CMTA – Essentials Workshop

1. CMTA – Essentials Workshop “Introduction to Investing in Municipal Bonds” September 28, 2010 Thomas Gardner, DPA City of Vista – Finance Director/Treasurer

2. Observation & Question • Most municipality’s investment policies do not provide specifically for the use of municipal bonds in their portfolio. • If in the policy, even fewer use them. • Why not? • Why are local agencies willing to sell bonds to investor they are unwilling to buy themselves?

3. Exploring the Issue: Overview • Considering the Option • State Law & Other Barriers • Management Considerations • Investment risks • The Differences to Consider • Due diligence • Evaluating a Purchase • Future Discussions

4. Considering the Options –State law • State law allows for: (a) Bonds issued by the local agency… (c) Registered state warrants or treasury notes or bonds of this state…or by a department, board, agency, or authority of the state… (d) Registered treasury notes or bonds of any of the other 49 United States in addition to California… (e) Bonds, notes, warrants…any local agency within this state... (Section 53601 of the State Government Code)

5. Considering the Options • Do Muni’s violate Section 53600.5.? Primary Objective: Safeguard the principal Secondary Objective: Liquidity Third Objective: “Return” on the funds under its control. • NO, NO, and NO.

6. What Are Some of the Barriers? • Not in current investment policies • In policies, but no past experience • Advisory Committee/management wants a “no risk” portfolio • Return on investment is insufficient to offset risk.

7. Other Barriers - Return on Investment • Historically the spread to agencies was not sufficient • No incentive for tax exempt bonds • Limited number of taxable notes. • Brokers – trade other things • Knowledge about Munis and their risk is limited.

8. Liquidity Risk Interest Rate risk Credit Risk Reinvestment Risk “Political/publicity” Risk - Greater - Same - Greater - Less (no calls) - Much Greater Other Barriers - Risk Avoidance

9. Investment Risk: Harrisburg, Vallejoor California Just $886 million of general obligation bonds in a $2.8 trillion municipal bond market this year have seen credit impairments, such as dipping into reserve funds or tapping bond insurance. • Bond holders didn't get paid on $32 million of that total Matt Fabian, Managing Director Municipal Market Advisors, Westport, Conn.

10. Implementing a Plan “for Municipals” • Suitable risk tolerance • Willingness • Consistent with management style • Consistent with investment plan • Consistent with a politically correct portfolio Ben Finkelstein, Author “The Politics of Public Fund Investing”

11. Why not Municipals? • They are not for everyone • Portfolios have to be customized for the agency they are serving. • Muni’s are a substitute for Corporate – not agencies

12. Changing Policies “The key to change... is to let go of fear.” - Rosanne Cash • “There is nothing wrong with change, if it is in the right direction.” - Winston Churchill

13. Focus On Risk Management • “Walk on thick Ice” • Approach changing policies/administration to create more risk control

14. Vista’s Example - Committee Concurrence • Limits on size per investment/entity - $2 m. • Two rating agencies – “Underlying A or better” • Limited portion of portfolio @ 15% • Prior approval by City Manager • Enhanced due diligence & review

15. Differences to Consider - Brokers • Working with Brokers • New policy review • Additional information for decisions • Agency P.O.S • Disclosure • CAFR – reserves, liabilities etc • Insurance carrier & their rating • Recent Pricing • Rating analysis • Use of Municipal Securities Rule Making Board - “emma.msrb”

16. Differences to Consider - Disappointments • Research may lead to “no go” • Underlying contracts or revenue streams may need more research than you have time for • (Example: State revenue bond based on multiple RDA’s revenue stream) • Call features may be more complicated ‘make whole calls’ require special calculations

17. Bumps in the Road • Offers inconsistent with policy • Example: State bond that was actually a JPA • “negative outlook”, or single rating • Problems with timely approvals • More lead time for approvals • Complexity in the research • Know the agency you are buying • Underlying security • Insurances • Ratings • Results in effort & lost opportunities

18. The Problem of Ratings - Singles

19. Not All Munis Are The Same • Taxable • Non-taxable • General Obligation • Pension Obligation (1937 act) • Special Revenues • Sewer • JPA • or Parking Structure

20. Benefits – Vista’s Use of Municipals

21. Takeaway: Benefits • Bullets • Fewer • Smaller • Yield • Higher yield higher Risk (i.e. parking) • Political Support

22. Takeaway: Mitigate the Risks • Select Quality - Know what you are buying • Smaller Sizes • Diversification • Be Careful of Liquidity • Alternative to “Corporates”

23. Takeaway: Don’t Use MUNI’s • Staff is too small and organization is too risk averse • Explaining why is now possible.

24. Continuing the Dialogue • This has been an introduction • Would you like a more lengthy Discussion? • Potential topics for future: • Changing the policies • Building a supporting team • Best Practices • Mitigating Risk • Evaluating the Agency