INVESTING IN OUR CHICAGO: QUARTERLY EARNINGS CALL

INVESTING IN OUR CHICAGO: QUARTERLY EARNINGS CALL Presented by City Treasurer Kurt Summers A u g u s t 1 1, 2 0 1 5 1 : 0 0 PM

BEFORE WE GET STARTED AUDIO Participants can hear the call through the computer or over the phone; you don t have to be on both to hear the presentation. You do need to be registered online to view the webcast. NEED HELP? If at any time during the call you need assistance, please call 773-710-3506 or email city.treasurer@cityofchicago.org. QUESTIONS Have a question? At any time during the presentation, type in your question by clicking Messages. There will be time alotted for Q&A at the end of the call.

WELCOME & PURPOSE OF CALL Status Quo In the past, the Treasurer s Office has produced one annual and publicly available financial report which contained a simple overview of the city s investments over the previous year. Best Practices As the primary investment manager for the City of Chicago, the Treasurer seeks to be held as accountable as any other investment management firm is to their investors. This call is shaped after some reporting done by the nation s largest investment managers and public companies. Transparency & Accountability During the Treasurer s 77 visits to Chicago s 77 neighborhoods, the greatest recommendation by residents across the City was that their financial steward provide more transparency and accountability. Action This second-ever Quarterly Earnings Call for the City of Chicago is only one step in financial reporting and performance tracking of the City s investment portfolio. The call will provide overviews of the global and national economies as well as Chicago's current fiscal landscape, balance sheet, and income statement. A quarterly scorecard on the Treasurer s progress will also be published online at chicagocitytreasurer.com 3

Agenda 01 1:00-1:05 Introduction, Purpose of Call, Agenda 05 1:14-1:19 Chicago Economy 02 1:05-1:08 Global Economy 06 1:19-1:24 City of Chicago Finances 03 1:08-1:11 National Economy 07 1:24-1:29 CTO Investments Update 04 1:11-1:14 Fixed Income Market 08 09 1:29-1:40 Q&A 1:40-1:45 Debrief and Closing 4

GLOBAL ECONOMY Real GDP (Annual Growth Rate) Country/Region Q1-15 Q2-15 United States 0.6 2.3 China 7.0 7.0 Japan -0.9 NA Spain 2.7 3.1 Germany 1.1 NA Brazil -1.6 NA Mexico 2.5 NA CPI Country/Region Q1-15 Q2-15 United States -0.23 0.86 China -0.09 0.00 Japan 0.00 0.68 Spain -0.77 1.71 Germany 0.28 0.00 Brazil 3.83 2.26 Mexico 0.51-0.58 GDP ( Gross Domestic Product) is a measure of economic growth CPI (Consumer Price Index) is a measure of price inflation Chart Source: tradingeconomics.com 5

NATIONAL ECONOMY The acceleration in real GDP growth in the second quarter reflects an upturn in exports and consumer spending Inflation rose over Q2 after slowing over 2014 with the plunge in energy prices Job growth steadily increased in the second quarter Unemployment (seasonally adjusted) decreased from 5.5% to 5.3% over Q2 Source: BEA, BLS 7

NATIONAL ECONOMY: OTHER INDICATORS Employment Growth (% change) US 2014 US 2015 YTD 2.1 0.7 Average Unemployment Rate 6.2 5.5 Median Household Income (Ths. $) 53.1 55.1 Houses Prices (% Change) 4.9% 5.7 (YOY) Single Family Permits (% Change) Multifamily Permits (% change) Housing Starts (avg. annualized) 2.1 6.1 (YOY) 16.7 70.3 (YOY) 1,000.5M 1,061.2M Table sources: Bureau of Census; Bureau of Labor Statistics; Bureau of Economic Analysis; Sentier Research; Federal Housing Finance Agency; U.S. Census Bureau 8

