Demand Deposit SLGS - PowerPoint Presentation

Demand Deposit SLGS Investment May 17, 2011

Table of Contents Overview SLGS Regulations – Required Certifications 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 Chapman and Cutler LLP | PFM Asset Management LLC 5 1972 SLGS Program initiated 1996 Regulations eliminated both the $35mm limit and advance refunding prohibition 1969 Legislation restricted the yield of investments for tax-exempt bond proceeds 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

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

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

Tax Regulatory Treatment Chapman and Cutler LLP | PFM Asset Management LLC 8 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)

Demand Deposit vs. Time Deposit SLGS Chapman and Cutler LLP | PFM Asset Management LLC 9 Demand Deposit Time Deposit Purchase Increment May be purchased to the penny (same for redemptions) Must be purchased in whole dollar amounts Redemption Time Depending on size, may be redeemed in 1 or 3 business days Redemptions in 14 days Redemption Value Redeemable at par plus accrued interest Uses market value redemption formula Rate Variable rate instruments typically reset weekly Fixed and reset daily 31 CFR 344.7, 8, 9 31 CFR 344.4, 5, 6

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

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 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 proceedsAmounts 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 applicableNo 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 yieldRate usually refreshed each Tuesday, the day after new T-Bill auctionDemand Deposit SLGS rate may be higher than one- or two-month Time Deposit SLGS rate Chapman and Cutler LLP | PFM Asset Management LLC 17

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 18

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 19

Comparisons to Other Investment Alternatives Chapman and Cutler LLP | PFM Asset Management LLC 20 Cash (not invested) No return FDIC insurance? Considered imputed earnings for tax law purposes (Treas. Reg. §1.148-5) 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)) Money Market Funds Returns currently near 0% Typically AAA-rated May not provide defeasance security (may lose value because of market risk)

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 datesRisk 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 Debt Service Funds Could be useful if not considered a “bona fide debt service fund” – arbitrage a concern Chapman and Cutler LLP | PFM Asset Management LLC 22 Project Funds With strict permitted investments language Good liquidity and potential to earn positive arbitrage if yield curve is flat or inverted

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 TreasuriesUse 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