U.S. State & Local Government Debt Markets

U.S. State & Local Government Debt Markets Global Interdependence Center March 25-27, 2012

Peter Demirali

David R. Kotok

Managing Director & Portfolio Manager

Chairman & Chief Investment Officer

John Mousseau, CFA Managing Director & Portfolio Manager

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U.S. State & Local Government (Sub-Sovereign) Debt Market • $3.8 Trillion in U.S. Dollars • State and local general obligations, state and local agencies (housing, public utilities, water, education, economic development, others) • Build America Bonds Revisited • Historical Default Rates • Meredith Whitney Whiplash

• State of the States Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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What is a Municipal Bond?

• It is a bond issued by a state, state or local agency, or local government (city or town)  2 types of Municipal Bonds

• General Obligation (G.O.)  The bond is secured by the issuer’s full faith, credit, and taxing power

• Revenue Bond  The bond is secured by revenue from tolls, user charges, or rents derived from the facility financed. Examples include turnpikes/toll roads, water and electric authorities, education and dormitory authorities, housing authorities, economic development authorities, port authorities and others.

• Historically, most municipal debt issued is exempt from federal income taxes. Recently, the Build America Bond (BAB) has significantly increased the amount taxable municipal supply and attracted substantial interest internationally.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Quarterly Data 3/31/1952 - 12/31/2011

Components of US Government Debt as Percentage of GDP 95 90 85 80 75 70 65 60 55 50 45 40 35

Total Marketable and Nonmarketable Federal Government Debt as % of GDP (

44 40 36 32 28 24 20 16 12 8 4

Government-Sponsored Enterprises (GSE) Debt as % of GDP (

21 20 19 18 17 16 15 14 13 12 11 10 9 8

State and Local Government Debt as % of GDP (

1955

1960

1965

1970

) 12/31/2011=99.36

95 90 85 80 75 70 65 60 55 50 45 40 35

) 12/31/2011=40.69

44 40 36 32 28 24 20 16 12 8 4 21 20 19 18 17 16 15 14 13 12 11 10 9 8

) 12/31/2011=19.63

1975

1980

1985

1990

1995

2000

2005

2010

CDL4  Copyright 2012 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

See NDR Disclaimer at

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. For data vendor disclaimers refer to

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.

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Build America Bonds Federally Subsidized Taxable Municipal Bonds • Build America Bonds (BABs) were created by the America Recovery Reinvestment Act of 2009 (“ARRA” or “Stimulus Act”) in February • Permits state and local governments to sell taxable bonds instead of tax-exempt bonds and receive periodic payments from the US Treasury equal to 35% of the interest on the bonds for the life of the debt • Congress created BABs to broaden the market for municipal debt and to provide a more efficient subsidy than tax exemption

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Build America Bonds - Continued Federally Subsidized Taxable Municipal Bonds • BABs program expired December 31, 2010 • There were no limits on the amount of debt that may be sold as BABs and no restrictions on their structure or maturity beyond the rules applicable to tax-exempt bonds • From an investor’s perspective, BABs are simply taxable municipal bonds. The Federal interest subsidies are paid directly to the issuers, not to investors, and are generally not material in the analysis of the creditworthiness of BABs.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

7 ŠCopyright 2012 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

(800) 257-7013

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Does Sub-Sovereign = Subprime?

• No! Historically, investment grade municipal bonds have had exceptionally low default rates.

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Default Rates: Muni vs. Corporates Average Cumulative Default Rates, 1970-2011, Municipal vs. Corporates All Municipals Rating 1 2 3 4 5