FIXED INCOME MARKET: OVERVIEW Why is this important, as individuals, investors, and issuers? Highly rated, short term municipal bonds continued to underperform their benchmark The Fed rate hike, as addressed by Janet Yellen and Dennis Lockhart, is expected to be a measured and gradual increase with a possible initial tightening in September: My own preference would be to be able to proceed to tighten in a prudent and gradual manner. Janet Yellen, Chairwoman of the Federal Reserve I remain very disposed to September being a possible date for a liftoff decision. Dennis Lockhart, Atlanta Fed President Rising interest rates can cause unrealized losses in fixed income portfolios Holdings with longer durations will see larger losses; a gradual increase in rates will allow portfolio managers to adjust to a rising rate environment Source: Chicago City Treasurer s Office, The Wall Street Journal, CNBC 10

FIXED INCOME MARKET Treasury Curve Chart Source: Bloomberg Finance L.P. 11

Agenda 01 1:00-1:05 Introduction, Purpose of Call, Agenda 05 1:14-1:19 Chicago Economy 02 1:05-1:08 Global Economy 06 1:19-1:24 City of Chicago Balance Sheet 03 1:08-1:11 National Economy 07 1:24-1:29 CTO Investments Update 04 1:11-1:14 Fixed Income Market 08 09 1:29-1:40 Q&A 1:41-1:45 Debrief and Closing 12

Junk Investment Grade CREDIT RATINGS TODAY Moody s downgraded its ratings of Chicago and sister agencies bonds due to concerns about unfunded pension liabilities Through prudent management of City investments and day-to-day finances, CTO can help support the City s financial health Chicago Bond Ratings (7/15/15) Moody s S&P Fitch Kroll City GO Bonds Aaa AAA AAA AAA CPS GO Bonds CPD GO Bonds Aa1 AA+ AA+ AA+ S&P Aa2 AA AA AA Kroll Aa3 AA- AA- AA- Fitch A1 A+ A+ A+ A2 A A A A3 A- A- A- Kroll Baa1 BBB+ BBB+ BBB+ Fitch/S&P Kroll Baa2 BBB BBB BBB S&P Baa3 BBB- BBB- BBB- Ba1 BB+ BB+ BB+ Moody s Fitch Moody s Ba2 BB BB BB Ba3 BB- BB- BB- Moody s B1 B+ B+ B+ B2 B B B B3 B- B- B- Caa1 CCC+ CCC+ CCC+ Caa2 CCC CCC CCC Caa3 CCC- CCC- CCC- Ca CC CC+ CC - C CC C - - CC- - D D DDD D 13

CHICAGO ECONOMY: OVERVIEW Chicago s strong, diversified economy continues to grow across sectors, demonstrating that the City remains a global economic powerhouse Among Chicago s recent successes: - Job growth and creation - Strong real estate market - Increased tourism - Major business expansions Source: World Business Chicago 14

CHICAGO S GLOBAL AND DIVERSE ECONOMY Only 22 countries have a larger GDP than Chicago Chicago has the U.S. s most diverse economy. No single sector employs more than 14% of the workforce Source: World Business Chicago, City of Chicago 2014 CAFR 15

Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Unemployment Rate CHICAGO ECONOMY: UNEMPLOYMENT The number of employed residents in the City increased by an estimated 2.1% over Q2 2015. National vs. Chicago Unemployment Rate Unemployment Rate June 2014 June 2015 Year/Year National 6.3% 5.5% -0.8 Chicago 7.9% 6.9% -1.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 National City of Chicago *Not Seasonally Adjusted Chart Sources: Bureau of Labor Statistics, World Business Chicago 16

CHICAGO ECONOMY: SELECTED INDICATORS Indicator Date Most Recent Year Earlier Yr-On-Yr Chg Employed Residents (1,000) - City May-15 1,275.0 1,259.1 1.3% Air cargo tonnage (ORD & MDW) May-15 143,977 131,765 9.3% Major business expansions - MSA Jun-15 YTD 202 - - Home sales -City May-15 2,700 2,453 10.1% Median home sales price ($) - City May-15 287,500 269,250 6.8% Office vacancy rate - downtown Q1 2015 12.7 13.7-1.0% Annual visitors (millions) - City May-15 50.17 48.48 3.5% Air passengers (millions) - ORD & MDW May-15 8.83 8.18 7.9% Source: World Business Chicago 17

