Market Update and Debt Portfolio Review

Sacramento Transportation Authority

April 9, 2009

Presented by:Public Financial Management Inc.

50 California Street, Suite 2300San Francisco, CA 94111

(415) 982-5544

General Market Update

• The financial sector continues to report losses and the economy continues to shed jobs.

– National unemployment is 8.5%.

– State unemployment is 10.5%.

• Consumer and retail activity has slowed significantly during the 14 month recession.

– Sales tax revenues are down throughout California.

• The Federal Reserve has reduced the target Federal Funds Rate to zero, as well as announcing that it will begin to take additional measures to promote liquidity.

• President Obama signed the American Recovery and Reinvestment Act into law, a $787 billion economic stimulus package designed to combat the recession and promote economic recovery.

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General Market Timeline

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June 6, 2008: UBS closes municipal

department

May 30, 2008: JPMorgan purchases

Bear Stearns

Sept. 7, 2008: Fannie Mae and

Freddie Mac enter

conservatorship

Sept. 22, 2008:

Barclays purchases

Lehman’s US business

Sept. 14, 2008: Bank of

America purchases

Merrill Lynch

Sept. 16, 2008: Lehman files

for bankruptcy

Sept. 16, 2008: Federal

government purchases AIG

Oct. 14, 2008: Government injects equity

into major banks

Dec. 16, 2008: Federal Reserve

cuts target rate to virtually

0%

Jan. 16, 2009: Bank of

America receives additional

government funds

Nov. 24, 2008: Federal

government provides

additional support to Citigroup

Jan. 18, 2009: Citigroup

announces future break-

up of company

Feb. 17, 2009: Stimulus bill is signed into

law by President

Obama

New Reality in the Municipal Bond Market

• Nearly all bond insurers have been downgraded over the last year.

– The value of credit enhancement is negligible for fixed rate bonds.

• The scarcity of reliable credit enhancement providers and the requirement for liquidity for variable rate demand bonds has driven costs up for issuers.

• The market has become strongly bifurcated between low and high rated credits.

– AA and better rated credits receive strong investor interest and price competitively

– A and lower rated credits have difficulty coming to market and must offer higher yields to attract investors.

• Early 2009 has seen a rally in the municipal market as more investors are examining municipal bonds as an alternative to Treasuries.

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Market Impact on Interest Rates

• Interest Rates have been volatile over the last 12 months.

– Rates have decreased since September and December 2008.

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Authority’s Existing Debt

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• The Authority’s three fixed rate notes:

– Series 2006 A

– Series 2006 B

– Series 2007 A

• Authority’s Current Ratings:

– Short term ratings: MIG-1 (by Moody’s) and SP-1+ (by S&P).

– Preliminary long term ratings: AA from S&P (on Aug. 30, 2007) and Aa3 from Moody’s (on Aug. 23, 2007).

Summary of Outstanding Debt

  Current Issue OriginalOutstandin

g Final Interest

SeriesRate Mode Date Principal Principal Maturity Rate Range

2006 A Sales Tax Revenue Notes Fixed 11/21/2006

$ 95,615,000

$95,615,000 10/1/2009

3.50% - 5.00%

2006 B Sales Tax Revenue Notes Fixed 11/21/2006

$ 4,475,000

$ 4,475,000 10/1/2009 4.00%

2007 A Sales Tax Revenue Notes Fixed 10/07/2007

$82,230,00

0

$82,230,000 10/1/2009 3.45% -

5.00%2009 Forward Starting Swaps - 10/12/2006

$318,300,0

00 - 10/1/2038 -

2009 Forward Starting Swap Structure

• On October 18, 2006, the Authority executed three floating-to-fixed interest rate swaps, consisting of three $106,100,000 swap agreements, totaling $318,300,000.

– Average synthetic fixed rate: 3.952%.

– Effective: October 1, 2009.

– Final Maturity: October 1, 2038.

• The purpose was to lock in existing rates and hedge future interest rate increases.

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Sacramento

Transportation

Authority

Sacramento

Transportation

Authority

Forward Swap

Goldman Sachs Bank USA

Forward Swap

Goldman Sachs Bank USA

67% LIBOR

VRDBs

Bondholders

VRDBs

BondholdersVariab

le Rate

Liquidity

Provider

Liquidity

ProviderFees

3.736%

Forward Swap

Bank of America, N.A.

Forward Swap

Bank of America, N.A.

67% LIBOR

3.736%

Forward Swap

Bear Stearns Financial Products

(JPMorgan)

Forward Swap

Bear Stearns Financial Products

(JPMorgan)

SIFMA

4.3825%

2006 Swap Considerations

• Swap Counterparties:

– Bank of America, N.A. (Aa2, A+, A+)

– Bear Stearns Financial Projects, Inc. (Aaa, AAA, N/A)

– Goldman Sachs Capital Markets, LP (Aa3, A, A+)

• The cost of liquidity associated with VRDBs has increased from an estimated 20 basis points to 120 basis points.

• In order to terminate the swap, the Authority would be required to pay the following termination fees (values as of April 6, 2009):

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Bear Stearns was bought by JP Morgan

in May, 2008.

CounterpartyTermination

PaymentGoldman Sachs Bank, USA $23,529,325 Bank of America, N.A $23,527,857 Bear Stearns Financial Products, Inc. (JPMorgan) $15,053,553 Total: $62,110,835

Market Impact on the Swap

• The Authority’s swaps would have performed acceptably (if in effect) since 2006 when compared to the general market index.

– Average spread to SIFMA of 0.2561%.

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Conclusion and Next Steps

• The Authority’s swap structure continues to serve as an effective hedge with an average synthetic fixed rate of 3.95%.

– Current market opportunity exists to reduce the synthetic fixed rate to 3.61% and reduce annual debt service by approximately $1 million.

• The Authority has several options for issuing bonds in September 2009:

– Variable rate bonds with liquidity

– SIFMA index bonds without liquidity

– Short-term (one-year) fixed rate note without liquidity

• Authority’s financing team will finalize strategy in early July with a presentation to the Board

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Proposed Next Steps 2009 Transaction

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Proposed TimelineDate Event

May, 2009 Draft Plan of FinanceJune, 2009 Board Adoption of Plan of FinanceJune, 2009 Review Underwriter PoolJune, 2009 Select Underwriting TeamJuly, 2009 Finalize strategy with financing teamJuly, 2009 Begin drafting documents

August, 2009 Meet with rating agenciesAugust, 2009 Receive Board approval of documents

Early September, 2009

Post preliminary OS and market bonds

Mid-September, 2009

Price bonds

October 1, 2009 Close transactionOctober 1, 2009 Forward swaps goes into effect