1. 0 Investing Bond Proceeds April 20, 2004 Lester T. Wood Managing Director Bond Logistix, LLC Lauren Brant Senior Managing Consultant PFM Asset Management LLC California Municipal Treasurer’s Association

2. 1 Noticing the Obvious FINISHED FILES ARE THE RE- SULT OF YEARS OF SCIENTIF- IC STUDY COMBINED WITH THE EXPERIENCE OF MANY YEARS

3. 2 Investing Bond Proceeds Financial Requirement P & I Payments Earning Assets Debt Service Reduce Borrowing Costs Bond Proceeds Use of Earnings Objective

4. 3 Overview Who’s Involved in the Decision Making Process? Arbitrage Considerations. Fun with Funds! Mixing and Matching Investments. Case Study.

5. 4 Who’s Involved? Public AgencyConsultants Finance DirectorTrustee TreasurerUnderwriter MayorFinancial Advisor City ManagerInvestment Advisor

6. 5 Arbitrage Considerations What is arbitrage? Exceptions, Exemptions, Elections How does arbitrage factor into the investment strategy for my bonds? How will I keep track of the arbitrage of my bond issue? Planning Ahead

7. 6 What is Arbitrage? Bond Yield (tax-exempt) Investment Yield (taxable) 4.0 5.0 6.0 7.0 8.0 9.0 199319941995199619971998 Positive Arbitrage Negative Arbitrage Yield 100% tax on earnings in excess of bond yield

8. 7 Loopholes Exceptions ─ Project fund spending Exemptions ─ Small issuer Elections ─ Penalty in lieu of rebate

9. 8 Investment Strategy Factors to consider prior to issuance: ─ IRS regulations ─ Marketplace vs. arbitrage yield ─ Interest rate trends Ongoing strategy considerations: ─ Arbitrage is cumulative from day one, across all funds

10. 9 Netting Effect

11. 10 How do I Keep Track? Transaction Future Value DateDaysTypeAmountFactorCash Flow ------------------------------------------------------------------------------------------------------- 5/12/981800Deposit236,491,000.001.29199835305,545,981.15 5/12/981800Withdrawal(39,947,000.00)1.29199835(51,611,457.98) 6/30/981752Withdrawal(25,949,000.00)1.28320184(33,297,804.46) 9/30/981662Withdrawal(14,175,000.00)1.26686948(17,957,874.92) 12/31/981572Withdrawal(20,475,000.00)1.25074500(25,609,003.95) 3/31/991482Withdrawal(20,100,000.00)1.23482575(24,819,997.66) 6/30/991392Withdrawal(19,050,000.00)1.21910912(23,224,028.78) 9/30/991302Withdrawal(19,050,000.00)1.20359253(22,928,437.66) 12/31/991212Withdrawal(19,600,000.00)1.18827343(23,290,159.16) 3/31/001122Withdrawal(20,650,000.00)1.17314930(24,225,533.12) 6/30/001032Withdrawal(19,600,000.00)1.15821768(22,701,066.49) 9/30/00942Withdrawal(12,200,000.00)1.14347610(13,950,408.41) 12/31/00852Withdrawal(5,150,000.00)1.12892215(5,813,949.06) 3/31/01762Withdrawal(1,000,000.00)1.11455344(1,114,553.44) ------------------------------------------------------------------------------------------------------- 15,001,706.05 Calculation Date5/12/03 Days Since Inception1800 Arbitrage Yield5.190000% Future Value at Earnings of 5.19%$15,001,706.05 Future Value at Earnings of 5.60%$16,486,923.58 Arbitrage Rebate Liability5/12/03$1,485,217.53 Earnings Yield5.600000%

12. 11 Planning Ahead At Issuance Calendar of Important Dates – Expenditure benchmarks – Yield restriction – 5-year payment date – Filing Data Collection – Segregated funds Refunding issues – Transferred proceeds

13. 12 Fun with Funds! Project (Acquisition/Construction) –Match to Draw Schedule Debt Service Reserve – Covenant to Maintain Fixed Amount – Semi-Annual Availability Capitalized Interest

14. 13 Fun with Funds! Debt Service Principal & Interest –Capitalized Interest –Cash Flow Thereafter Escrows

15. 14 Surety Bonds or L.O.C. Insurance with Recourse Replace Cash Funded DSR – Debt Cap Problem at Time of Issuance – Over Budget on Project Costs After Issuance

16. 15 Cost of Surety or L.O.C. Premium Cost Lost Ability to Earn Positive Current/expected arbitrage position

17. 16 Mixing & Matching Investments Typical bond proceeds investments : ─Liquidity Pools ─Structured Portfolios ─Investment Agreements

18. 17 Considerations Liquidity requirements Yield objectives (arbitrage yield vs. market) Purpose of funds Agency’s tolerance for risk Bond document investment language (boilerplate) Net/Gross funding for construction fund

19. 18 Liquidity Pools Money market funds County pool Local Agency Investment Fund (LAIF) Joint powers authority Features Liquidity within restrictions of investments Ease in administration Issues to consider Variable investment rate No customization to draws

20. 19 Structured Portfolios Features Customized investment strategy –Portfolio initially structured to match expected draw schedule Active trading can improve yield Portfolio restructured as draw schedule changes and to adjust for market changes Ability to lock in higher yield on longer-term funds Issues to consider Can be time consuming to monitor and manage Slightly higher transaction costs may be incurred Mark-to-market risk for Reserve Fund Reduced liquidity

21. 20 Investment Agreements Guaranteed Rate Withdrawals at Par Shift Reinvestment and Market Rate Risks to Provider Issuer Assumes Credit Risk on IAs

22. 21 Investment Agreement Providers Banks Primary Dealers Private Placements Insurance Companies

23. 22 Investment Agreements Standard With Collateral Downgrade Collateralized Puts Forward Delivery

24. 23 Uses of Investment Agreements Construction / Acquisition Full flex draws Debt Service Reserves Semi-annual draw Debt Service Float Monthly window

25. 24 Conclusion 1.Consider the risks/rewards of all options. 2.Develop an investment strategy for all proceeds prior to issuance. 3.Revisit each fund’s strategy on a frequent basis. By doing these things, you increase your chances of reducing your borrowing costs.