CHICAGO ECONOMY: PRIVATE SECTOR EMPLOYMENT Private Sector Employment increased by ~16,700 jobs in Q2, which includes: Professional and Business Services (+7,000) Leisure and Hospitality (+6,300) Financial Activities (+4,400) Source: World Business Chicago 18

CHICAGO ECONOMY: INNOVATION, INVESTMENT & EXPANSION There are nearly 300 venture capital and seed stage investment firms in Chicago; between 2010 and 2014, Chicago startups received more than $3 billion in VC funding, with over $1.6 billion in 2014 alone In 2014, more than 600 major business expansions were announced, representing $6.8+ billion in economic development and over 20,000 new jobs Between 2010 and 2013, tech jobs in Chicago grew by 25.8%, edging out Silicon Valley and all but two peer cities In 2015, over a dozen tech companies will add 1,000 jobs in Chicago Sources: City of Chicago press release, City of Chicago 2014 CAFR 19

CITY OF CHICAGO: CORPORATE FUND REVENUES Corporate Fund - Revenue 2014 2014 2015 Projected 2015 Year-End 2016 $ MILLIONS Year-End Est.* Actual** * Estimate*** Projected*** Tax Revenue Utility Taxes and Fees $464.5 $447.3 $449.4 $441.0 Transaction Taxes $297.4 $309.2 $345.4 $338.9 Transportation Taxes $182.6 $185.0 $191.1 $191.8 Recreation Taxes $184.3 $187.6 $214.5 $217.0 Business Taxes $100.0 $100.0 $111.8 $113.9 Sales and Use Taxes $609.4 $630.9 $651.3 $676.4 Income Tax, PPRT & Other Intergovernmental $294.0 $304.0 $447.0 $441.9 Total Tax Revenue $2,132.2 $2,164.0 $2,410.5 $2,420.9 Non-Tax Revenue Licenses and Permits $125.0 $126.0 $129.3 $137.1 Fines, Forefeitures and Penalties $360.7 $354.5 $338.7 $330.1 Charges for Services $121.7 $123.6 $122.3 $112.6 Municipal Parking $6.4 $6.4 $7.0 $6.6 Leases, Rentals and Sales $20.3 $20.8 $25.0 $31.2 Reimbursement, Interest & Other $378.3 $397.0 $460.3 $390.7 Total Non-Tax Revenue $1,012.4 $1,021.6 $1,082.6 $1,008.3 Proceeds and Transfers In $57.3 $32.8 $41.6 $33.3 Total Revenue to the Corporate Fund $3,201.9 $3,218.4 $3,534.7 $3,462.5 Appropriated Prior Year Fund Balance $53.4 - $0.0 $0.0 Total Corporate Fund Resources $3,255.3 $3,261.3 $3,218.4 $3,534.7 $3,462.5 *Per City of Chicago 2014 Annual Financial Analysis **Per City of Chicago 2014 CAFR ***Per City of Chicago 2015 Annual Financial Analysis Chart Sources: Chicago Office of Budget Management 21

