EFTA01378356.pdf

Municipal Credit > Investment Grade State of California Updated: Oct 31, 2015 Trade Idea: 0 Buy state of California general obligation bonds. Investment Rationale: o Security: The bonds are general obligations to which the state of California pledges its full faith and credit. Debt service is second in line of priority payments only behind K-12 and higher education funding. o Large, diverse, and dynamic economy. The state has the eighth largest economy in the world. Real GDP= $2.3 trillion (2014). 0 California's tax receipts increased significantly in 2015 and 2015 as economic recovery materialized, and at the same time, the state employed conservative budgeting practices and institutional changes that facilitated a substantial improvement in its financial position. o As of the 2015 Budget Act, the state has passed an on-time budget for five years in a row. This is largely due to Proposition 25 (2010) which allows the legislature to pass a budget by simple majority rather than two-thirds super majority. 0 During the recession, California borrowed and deferred payments in order to balance its budget and fund operations. Due to this, the general fund balance remains negative on a GAAP basis but continues to improve as the state has reduced budgetary borrowing and continues to pay down these deferred payments. o California voters passed Proposition 2 in 2014 which will strengthen the state's budget stabilization fund. This is a key development as the state's revenue is volatile and typically correlates to overall economic conditions. o The state is highly levered. Additionally, its two pension plans, CaIPERS and CaISTRS, have a combined unfunded liability of $116 billion as of FYE14. Funded ratios will continue to improve due to implemented contribution increases. The state's unfunded OPEB liability is also elevated at $72 billion but the FY16 budget establishes a trust to begin pre-funding this liability. Recommendation(s): View Trade Horizon Credit Moody's/S&P Internal Cusip Maturity Par Amount of Last Trade to Next Expected /Fitch Ratings Rating Selected AAA Curve Issuance Matra ay Buy 12 months State of Aa3/AA4A. Ar451able 130638P63 2/1/2038 240,000800 +30 $3.5 billion California now money in FY16 Deutsche Asset & Wealth Management 69 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0075525 CONFIDENTIAL SDNY_GM_00221709 EFTA01378356