Demand Deposit SLGS Investment May 17, 2011 Presented

Demand Deposit SLGS Investment May 17, 2011 Presented

Demand Deposit SLGS Investment May 17, 2011 Presented by: David J. Cholst Partner [email protected] (312) 845-3862 Matthew Eisel, CFA Senior Managing Consultant [email protected] (717) 232-2723 PFM Asset Management LLC 111 West Monroe Street Chicago, IL 60603-4080 www.chapman.com One Keystone Plaza, Suite 300 North Front & Market Streets Harrisburg, PA 17101-2044 www.pfm.com Table of Contents

I. Overview II. SLGS Regulations Required Certifications III. Pricing, Liquidity, and Potential Uses Chapman and Cutler LLP | PFM Asset Management LLC 2 I. Overview Chapman and Cutler LLP | PFM Asset Management LLC 3 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 4 History 1969 Legislation restricted the yield of investments for taxexempt bond proceeds 1972 SLGS Program initiated 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 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 5 Monthly SLGS Statistics From: https://www.treasurydirect.gov/govt/reports/slgs/slgs_mnthlyslgsstat.htm Chapman and Cutler LLP | PFM Asset Management LLC 6 Demand Deposit SLGS Outstanding

$6,000 $5,365 $5,000 (millions) $4,000 $3,000 $2,000 $1,211 $1,000 $517 $3 $0 Chapman and Cutler LLP | PFM Asset Management LLC 7 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 8 Demand Deposit vs. Time Deposit SLGS Demand Deposit Time Deposit May be purchased to the penny

(same for redemptions) Must be purchased in whole dollar amounts Redemptions in 14 days Redemption Time Depending on size, may be redeemed in 1 or 3 business days Redemption Value Redeemable at par plus accrued Uses market value redemption interest formula Rate Variable rate instruments typically reset weekly Purchase Increment

31 CFR 344.7, 8, 9 Chapman and Cutler LLP | PFM Asset Management LLC Fixed and reset daily 31 CFR 344.4, 5, 6 9 II. SLGS Regulations Required Certifications Chapman and Cutler LLP | PFM Asset Management LLC 10 SLGS Regulations - Required Certifications 1. Eligible Sources of Funds (31 CFR 344.1) 2. Certifications (31 CFR 344.2(e)) 3. Impermissible Practices (31 CFR 344.2(f)) 4. Subscription (31 CFR 344.8) Chapman and Cutler LLP | PFM Asset Management LLC 11 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 12 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 CFR 344.2(e)(2)(ii)) Chapman and Cutler LLP | PFM Asset Management LLC 13 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

14 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 15 III. Pricing, Liquidity and Potential Uses

Chapman and Cutler LLP | PFM Asset Management LLC 16 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 Demand Deposit SLGS vs. 1-Month Time Deposit SLGS 0.18% 0.16% 0.14% 0.12% 0.10% 0.08% 0.06% 0.04% 0.02%

0.00% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1

1 01 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 2 / / / / / / / / / / / / / / / / / / / / / / / /

/ / / 20 5/4 /18 6/1 /15 /29 /13 /27 /10 /24 9/7 /21 0/5 /19 1/2 /16 /30 /14 /28 /11 /25 2/8 /22 3/8 /22 4/5 /19 4/ 5 6 6 7 7 8 8 9 1 10 1 11 11 12 12 1 1 2 3 4 DD SLGS 1-mo TD SLGS Chapman and Cutler LLP | PFM Asset Management LLC

17 Pricing Considerations Usually dont 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) Demand Deposit SLGS vs. 6-Month T-Bill 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 11 11 11 11 11 11 11 11 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 / 20 5/4 /18 6/1 /15 /29 /13 /27 /10 /24 9/7 /21 0/5 /19 1/2 /16 /30 /14 /28 /11 /25 2/8 /22 3/8 /22 4/5 /19 4/ 5 6 6 7

7 8 8 9 1 10 1 11 11 12 12 1 1 2 3 4 DD SLGS 6-mo T-bill Chapman and Cutler LLP | PFM Asset Management LLC 18 Comparison to Money Market Funds Demand Deposit SLGS may provide higher yield than Treasury-only money market funds Demand Deposit SLGS vs. Money Market Fund (Treasury-Only)

0.14% 0.12% 0.10% 0.08% 0.06% 0.04% 0.02% 0.00% 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 11 11 11 11 11 11 11 11 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 / 20 5/4 /18 6/1 /15 /29 /13 /27 /10 /24 9/7 /21 0/5 /19 1/2 /16 /30 /14 /28 /11 /25 2/8 /22 3/8 /22 4/5 /19 4/ 5 6 6 7 7 8 8 9 1 10 1 11 11 12 12 1 1 2 3

4 DD SLGS Goldman Sachs Financial Square Funds - Government Series Chapman and Cutler LLP | PFM Asset Management LLC 19 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) Potential SLGS 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 20 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 21 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 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 Debt Service Funds Could be useful if not considered a bona fide debt service fund arbitrage a concern 22 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 23

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