6

7

8

9

10

Aaa

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

Aa

0.00%

0.00%

0.00%

0.00%

0.01%

0.01%

0.01%

0.01%

0.01%

0.01%

A

0.00%

0.00%

0.01%

0.01%

0.02%

0.02%

0.02%

0.03%

0.04%

0.04%

Baa

0.01%

0.04%

0.07%

0.11%

0.14%

0.19%

0.24%

0.28%

0.33%

0.37%

Ba

0.28%

0.80%

1.32%

1.83%

2.29%

2.76%

3.26%

3.60%

3.82%

3.92%

B

3.21%

6.27%

9.18%

12.21%

15.20%

17.12%

18.19%

19.06%

20.15%

21.85%

Caa_C

9.17%

13.01%

15.39%

16.65%

17.58%

18.72%

20.15%

21.97%

23.68%

23.68%

Investment-Grade

0.00%

0.01%

0.02%

0.02%

0.03%

0.04%

0.05%

0.06%

0.07%

0.08%

Speculative-Grade

1.33%

2.47%

3.49%

4.45%

5.35%

6.08%

6.71%

7.19%

7.59%

7.94%

All Rated

0.01%

0.03%

0.04%

0.05%

0.07%

0.08%

0.09%

0.10%

0.12%

0.13%

Rating

1

2

3

4

5

6

7

8

9

10

Aaa

0.00%

0.01%

0.01%

0.04%

0.10%

0.17%

0.24%

0.31%

0.39%

0.48%

Aa

0.02%

0.06%

0.13%

0.24%

0.35%

0.46%

0.57%

0.67%

0.76%

0.86%

A

0.06%

0.19%

0.39%

0.58%

0.80%

1.04%

1.30%

1.61%

1.93%

2.22%

Baa

0.18%

0.50%

0.91%

1.38%

1.89%

2.42%

2.92%

3.44%

4.03%

4.71%

Ba

1.12%

3.10%

5.44%

7.91%

10.15%

12.21%

14.02%

15.83%

17.67%

19.54%

B

4.25%

10.01%

15.73%

20.74%

25.27%

29.51%

33.50%

36.97%

40.16%

43.00%

Caa_C

17.32%

28.95%

38.27%

45.67%

51.97%

56.23%

59.21%

62.60%

66.22%

70.24%

Investment-Grade

0.09%

0.26%

0.49%

0.74%

1.02%

1.32%

1.61%

1.92%

2.26%

2.61%

Speculative-Grade

4.56%

9.35%

13.89%

17.87%

21.34%

24.35%

26.99%

29.37%

31.60%

33.69%

1.61%

3.27%

4.82%

6.14%

7.26%

8.22%

9.04%

9.79%

10.50%

11.17%

Global Corporates

All Rated Source: Moody’s Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Default Rates: GO and Non-GO Average Cumulative Default Rates, 1970-2011, GO and Non-GO Non-General Obligation Rating 1 2 3 4 5 6 7 8 9 10 Aaa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Aa 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.02% 0.02% 0.03% 0.03% A 0.00% 0.01% 0.02% 0.02% 0.03% 0.04% 0.05% 0.06% 0.08% 0.09% Baa 0.02% 0.07% 0.14% 0.22% 0.29% 0.38% 0.48% 0.58% 0.68% 0.77% Ba 0.38% 1.16% 1.96% 2.75% 3.50% 4.29% 5.15% 5.76% 6.15% 6.36% B 3.95% 7.74% 11.38% 15.25% 19.18% 21.78% 23.30% 24.59% 26.33% 29.24% Caa_C 9.43% 13.36% 15.79% 17.06% 18.00% 19.17% 20.63% 22.51% 24.29% 24.29% Investment 0.00% 0.02% 0.03% 0.05% 0.06% 0.09% 0.11% 0.13% 0.16% 0.18% -Grade Speculative 1.83% 3.44% 4.92% 6.33% 7.69% 8.85% 9.86% 10.67% 11.36% 12.01% -Grade All Rated 0.03% 0.06% 0.09% 0.12% 0.15% 0.18% 0.21% 0.24% 0.27% 0.30% General Obligation Rating 1 2 3 4 5 6 7 8 9 10 Aaa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Aa 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% A 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% Baa 0.00% 0.01% 0.01% 0.02% 0.02% 0.03% 0.03% 0.03% 0.04% 0.04% Ba 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% B 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Caa_C 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Investment 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% -Grade Speculative 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% -Grade All Rated 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Notes: 1. The first cohort considered is the one-year cohort starting on January 1, 1970. The last cohort considered is the one-year cohort starting on January 1, 2011.

