Demand Deposit SLGS Investment

1. Demand Deposit SLGS Investment May 17, 2011

2. Table of Contents • Overview • SLGS Regulations – Required Certifications • Pricing, Liquidity, and Potential Uses Chapman and Cutler LLP | PFM Asset Management LLC

3. I. Overview Chapman and Cutler LLP | PFM Asset Management LLC

4. Definition Demand Deposit SLGS • One-day certificates of indebtedness that are automatically rolled over each day until redemption is requested (31 CFR §344.7) • Pay interest at a variable rate (reset weekly) (31 CFR §344.7(a)) • Exempt from both yield restriction and rebate (Treas. Reg. §1.150-1(b)(2)) Chapman and Cutler LLP | PFM Asset Management LLC

5. History • 1986 • Demand Deposit SLGS introduced • Suggested as part of the 1986 Tax Act in response to a Congressional Mandate to make the SLGS Program more flexible • Designed to be an investment vehicle for avoiding the need for arbitrage rebate computations • Prohibited for advance refundings 1969 Legislation restricted the yield of investments for tax-exempt bond proceeds 1972 SLGS Program initiated • 1989 • Limited to bond issues of $35mm or less 1996 Regulations eliminated both the $35mm limit and advance refunding prohibition Chapman and Cutler LLP | PFM Asset Management LLC

6. Monthly SLGS Statistics From: https://www.treasurydirect.gov/govt/reports/slgs/slgs_mnthlyslgsstat.htm Chapman and Cutler LLP | PFM Asset Management LLC

7. Demand Deposit SLGS Outstanding Chapman and Cutler LLP | PFM Asset Management LLC

8. Tax Regulatory Treatment • For purposes of arbitrage, treated as tax-exempt bonds (Treas. Reg. §1.150-1(b)) • Excluded from rebate and yield restriction computations (Code Section 148(b)(3)(A) • Treatment for other Code Sections unclear (e.g. Section 149(g)) • Treasury Regulations § 1.149(d)-1(b)(3) provide special rules for “mixed escrows” (may apply to Demand Deposit SLGS) Chapman and Cutler LLP | PFM Asset Management LLC

9. Demand Deposit vs. Time Deposit SLGS 31 CFR 344.7, 8, 9 31 CFR 344.4, 5, 6 Chapman and Cutler LLP | PFM Asset Management LLC

10. II. SLGS Regulations – Required Certifications Chapman and Cutler LLP | PFM Asset Management LLC

11. SLGS Regulations - Required Certifications • Eligible Sources of Funds (31 CFR 344.1) • Certifications (31 CFR 344.2(e)) • Impermissible Practices (31 CFR 344.2(f)) • Subscription (31 CFR 344.8) Chapman and Cutler LLP | PFM Asset Management LLC

12. 1. Eligible Source of Funds (31 CFR 344.1) Eligible sources are the same as for Time Deposit SLGS and include: • Gross proceeds of a tax-exempt bond issue (or reasonably expected to become gross proceeds) • Former gross proceeds • Amounts held in a commingled fund with gross proceeds • Proceeds of a taxable issue that refunds or is refunded by a tax-exempt issue • Other amounts subject to §148 yield restriction limitations (BAB proceeds that are not excepted) Chapman and Cutler LLP | PFM Asset Management LLC

13. 2. Certifications • Certifications are similar to Time Deposit SLGS (though not as comprehensive) and include: • Agency Certification (31 CFR 344.2(e)(1)) • Purchased with early liquidation proceeds • Yield means what it means for arbitrage (§ 1.148-5) – not applicable • No certification required on redemption (31 CFR344.2(e)(2)(ii)) Chapman and Cutler LLP | PFM Asset Management LLC

14. 3. Impermissible Practices (31 CFR 344.2(f)) • Generally the same as for Time Deposit SLGS (except for redemptions) • No “cost-free” option • Limitation on yield of purchased SLGS Chapman and Cutler LLP | PFM Asset Management LLC

15. 4. Subscription • Information needed to enter subscription into SLGSafe: (31 CFR 344.8(b)) • Issue date • Principal amount • Issuer name and TIN • Title of officer authorized to purchase (and redeem) SLGS • Description of tax-exempt bond issue • Time requirements (31 CFR 344.8(a)) • Subscription due • At least 5 business days prior to the issue date for issues consisting of $10 million or less • At least 7 days prior to the issue date for issues greater than $10 million • No more than 60 days in advance Chapman and Cutler LLP | PFM Asset Management LLC

16. III. Pricing, Liquidity and Potential Uses Chapman and Cutler LLP | PFM Asset Management LLC

17. Pricing • Tax-exempt and variable rate • Priced off of 3-month Treasury Bill (“T-Bill”) • typically yields 75% of the T-Bill yield • Rate usually refreshed each Tuesday, the day after new T-Bill auction • Demand Deposit SLGS rate may be higher than one- or two-month Time Deposit SLGS rate Chapman and Cutler LLP | PFM Asset Management LLC

18. Pricing Considerations • Usually don’t know rate when subscription is placed • Subject to weekly reset (makes market calls a bit more difficult) • Preserve optionality • Outperform if Fed increases target rate (“reinvestment risk” not a big concern) Chapman and Cutler LLP | PFM Asset Management LLC

19. Comparison to Money Market Funds • Demand Deposit SLGS may provide higher yield than Treasury-only money market funds Chapman and Cutler LLP | PFM Asset Management LLC

20. Comparisons to Other Investment Alternatives Cash (not invested) • No return • FDIC insurance? • Considered imputed earnings for tax law purposes (Treas. Reg. §1.148-5) • Money Market Funds • Returns currently near 0% • Typically AAA-rated • May not provide defeasance security (may lose value because of market risk) Demand Deposit SLGS Securities • Liquidity resembles money market fund for draws less than $10 million • May yield slightly higher than money market funds • Backed by full faith and credit of U.S. (31 CFR 344) • PotentialSLGS window closure is problematic • Redemptions in 1 or 3 business days depending on size (31 CFR 344.9(a)) Chapman and Cutler LLP | PFM Asset Management LLC

21. Other Considerations • Cash flows uncertain, so generally need to “gross fund” fixed liabilities because rate could go to 0% • Need to set up procedure for redemptions; do not automatically redeem or “mature” • Exhibit to escrow deposit agreement showing subscription and redemption dates • Risk of SLGS window closing • When window closes, Demand Deposit SLGS are rolled over into special 90 day certificates of indebtedness • Certificates of indebtedness can often be redeemed early Chapman and Cutler LLP | PFM Asset Management LLC

22. Common Uses of Demand Deposit SLGS Escrows • May allow for an escrow that yields above the bond yield • Especially useful for current refundings and float periods Debt Service Funds • Could be useful if not considered a “bona fide debt service fund” – arbitrage a concern • Project Funds • With strict permitted investments language • Good liquidity and potential to earn positive arbitrage if yield curve is flat or inverted Chapman and Cutler LLP | PFM Asset Management LLC

23. Unique Considerations and Investment Strategies • Useful for periods of less than 30 days when you want to earn interest • Better alternative to 0% SLGS in 15 to 29 day window unless yield restriction concerns exist • Less costly and administratively simple alternative to purchasing open market Treasuries • Use in funds subject to rebate or yield restriction in high interest rate environment – retainable earnings in excess of arbitrage yield Chapman and Cutler LLP | PFM Asset Management LLC