Trends in Municipal Bond Yields April 21, 2017 to May 4, 2017

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1 Budget Passage and Debt Ceiling Congress averted at least a partial government shutdown by approving a continuing resolution budget on April 28, 2017 that funded the U.S. government through May 5, 2017 and gave Congress an extra week to work towards a longer spending bill to fund the government through September. Subsequently, Congress passed a spending bill on May to provide funding to the U.S. government through September after the White House agreed to remove a requirement that any spending bill include funding for a border wall. The spending bill increases federal highway and public transportation funding by $1.3 billion compared to fiscal The Community Development Block Grant program will receive $3 billion and clean water and drinking water state revolving funds will receive $2.3 billion, the same funding levels as the fiscal year ended September 30, The bill includes an additional $10 billion in funding for the Water Infrastructure Finance and Innovation (WIFIA) program, and a slight increase of $49 million of funding for the Army Corps of Engineers (The Bond Buyer, May 4, 2017). The spending bill will not affect the Federal debt ceiling and the steps taken by the Treasury Department to reduce outlays that impact the debt ceiling remain in place, including canceling the availability of SLGS (State and Local Government Series securities, a specialized form of Treasury obligations used to fund defeasance escrows for tax-exempt bonds). In late April, Treasury Secretary Mnuchin indicated that the ceiling must be raised sometime this fall. Downward Trend in Interest Rates Loses Steam The past two weeks saw a reversal of the downward trend in intermediate and long-term rates that began in mid-march. The 10-year U.S. Treasury yield is up 12 basis points (0.12%) over the two weeks ended May 4, 2017, with the equivalent-term AAA taxexempt muni yield increasing 12 basis points, as reported by Thomson Reuters Municipal Market Data (MMD). The change in MMD yields during this period at benchmark terms can be viewed in the table on the following page: May 9, 2017

2 Trends in Municipal Bond Yields April 21, 2017 to May 4, 2017 April 21, 2017 May 4, 2017 Change AAA Yields* 5 Years 1.37% 1.41% 0.04% 10 Years 2.05% 2.17% 0.12% 20 Years 2.76% 2.89% 0.13% 30 Years 2.90% 3.03% 0.13% Bond Buyer 20 Bond Index** 3.71% 3.82% 0.11% Source: * Thomson Reuters Municipal Market Data ** The Bond Buyer. Average yield on a portfolio of municipal bonds maturing in 20 years, with an average rating of AA/Aa2. The Federal Open Market Committee (FOMC) in its May 3, 2017 meeting maintained its target range for the fed funds rate at 0.75% % after a 0.25% increase in March. The FOMC views slowing first quarter growth as transitory and expects economic activity will expand at a moderate pace. The Committee also expects labor market conditions will improve and inflation will stabilize around its two percent target in the medium term. The Committee stated that if these conditions are present, it could warrant further gradual increases in the fed funds rate. Market participants now view a 0.25% increase during the June meeting as highly probable, with market expectations of a rate hike at 83.1% according to the Chicago Mercantile Exchange s (CME) FedWatchTool. Puerto Rico Files for Title III Bankruptcy On Monday, May 3, 2017, the Puerto Rico Oversight Board, put the territory into the largest ever municipal bankruptcy, seeking protection from creditors for what amounted to $51.9 billion of debt as of February, The immediate cause of the bankruptcy was the filing of multiple bondholder lawsuits on May 2, 2017 after a stay on bondholder debt collection litigation that was part of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) expired. This amount far exceeds the record set by the City of Detroit s 2013 bankruptcy filing, which affected over $18 billion of debt and long-term liabilities and resulted in the elimination of over $7 billion of obligations. Puerto Rico is struggling to manage approximately $74 billion of debt and $49 billion of unfunded pension liabilities, the latter of which were only 1.57% funded as of June 30, The territory can no longer fully meet its requirements for debt and government services, and cannot refinance its outstanding debt, as it no longer has market access. In March, the Oversight Board approved a fiscal plan for the next nine fiscal years that