2. Transition rates are averaged over cohorts spaced one month apart.

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Credit Default Swaps (CDS): MI

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Credit Default Swaps (CDS): CA

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Credit Default Swaps (CDS): IL

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Credit Default Swaps (CDS): MD

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Credit Default Swaps (CDS): TX

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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Meredith Whitney Whiplash

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New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

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State & Local Gov’t Employment Declining

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State & Local Gov’t Employment Far Worse

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Local Gov’t Education Employment

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State Tax Revenue

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Muni’s & Treasuries: January 1, 2007 8

7

Taxable Equivalent

Interest Rate

6

U.S. Treasury 5

Municipal Market Advisors AAA

4

3

2

1

0 0

5

Source: Bloomberg and Cumberland Advisors.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

10

15

20

25

30

Years (800) 257-7013

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Muni’s & Treasuries: December 29, 2008 9.00

8.00

Taxable Equivalent Yield

Interest Rate

7.00

6.00

Municipal Market Advisors AAA

5.00

4.00

U.S. Treasury 3.00

2.00

1.00

0.00 0

5

Source: Bloomberg and Cumberland Advisors.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

10

15

20

25

30

Years (800) 257-7013

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Muni’s & Treasuries: April 20, 2009 8

Build America Bonds 7

Taxable Equivalent Yield

Interest Rate

6

5

Municipal Market Advisors AAA 4

U.S. Treasury 3

2

1

0 0

5

Source: Bloomberg and Cumberland Advisors.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

10

15

20

25

30

Years (800) 257-7013

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Muni’s & Treasuries: October 20, 2009 8

7

Taxable Equivalent Yield

Interest Rate

6

5

Build America Bonds

Municipal Market Advisors AAA

4

U.S. Treasury 3

2

1

0 0

5

Source: Bloomberg and Cumberland Advisors.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

10

15

20

25

30

Years (800) 257-7013

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Muni’s & Treasuries: April 20, 2010 8

Taxable Equivalent Yield

7

Build America Bonds

Interest Rate

6

U.S. Treasury 5

4

Municipal Market Advisors AAA 3

2

1

0

0

5

Source: Bloomberg and Cumberland Advisors.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

10

15

20

25

30

Years (800) 257-7013

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Muni’s & Treasuries: November 2, 2011 8

7

Taxable Equivalent Yield

Interest Rate

6

Build America Bonds

5

4

Municipal Market Advisors AAA

3

U.S. Treasury 2

1

0 0

5

10

15

20

25

30

-1

Source: Bloomberg and Cumberland Advisors.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

Years (800) 257-7013

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Muni’s & Treasuries: March 19, 2012 8

7

Taxable Equivalent Yield

Interest Rate

6

Build America Bonds

5

4

Municipal Market Advisors AAA

U.S. Treasury

3

2

1

0 0

5

Source: Bloomberg and Cumberland Advisors.

Florida Office One Sarasota Tower 2 N. Tamiami Trail, Suite 303 Sarasota, FL 34236

New Jersey Office 614 E. Landis Avenue Vineland, NJ 08360

10

15

20

25

30

Years (800) 257-7013

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About Cumberland Advisors Cumberland Advisors supervises over 1.9 billion dollars in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 49 states, the District of Columbia, and in countries outside the U.S. Cumberland Advisors is an SEC-registered investment adviser.

Munis, Taxables, ETFs Cumberland’s portfolio management efforts emphasize long-lasting relationships and continuous dialogue among clients, their consultants, tax advisors, accountants, estate planners, and their assigned portfolio management contact at Cumberland. Cumberland offers several different investment portfolio management styles. Our investment strategy is described in detail on our website.

Fixed Income All of our fixed-income offerings are total return strategies, but can take the client’s current income needs into consideration. Our fixed income styles are Tax-Free Municipal Bonds, Taxable Bonds, and Short-Term Investment Program Stocks Cumberland uses Exchange-Traded Funds to manage global equities. Exchange-Traded Funds (ETFs) are securities that mimic the price performance and dividend yield of an index, or a basket, of securities.

Cumberland uses ETFs as building blocks in crafting a portfolio, investing in attractive equity sectors, industries, market capitalization strata, styles, and regions. Our equity portfolios are U.S. Exchange-Traded Funds (ETF) Equity, International Exchange-Traded Funds (ETF) Equity, Emerging Markets ExchangeTraded Funds, and Global Multi-Asset Class Exchange-Traded Funds.

Balanced Accounts Cumberland can blend the strategies presented above to create a balanced mix of stocks and bonds.

For further information about Cumberland Advisors, please visit our website at www.cumber.com.

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