CITY OF CHICAGO: CORPORATE FUND EXPENDITURES Corporate Fund - Expenditures 2014 2014 2015 Proposed 2015 Year-End 2016 $ MILLIONS Year-End Est.* Actual** Budget* Estimate*** Projected*** Salaries and Wages $2,320.1 $2,443.1 $2,436.5 $2,517.4 Healthcare Benefits $377.8 $404.2 $379.0 $413.7 Worker's Compensation $63.1 $66.6 $66.8 $66.1 Contractual Services $358.1 $365.0 $360.1 $382.6 Commodities and Materials $23.9 $24.4 $27.2 $30.0 Utilities $16.1 $16.6 $17.2 $16.7 Motor Fuel $27.1 $29.0 $26.9 $24.8 Claims, Refunds, Judgments, and Legal Fees $32.1 $57.2 $43.8 $63.0 Miscellaneous $26.9 $31.7 $26.0 $30.6 Transfers Out $10.1 $10.0 $10.8 $10.1 Pension Contribution - $67.9 $140.2 $140.2 Total Expenditures $3,255.3 $3,261.3 $3,515.7 $3,534.5 $3,695.2 *Per City of Chicago 2014 Annual Financial Analysis **Per City of Chicago 2014 CAFR ***Per City of Chicago 2015 Annual Financial Analysis Chart Sources: Chicago Office of Budget Management 22

CITY OF CHICAGO 2014 Comprehensive Annual Financial Report In Thousands of USD FY 2014 Assets Current Assets 5,514.4 Restricted Assets 4,474.3 Noncurrent Assets 602.4 Total Capital Assets 22,103.7 Total Assets 32,694.8 Liabilities Current Liabilities 3,512.7 Long Term Liabilities 32,496.9 Total Liabilities 36,009.6 Net Assets Total Net Assets -3,314.8 Total Liabilities & Net Assets 32,694.8 Chart Source: City of Chicago CAFR 2014 23

CHICAGO S PENSION FUNDING The combined actuarial value funded ratio of Chicago-area pension funds has fallen from 69.7%in FY2004 to 47.3% in FY2013. Combined unfunded liabilities for the same eleven funds grew from $14.4 B in FY2004 to $39 B in FY2013. Chart Sources: Civic Federation 24

FEE SAVINGS INITIATIVE Chicago s 11 local pension funds have over $35B in assets and pay $144M in fees annually. Each plan has its own process of contracting with investment managers, resulting in plans using the same managers with different fee schedules. CTO seeks to lower pension funds costs by creating a clearinghouse to allow funds to share investment and management fee information. Currently, 5 of the 11 local funds have adopted a resolution to participate in the clearinghouse. Funds can use shared information to renegotiate fee pricing, potentially saving more than $1 billion in fees over the plans lifetimes. 25

CTO INVESTMENTS: PORTFOLIO ALLOCATION AS OF 6/30/15 Cash 8.91% Certificate of Deposit 0.09% Commercial Paper 6.02% Corporate Bonds 7.16% Money Market 8.78% Municipal Bonds 8.61% Investment Amount Q2 2015 Q2 2014 Certificate of Deposit $ 5,209,528 0.09% 0.24% Commercial Paper $ 345,661,128 6.02% 4.02% Corporate Bonds $ 411,380,396 7.16% 5.36% Money Market $ 504,225,254 8.78% 6.59% Municipal Bonds $ 494,822,221 8.61% 8.37% Treasuries $ 93,452,746 1.63% 0.00% U.S. Agency Bonds $ 3,377,758,973 58.80% 66.07% U.S. Agency 58.80% Treasuries 1.63% Cash $ 511,745,221 8.91% 9.35% Total $ 5,744,255,467 100% 100% 2015 Q1 Q2 CTO Investment Purchases $ 1,302,340,622.50 $ 2,189,004,884.58 Chart Source: Chicago City Treasurer s Office 27

CTO INVESTMENTS: PORTFOLIO STATISTICS Portfolio Statistics Average Coupon 0.90% Yield to Maturity 0.90% Yield to Call 0.91% WAM 1.90 Effective Duration 1.54 Average Rating AA+ Q2 CTO Effective Yield 0.90% BAML 1-5 Year US Agency Index Effective Yield 0.87% 10+ years 5-10 years 3-5 years 2-3 years 1-2 years 9-12 months 6-9 months 3-6 months 0-3 months Money Market Cash MATURITY SCHEDULE IN MILLIONS $0 $500 $1,000 $1,500 $2,000 Chart Source: Chicago City Treasurer s Office 28

