City of Laguna Beach Investment Status Report With Guest Financial Expert Bill Blackwill, Managing Director Stifel Investment Services Thursday May 18, 2017 4:30 to 5:30pm Laguna Beach City Hall, Conference Room C Agenda Status of investments, March 31, 2017 2 Strategies for investing in a rising rate environment 8 Options to consider 15 Laura Parisi, CPA, CCMT, CFIP City Treasurer

Investment Priorities Top priority is safety of taxpayer dollars achieved through internal controls, portfolio diversification, experienced brokers and custodial bank. Reliable monthly reporting, semi-annual outside auditor review, annual audit and this committee provided guidance. Liquidity in a rising rate environment is critical. Fewer to no bond calls and investment of short-term funds beyond LAIF. Yield increases as positions mature. Cash flow management is key. City Treasurer’s Monthly Report 11/14/2018

Increased Volume and Diversification March 31, 2017 Investment Inventory totaled $95m vs. Prior Year $85.5m City Treasurer’s Monthly Report 11/14/2018

Liquidity and Cash Flow City Treasurer’s Monthly Report 11/14/2018

Short-term investment outside of LAIF Current Year Prior Year Fair Value   Cost Pct. of Total Avg. Return Short-term marketable securites State - LAIF 1,437,985 1,439,171 1% 0.82% 9,759,683 Negotiable CDs 3,497,646 3,493,000 4% 1.12% 4,242,877 Federal agency securities 5,994,930 5,998,130 6% 0.92% 1,998,000 Medium-term corporate notes 4,191,346 4,203,485 1.10% 1,000,000 Municipal bonds 999,010 1.00% - Supranational security 998,620 1,001,790 Total 17,119,537 17,135,576 18% 1.11% 17,000,559 State - LAIF Tax Exempt Bond Funds 2,112,678 2,114,421 City of Laguna Beach Investment Status 11/14/2018

City Treasurer’s Monthly Report 11/14/2018

Investment Income and Yield at March 31, 2017 City of Laguna Beach Investment Status 11/14/2018

Strategies for Investing in a Rising Rate Environment The Case for Rising Rates Economy is maintaining decent growth rate Fed is trying to remove excess accommodation Fed is trying to curtail rising Inflation Trump is likely to pass stimulus measures How much and when? Near full employment

Why Rates might not rise much Need to factor in balance sheet reduction Higher rates will cool off real estate Trump agenda won’t be easy

Investment Income and Yield at March 31, 2017 City of Laguna Beach Investment Status 11/14/2018

What makes sense with fixed income portfolios Shorter Maturities Step up Bonds Be careful though Just Thinking rates will rise is not enough You must be right on how much and how quickly City of Laguna Beach Investment Status 11/14/2018

Treasury Yield Curve City of Laguna Beach Investment Status 11/14/2018

Step Up Example Potential new 5yr-1yr 1-Time Call / 1-Time Step FHLMC 5/24 settlement Coupon Schedule: 1.50% for 1yr beats 1yr bullets by 25bps  2.50% 4yr back end is 70Bps higher than current 4yr bullets. 2.29% Irr if it extends to maturity outperforms 5yr bullets by 27bps City of Laguna Beach Investment Status 11/14/2018

In Conclusion Be Careful We don’t know for sure what rates will do Make sure your liquidity is sufficient City of Laguna Beach Investment Status 11/14/2018

OPTIONS TO CONSIDER Increase diversification by reducing the issuer holding percentage for corporate, municipal and supranational securities from 5% to 2%. The committee recommended that a 2% maximum per issuer be applied to Corporate Medium-Term Notes and Commercial Paper and to Supranational issuers of securities. The limitations will be reflected in the 2018 Investment Policy update.   Authorize a new security class – Asset Backed Securities. The additional investment option was not recommended at this time due to the complexity in accounting and only a small incremental increase in yield. Purchase/lease investment software. An amount has been included in the budget for the City Treasurer beginning in 2017. Investment in local securities (Laguna Beach) – We are working through glitches. There are no additional purchases planned and the glitches are being addressed as they arise. Thank you for your assistance in reviewing the 2017 investments held by the City of Laguna Beach! City of Laguna Beach Investment Status 11/14/2018