3 dictated levels of spending and revenues and provided funding for only 26% of debt service in years 2018 through The bankruptcy proceedings will consolidate the territory s debt restructuring process under a single judge who will ultimately approve a plan to restructure the territory s debt that is consistent with a fiscal plan approved by the Oversight Board. The territory s bankruptcy is not expected to have a strong immediate impact on the larger municipal bond market; however, the outcome of the bankruptcy proceedings will set a precedent for future potential debt restructurings. Municipalities with large, unfunded pension liabilities and heavy debt burdens could be impacted by the results of Puerto Rico s restructuring. House Passes American Health Care Act (AHCA) On Thursday, May 4, 2017 the House voted to approve the AHCA amid opposition from governmental groups, including the American Federation of State, County and Municipal Employees and the U.S. Conference of Mayors as reported by The Bond Buyer (May 4, 2017). The groups opposed to the bill argue that it will decrease the number of people with insurance and increase health care and social program costs to states and local governments. As reported by NPR (May 4, 2017), the current form of the bill contains provisions that will affect state and local governments including changes to Medicaid, state waivers, the insurance mandate, pre-existing conditions, and tax credits. The greatest impacts to state and local governments would likely come from the changes to Medicaid and state waivers from certain Affordable Care Act (ACA) provisions. Changes to Medicaid include the conversion of Medicaid from an entitlement program, in which the government pays for all healthcare costs of Medicaid recipients, to a grant program, where the government provides a set amount of funding per recipient or a block grant program with funding administered by states and fewer federal program requirements. Under the grant program, growth in federal funding would be linked to changes in the consumer price index (CPI) and may not grow as quickly as medical cost inflation (which has outpaced CPI in every year since 2005 except for 2008). Additionally, the bill would impact the thirty-one states and the District of Columbia that elected to expand Medicaid eligibility to single, nondisabled adults with incomes slightly above the poverty line. The federal government would not cover new recipients enrolled in expansion programs after 2019, and would not cover any recipients who reenroll after having more than a month s break in eligibility. States could elect to maintain coverage at

4 current levels for the eligible pool; however, costs for recipients enrolled after 2019, or reenrolled, would need to be paid for by the states. The bill, which is a first step towards accomplishing the President s campaign pledge to repeal and replace the ACA, now heads to the Senate, where republican leadership has indicated that it will await an analysis by the Congressional Budget Office (CBO) before reviewing the legislation. IMPORTANT INFORMATION: PLEASE READ The information contained herein reflects, as of the date hereof, the view of Ehlers & Associates, Inc. (or its applicable affiliate providing this publication) ( Ehlers ) and sources believed by Ehlers to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein. In addition, there can be no guarantee that any projection, forecast or opinion in these materials will be realized. Past performance is neither indicative of, nor a guarantee of, future results. The views expressed herein may change at any time subsequent to the date of publication hereof. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as advice within the meaning of Section 15B of the Securities and Exchange Act of 1934, or otherwise relied upon by you in determining a course of action in connection with any current or prospective undertakings relative to any municipal financial product or issuance of municipal securities. Ehlers does not provide tax, legal or accounting advice. You should, in considering these materials, discuss your financial circumstances and needs