Percent Yield Effective Duration CTO INVESTMENTS: Q2-15 YIELD & DURATION Q2-15 YIELD Q2-15 DURATION 1.00% 2.50 0.90% 0.80% 2.00 0.70% 0.60% 1.50 0.50% 0.40% 1.00 0.30% 0.20% 0.50 0.10% 0.00% Treasurer's Office BAML 1-5 Year US Agency Index US 90 Day Treasury Bill 0.00 Treasurer's Office BAML 1-5 Year US Agency Index US 90 Day Treasury Bill Effective Yield 0.90% 0.87% 0.01% Effective Duration 1.54 2.06 0.25 Chart Source: Chicago City Treasurer s Office 29

CTO Advantage To manage money for our Sister Agencies utilizing our expertise for investment access, economy of scale, reduction of internal Agency costs and increased return on investment. To afford our Sister Agencies the freedom to utilize their management and core assets directly on fulfilling their stated missions. CTO can manage the day-to-day operations of a Sister Agency s management portfolio while allowing the Sister Agency to maintain ultimate decision-making power over their investments. In the case of the Chicago Park District, this achieved a greater net return on investments when compared to prior in-house management and third party managers. On July 29, 2015, Chicago City Council approved the IGA between the Public Building Commission (PBC) and the Office of the City Treasurer (CTO). Implementation is now in process to on-board the portfolio and effect change to investments and earnings for PBC. 30

CTO Advantage: Park District Case Study CTO-recommended investments to the Chicago Park District (CPD) have met cash flow requirements and earned CPD over $411,000.00 since implementation of CTO portfolio management.. 31

Municipal Depository Ordinance Introduced on June 17 by Mayor Emanuel and sponsored by Aldermen Tunney and Sawyer; likely to be voted on by the Finance Committee and City Council early this fall. Municipal depositories will reapply for their status on a triennial basis. Recent ratings downgrades have shrunk the capacity of banks to provide credit support to the city; it is more critical than ever that we maintain and expand relationships with banks. This streamlined process paves the way to attract more banks as municipal depositories as well as to protect future credit availability. The ordinance also temporarily authorizes successor entities that have undergone consolidation. The ordinance will require all municipal depository banks to provide reports on their local commercial, mortgage, and other lending as required by the HMDA and CRA. 32

Investment Policy Update On July 29, Mayor Emanuel introduced proposed changes to the City of Chicago s current Investment Policy that would improve the security, credit and investment quality of the City s investment portfolio while also ensuring greater accountability to Chicago s taxpayers. Changes to the policy are broken down into three categories and were introduced to Chicago s City Council in July: Protecting Taxpayers Limiting holdings in securities that have exhibited increased volatility or whose limited sector coverage impedes the transparent flow of information, enhances the risk profile of the portfolio and secures the preservation of principal. Increasing Transparency and Accountability Mandating the Treasurer s Office to report to City Council and the public on a regular basis in order to collect important feedback regarding the City s investment strategy, ensure timely review of policies given current market conditions and keep better track of the performance of the City s portfolio over time. Improving Investment Quality New improvements to provide the Treasurer s Office with opportunities to pursue further diversification and enhanced earnings while securing the credit quality of the City s investment portfolio. 33

Q&A 35

DEBRIEF & CLOSING Follow Us Join a Think Tank Feedback Share Twitter: @kurtasummers Facebook: /summerschicago www.chicagocitytreasurer.com Keep the conversation going in your neighborhood! Let us know what you thought about our first call. Email us at city.treasurer@cityofchicago.org Share with your neighbors what you learned today. Invite friends and family to join our next call and stay engaged. 37

Thank You For Joining 38

DISCLAIMER PLEASE NOTE: This presentation has not been prepared to give information for making decisions on buying or selling securities and should not be relied upon by investors in making investment decisions. With respect to any bonds, notes, or other debt issued by the City of Chicago, please refer for information only to the City s disclosure documents and continuing disclosure filings for such bonds, notes, or other debt obligations. 39