Office of the Treasurer-tacxo Llector Chrissw . Street Treasurer-tax Collector Paulc . GORMANc.P,.A .. Ctp*

In December, 2008 Standard & Poor's issued its AAAm rating for the County's two Money Market Funds. This rating does not apply to the County's Extended Funds. In June, 2008, Moody's issued a comparable high-quality rating that included the Extended Funds except for a separate fund that contained the defaulted Whistlejacket SIV. Response: Agrees with the finding.

The County investment policy prohibits investments in the commercial paper or medium-term notes of corporations that are not organized and operating within the United States. The policy also prohibits investments in derivatives. Response: Agrees with the finding.

Findings pertaining to the revised December, 2008, IPS are:

The Treasurer produced financial statements with mark-to-market values that were unsupportable according to the County's own internal auditors. Response: Partially Agrees with the finding. The Treasurer agrees that internal auditors issued a qualified opinion stating they were "unable to obtain sufficient appropriate audit evidence to support Treasury management's valuation of the fair market value" for both Whistlejacket and Sigma Finance SIV holdings. The Treasurer disagrees the values were unsupportable. The Treasurer's office provided internal audit analyses to support values. The Treasurer utilized mark- to-market rules as set forth by Level 3 measurements in Statement of Financial Accounting Standards No. 157, Fair Value Measurements, for pricing securities. The Treasurer valued both these securities with reference to similarly rated investments, comparable yields, and a forecast of cash flows. ٠.

PFM Asset Management, a consulting firm, was hired in late 2007 to perform a risk analysis of the County's investment pools. In their report PFM concluded that the County's investments were of high quality and managed in a prudent manner. The firm also offered some suggested changes to the IPS that were later adopted. However, PFM reached a questionable conclusion about the Whistlejacket SIV by expressing an opinion that "No portfolio holdings are impaired or in present danger of becoming impaired." Evaluating investment compliance with the IPS was outside the scope of PFM's review. PFM limited its interviews and research to Treasury staff and Treasury documents. Response: Disagrees partially with the finding. PFM issued a report on January 28, 2008. Although Whistlejacket had been placed on "credit watch" by the rating agencies on November 30, 2007, there was no information in the market to reach a conclusion that the asset was either impaired or in present danger of becoming impaired. It was still rated as investment grade, and paying the required interest payments as of January 28. Also on January 28, 2008, Moody's Investors Services issued a Global Credit Research Announcement affirming their "A3 rating of Standard Chartered PLC, with a stable outlook following an announcement by the bank that it intends to fund the debt obligations of its Structured Investment Vehicle (SIV) Whistlejacket as they come due." On December 31, 2007, the two assets were priced at 97.701% and 99.138% (of purchase price). Subsequent to the PFM report, Whistlejacket was downgraded on February 12, 2008 by Moody's and by Standard and Poor's on February 15, 2008.

The investment in SIVs were imprudent for several reasons. Among them are: safety and liquidity, the highest priorities for the County's investments, were not adequately considered; the TOC never reviewed them; and, 56 out of 58 California counties chose not to invest in them. Response: Disagrees partially with the finding. Treasury staff exercised prudence in their credit and analytical research regarding safety and liquidity. During the eight (8) years that the Treasurer's office had been invested in these type of securities, the sponsors of these investment vehicles continuously reviewed. The Treasurer's office can not verify that 56 out of 58 California Counties chose not to invest in these securities. ė

There is confusion surrounding the purpose of the TAC, its membership, and the advice it gives to the Treasurer's Office at its quarterly meetings. Response: Diagrees with the finding The Treasurer's office has no confusion regarding the purpose and membership of the Treasurer's Advisory Committee. Responses to Recommendations: R.1, R.2, R.3, R.10 and R.11