5 with professionals in those areas before making any decisions. Any information contained herein may not be construed as any sales or marketing materials in respect of, or an offer or solicitation of municipal advisory service provided by Ehlers, or any affiliate or agent thereof. References to specific issuances of municipal securities or municipal financial products are presented solely in the context of industry analysis and are not to be considered recommendations by Ehlers. Investment Trends Ehlers Investment Partners A Tale of Fannie Mae and Freddie Mac Trends in Investment Returns May 9, Year Ago 1 Month Ago Today 1 Yr Certificate of Deposit % % % 3 Yr Certificate of Deposit % % % 5 Yr US Agency Note % % % Money Market Funds 0.10%-.25% 0.35%-0.75% 0.40%-0.80% Source :Bloomberg, Wall Street Journal, The Economist When the financial crisis and housing market collapse began in 2008, the future of Fannie Mae and Freddie Mac were uncertain. When these Government Sponsored Enterprises were bailed out by the federal government in 2008 there were strings attached. A ruling in a recent court case shows how lucrative the bailout was for the federal government. Equity investors in Fannie and Freddie stock were dissatisfied with the government absorbing all profits per executive action of the Obama administration in Since 2008, the Treasury has taken in over $250 billion of Fannie and Freddie profits, 30% more than the cost of the bailout. Fannie and Freddie equity investors felt the U.S. Treasury misappropriated the profits of the two firms and took their case to court, where an earlier decision in 2014, siding with the government, was upheld. The Economist estimates the Treasury s profit-absorbing policy is running down Fannie and Freddie capital by $600 million a year, and at this pace, both entities will be running at an operating loss by While there are critics on both sides of the existence and direction of Fannie and Freddie, they do stand behind much of America s housing market and create a large risk in the overall economy. If we did see another housing collapse, The Economist estimates the financial setback to the Treasury at 2-4% of GDP. Fannie s and Freddie's bonds are used by many municipalities as investments and banks as collateral for deposits. Fannie and Freddie carry the implied, not direct, backing of the US Government. However, in 2009, we did see the government step in to intervene. As bond investors in these entities, it would be beneficial to watch how these organizations adjust structurally and financially over the next year. To discuss this topic or other

6 diversification options within your portfolio, reach out to an investment advisor at Ehlers Investment Partners.

