STATEMENT OF INVESTMENT POLICY

10.0 Unauthorized investments/investment activities | Section 53601.6 of the California Government Code disallows the following investments acquired after January 1, 1996: inverse floaters, range notes, or interest-only strips that are derived from a pool of mortgages. In addition, and more generally, investments are further restricted as follows:

10.1 | No investment will be made that has either (1) an embedded option or characteristic which could result in a loss of principal if the investment is held to maturity, or (2) an embedded option or characteristic which could seriously limit accrual rates or which could result in zero accrual periods.

10.2 | No investment will be made that could cause the portfolio to be leveraged.

11.0 Investment strategy.

11.1 Pooled Investments | A buy and hold strategy will generally be followed; that is, investments once made will usually be held until maturity. A buy and hold strategy will result in unrealized gains or losses as market interest rates fall or rise from the coupon rate of the investment. Unrealized gains or losses, however, will diminish as the maturity dates of the investments are approached or as market interest rates move closer to the coupon rate of the investment. A buy and hold strategy requires that the portfolio be kept sufficiently liquid to preclude the undesired sale of investments prior to maturity. Occasionally, the City Treasurer may find it advantageous to sell an investment prior to maturity, but this should only be on an exception basis and only when it is clearly in the best interest of the City to do so.

11.2 Investments held separately | Investments held separately for bond proceeds will follow the trust indenture for each issue.

12.0 Diversification | The portfolio will be diversified to avoid incurring unreasonable and avoidable risks regarding specific security types or individual financial institutions. In addition to the limitations on specific security types indicated in paragraph 8.0 of this Investment Policy, and with the exception of U.S. Treasury/Federal agency securities and authorized pools, no more than 5% of the City's portfolio will be placed with any single issuer.

13.0 | Maximum maturities and maximum modified duration.

13.1 Pooled Investments | A policy of laddered maturities will be followed for pooled investments. The following maturity requirements will apply as of the month end of each reporting period.

13.1.1 | Investments maturing within one year must be no less than two-thirds of the approved operating budget of the current year. This requirement will be met within 3 months following adoption of the current operating budget. Remaining investments of the portfolio will not have a maturity greater than 5 years from the current date except as provided in paragraph 13.1.3 of this Investment Policy.

13.1.2 | The average portfolio investment maturity shall be 3 years or less. A dollar-weighted average will be used in computing the average maturity of the portfolio.

13.1.3 | Before an investment is made in securities that mature more than 5 years from the current date, the City Treasurer and the Administrative Services Director will review the City's long term cash needs. Both must concur before such an investment is made. Investments beyond 5 years will not be greater than 10% of the portfolio, and will be counted in the percentage of the portfolio that may mature beyond 1 year. No investments will be made that mature beyond 10 years from the current date.

13.1.4 | Callable investments will be recorded at their maturity dates

13.2 Maximum modified duration | The investment restrictions identified in paragraphs 8.0 and 10.0, and the maturity requirements identified in paragraph 13.1, imply that the value of City investments should not change more than 2.2% for every 1% change in market interest rates. To ensure that this is the case, a maximum modified duration is established at 2.2. This states that the unrealized gains and losses of the portfolio are not expected to exceed 2.2% for every 1% change in market interest rates. A modified duration in excess of 2.2 would indicate that the portfolio is exposed to more market risk than is desired by this policy. If the modified duration of 2.2 is exceeded, an explanation will be made in the first monthly report following the occurrence.

13.3 Investments Held Separately | Maturities for investments held separately will conform with the trust indenture for each issue.

14.0 Selection of financial institutions and brokers/dealers | Investments shall be purchased only through well established, financially sound institutions. The City Treasurer shall maintain a list of financial institutions and broker/dealers approved for investment. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions will be given a copy of the City's Investment Policy, and a return cover letter which must be signed indicating that the investment policy has been read and understood. Qualified financial institutions and broker/dealers must supply the City Treasurer with the following:

14.1 Financial Institutions

• Current audited financial statements.
• Depository contracts, as appropriate.
• A copy of the latest FDIC call report or the latest FHLBB report, as appropriate.
• Proof that commercial banks, savings banks, or savings and loan associations are state or federally chartered.

14.2 Broker/Dealers

• Current audited financial statements.
• Proof that brokerage firms are members in good standing of a national securities exchange.

Commercial banks, savings banks, and savings and loan associations must maintain a minimum net worth to asset ratio of 3% (total regulatory net worth divided by total assets), and must have had a positive net earnings for the last reporting period.