JOSHUA BASIN WATER DISTRICT October 2012

The District is required to re-approve the investment policy on an annual basis. We must also prepare a quarterly investment report, which details the Districts investments and earnings for the governing body. Both requirements were enacted in response to the 1994 County of Orange bankruptcy in which the County Board of Supervisors was unaware of questionable investments made by the County Treasurer. By law, the primary objective of any person investing public funds is to safeguard principal; secondly to meet liquidity needs; and lastly, to achieve a return or yield on invested funds.

The Districts investment policy allows investments such as the following: Obligations issued or guaranteed by the United States of America Certificates of Deposit fully insured by the FDIC Highly-rated money market portfolios Long and medium-term corporate debt guaranteed by a highly-rated corporation Public housing bonds issued by public agencies Local Agency Investment Fund

The District invests all reserves in LAIF, currently $7.3 million, including $2.4 million deposit from HDMC, because we have no staff with training and expertise in evaluating and making investments. The Government Code declares that each person, treasurer, or governing body authorized to make investment decisions act with care, skill, prudence and diligence when handling public funds.

The Local Agency Investment Fund (LAIF) was created by state statute in 1977 as an investment alternative for Californias local governments and special districts. The program enables us to participate in a major portfolio which invests hundreds of millions of dollars, using the expertise of the Treasurers Office investment staff. Oversight is provided by the Local Agency Investment Advisory Board, consisting of five members.

LAIF is part of the Pooled Money Investment Account (PMIA), begun in 1953, to invest taxpayers money and manage the States cash flow. Policies, goals and objectives established for the portfolio make certain that the goals of safety, liquidity and yield are not jeopardized. Oversight is provided by the Pooled Money Investment Board including the State Treasurer, Director of Finance and State Controller.

2,693 participants and $21 billion invested; 64% of the participants are special districts. Maximum $50M investment except for bond proceeds. 15 transactions per month, in or out, in minimum $5,000 increments. Funds available same day. Bond proceeds allow for a one-time deposit, no maximum, withdrawals every 30 calendar days from date of deposit.

Goal 1 Portfolio safety/diversification – high quality mix of securities, spreading investments over different types minimizes the impact of any one industry/investment class Goal 2 Liquidity - managed to ensure normal as well as scheduled extraordinary cash needs can be met. Further, marketable treasuries will also be maintained to cover unforeseen withdrawals or delayed deposits. Goal 3 Yield on investment – investments are made in such a way as to realize the maximum return consistent with safe and prudent treasury management.

State statute requires that administrative costs not exceed 5% of quarterly interest earnings; however, costs are directly correlated to the cost of operation only. Costs have not exceeded 2.1% since at least State Treasurers Office has oversight responsibility and they are audited by the Bureau of State Audits on an annual basis.

Insurance related to the credit risk of the investments: There is no insurance for individual securities or the portfolio in general. However, due to the characteristics of the portfolio, credit risk is minimal. Certain trigger mechanisms for such insurance policies to become effective are judged to be improbable, such as the requirement that all investment earnings are exhausted before insurance coverage becomes effective. The State is self-insured and any fraud assertions would be heard by the Attorney General and any judgment awarded would be appropriated by the Legislature. Third-party designated depositories provide insurance coverage for any fraudulent acts. Risk management controls cover losses ranging up to $500 million, depending upon the incident. Insurance related to fraudulent acts or lack of fidelity on the part of administrators or custodians:

The State cannot declare bankruptcy under Federal regulations; therefore, money in the LAIF shall not be subject to transfer or loan or seizure by any state official or state agency. Further, Government Code states that moneys placed with the Treasurer for deposit in the Local Agency Investment Fund by cities, counties, special districts, nonprofit corporations, or qualified quasi-government agencies shall NOT be subject to either of the following: Transfer or loan pursuant to Sections 16310, 16312, or 16313: – authorizes transfer of money not needed to the General Fund when the General Fund in the State Treasury is or will be exhausted – authorizes withdrawal of funds from the General Fund to fund a program or project which will be repaid at a later sale of state bonds or notes – authorizes loans to state agencies from the Pooled Money Investment Account to repay or replace existing financing. Impoundment or seizure by any state official or state agency. Additionally, the Government Code also says that our right to withdraw our deposited money may not be affected by the States failure to adopt a budget by July 1.

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