7 Selected Sale Results April 24, May 5, 2017 Sale Date Issuer St Par Amt (in millions) Issue Underlying Rating Credit Enhanced Rating BQ TIC / NIC Ave. Life Maturities # of Bidders Winning Bidder/Purchaser 04/24/17 Red Wing, City MN 9.33 GO Bonds Aa2 Y 1.90% Wells Fargo Secs 04/24/17 Orono SD No. 278 MN 2.87 GO Facilities Maintenance Bonds Aa2 N 1.87% Fifth Third Secs 04/24/17 Fergus Falls SD No. 544 MN 5.66 GO Refunding Bonds Aa2 Y 1.30% Hutchinson Shockey 04/24/17 Rocori Area SD No. 750 MN GO School Building Refunding Bonds Aa2 N 2.77% Northland Secs 04/24/17 Wright County MN 6.60 GO Alternative Facilities Refunding Bonds Aa2 Y 1.89% Wells Fargo Secs 04/24/17 Brillion, City WI 0.93 Waterworks System Revenue Bonds NR Y 3.09% BOK 04/24/17 Brillion, City WI 1.59 GO Promissory Notes NR Y 2.42% BOK 04/24/17 Racine Unified SD WI 8.00 GO School Improvement Bonds Aa3 Y 2.54% Citigroup 04/25/17 Chillicothe-Illinois Valley Central SD No. 321 IL 1.15 GO CABs AA- Y 2.28% D.A. Davidson 04/25/17 Sycamore Park District IL 7.13 GO Park Bonds AA BAM ins. Y 4.01% Baird 04/25/17 Morris, City MN 2.09 GO Improvement Bonds A1 Y 2.53% United Banker's Bk 04/25/17 St. Anthony, City MN 5.31 GO Bonds AA Y 2.19% Piper Jaffray 04/25/17 North St. Paul-Maplewood-Oakdale SD No. 622 MN 6.60 GO Alternative Facilities Refunding Bonds Aa2 Y Y 1.89% Wells Fargo Secs 04/25/17 Milwaukee Area Tech College Dist WI 1.50 GO Promissory Notes Aa2 N 1.43% Hutch 04/25/17 Oconomowoc Area SD WI GO Corporate Purpose Bonds Aa2 N 2.76% Piper Jaffray 04/25/17 Waukesha County WI GO Prom Notes Aaa/NR/AAA Y 1.83% Baird 04/26/17 Big Dry Creek Metropolitan Dist CO GO Limited Tax Refunding Bonds NR N N/A N/A 2047 Neg D.A. Davidson 04/26/17 Salisbury Heights Metropolitan Dist CO 2.85 GO Limited Tax Bonds NR Y N/A N/A 2047 Neg D.A. Davidson 04/26/17 Inverness, Village IL 5.07 GO Refunding Bonds AAA Y 1.68% Baird 04/26/17 Minneapolis-St. Paul Metropolitan Council MN GO Transit Bonds Aaa/AAA N 1.78% Baird 04/26/17 Minneapolis-St. Paul Metropolitan Council MN GO Wastewater Revenue Bonds Aaa/AAA N 2.87% BA Merrill Lynch 05/01/17 Augusta, City KS 1.43 GO Temp Notes SP-1+ Y 1.39% UMB Bank 05/01/17 Goodland, City KS 2.44 GO Bonds A+ Y 2.07% UMB Bank 05/01/17 Medicine Lodge, City KS 1.93 GO Sales Tax Bonds A- Y 2.53% Commerce Bank 05/01/17 Jordan, City MN 6.84 GO Bonds A1/AA BAM ins. Y 2.85% PNC Capital Mkts 05/01/17 Robbinsdale Area SD No. 281 MN GO Alternative Facilities Refunding Bonds Aa2 Y N 2.14% Baird 05/01/17 Otter Tail County MN 1.34 GO Capital Improvement Bonds AA Y 2.04% Baird 05/01/17 Menomonie, City WI 2.00 GO Prom Notes A+ Y 2.21% Bankers' Bank 05/01/17 Menomonie, City WI 3.25 GO Corporate Purpose Bonds AA BAM ins. Y 2.96% Baird 05/01/17 Sheboygan, City WI 5.00 GO Prom Notes Aa2 Y 2.07% UMB Bank 05/01/17 Northcentral Tech College Dist. WI GO Prom Notes Aa1 N 1.98% FTN Fin Cap Mkts 05/02/17 Denver SD No. 1 CO Certificates of Participation NR/AA-/AA N N/A N/A Neg. Stifel 05/02/17 Lawrence, City KS 3.03 GO Improvement Bonds Aa1 N 2.04% Baird 05/02/17 Lawrence, City KS GO Energy Improvement Bonds Aa1 N 3.14% Baird 05/02/17 Minneapolis, City MN GO Improvement and Various Purpose Bonds NR/AAA/AAA N 2.06% Baird 05/02/17 Minneapolis, City MN Taxable GO Sales Tax Refunding Bonds NR/AAA/AAA N 3.17% Baird 05/02/17 North St. Paul, City MN 1.49 GO Improvement Bonds AA Y 2.49% Northland Secs. 05/02/17 Shafer, City MN 1.14 GO Improvement and Utility Revenue Bonds A+ Y 2.59% United Banker's Bk 05/02/17 Thief River Falls, City MN 5.53 GO Water Revenue Bonds AA+ Y Y 3.08% BOK 05/02/17 Isanti County MN 2.39 GO Bonds NR Y 1.97% UMB 05/02/17 Burlington, City WI 1.61 Sewer System Revenue Bonds NR Y 3.40% Bankers' Bank 05/02/17 Burlington, City WI 7.99 GO Corp Purp Bonds AA- Y 2.69% Northland Secs. 05/02/17 Allouez, Village WI 3.08 GO Prom Notes Aa2 Y 2.11% UMB Bank 05/04/17 Englewood SD No. 1 CO GO Bonds Aa2 Y N N/A N/A Neg. RBC Capital Mkts 05/04/17 Leyden Ranch Metropolitan Dist. CO 6.50 GO Limited Tax Bonds NR N N/A N/A Neg. D.A. 05/04/17 Milwaukee, City WI Taxable GO Prom Notes NR/AA/AA N 2.98% Piper Jaffray 05/04/17 Milwaukee, City WI GO Prom Notes NR/AA/AA N 2.13% Wells Fargo (800)