Ability to maintain Tier 1 status through the investment period  Liquidity of the name in the overall market Minimum information requirements:  Actual cash flow results for the prior fiscal year  Projected cash flow for the current fiscal year  Borrowable resources or other sources of additional liquidity, both current and projected  Historical financial results, e.g., general fund GAAP and/or unaudited results  Proposed or enacted budget

6 California Tax and Revenue Anticipation Notes (TRANs) Key metrics:  TRANs size, relative to projected receipts  Set aside dates; coverage at set-asides  Net projected debt service coverage (gross vs. net)  Unused cash relative to total disbursements

7 California Tax and Revenue Anticipation Notes (TRANs) Evaluating the credibility of cash flow projections:  Is there sufficient detail by major line item to test the reasonableness of the projection?  What are the key assumptions?  How does growth or decline compare relative to historical experience?  How have the projections incorporated known revenue/expenditure impacts (e.g., state deferrals)?  Does the projected cash flow projection square with the proposed/enacted budget?  Ability to confirm cash balances, including alternate liquidity cash balances, with audited financial information?  Do I understand the derivation and availability of the alternative liquidity? Continuing disclosure:  Cash flow actual performance vs. projection  Other available financial information

8 Other Short-term Debt Instruments  Commercial Paper (bank vs. self liquidity)  Variable Rate Demand Obligations (VRDOs)  Bond Anticipation Notes (BANs)