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RESOLUTION NO. 2014-105 OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA APPROVING AN AGREEMENT WITH PFM ASSET MANAGEMENT LLC TO PROVIDE INVESTMENT MANAGEMENT SERVICES AND AUTHORIZING THE CITY MANAGER TO EXERCISE TWO ONE-YEAR OPTIONS TO EXTEND THE AGREEMENT
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RECOMMENDED ACTION
Recommended Action
Council adopt the resolution.
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SUMMARY
The Finance Department currently manages the City's investment portfolio of approximately $120 million with Finance staff. A Request for Proposal for Investment Management Services was issued on March 25, 2014 with proposals due on April 21, 2014. The Selection committee interviewed three of the four proposing firms and recommends that PFM Asset Management LLC be awarded the contract. The contract is for a three-year period with two one-year options for a maximum contract period of 5 years.
ENVIRONMENTAL REVIEW
The Development Services Director has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that approval of an agreement for investment management services is not a "Project" as defined under Section 15378 (b)(4) of the State CEQA Guidelines; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
BOARD/COMMISSION RECOMMENDATION
Not applicable
DISCUSSION
Background
Role of the Investment Official
Under California law, the governing body of a local agency has primary responsibility for investment of public funds (California Government Code Section 53600.3). The authority of the legislative body to invest or reinvest funds of a local agency may be delegated for a one-year period by the legislative body to the treasurer of the local agency, who assumes full responsibility until the delegation is revoked or expires; such a delegation may be renewed on an annual basis. It is common practice for the legislative body to delegate its investment responsibility.
The City Council delegates its investment responsibility and therefore their role as the primary investment officials to the City's Director of Finance/Treasurer annually at the time that the City's Investment Policy is adopted. This delegation was authorized most recently by City Council adoption of Resolution 2014-039.
Delegation of investment duties does not relieve the primary investment official of their fiduciary responsibilities under California law. Whether an investment official delegates responsibilities to internal staff or to a third party (such as an investment advisor), the investment official is responsible for ensuring that the investment process is managed prudently, professionally, and in accordance with all legal requirements.
The primary investment official must take an active role in the development of investment policies and strategies, ensure that reporting is timely and complete, monitor compliance, credit quality, and performance, and follow-up on any adjustments in strategy necessitated by changes in agency objectives, cash flows, or economic and market conditions. These responsibilities require a considerable commitment of time and effort that includes on-going education by the primary investment official and internal staff that performs these duties.
The Finance Department has seen a reduction in staffing during the recession and would like to transition the duties for the day-to-day investment trading activities to an investment advisor. The duties assumed by the investment advisor will not relieve the primary investment official of their fiduciary duties. Finance staff will continue to be responsible for producing quarterly investment reports, managing the City's cash flow and liquidity needs and overseeing the investment advisor activities.
The interest rate environment has seen historic declines during the recession and has been at record low levels during the recovery period. However, it is anticipated that interest rates will begin to increase and it is an appropriate time to transition the investment trading activities to that of a professional investment advisor. Carlsbad and Oceanside both have dedicated staff that actively manages their portfolios by buying and selling investments daily as opposed to the City's more passive "hold-to-maturity" investment style. In addition, Coronado and El Cajon currently have PFMAM serving as their investment advisors.
Role of the Investment Advisor
Investment advisors are professionals with experience, training, and special expertise in the area of investment management. Investment advisors receive a fee for their service. Public agencies hire investment advisors that have experience with fixed-income securities rather than equities, real estate, or foreign bonds. Public agencies seek advisors that are experienced with the securities authorized by the California Government Code and the local agency's adopted investment policy.
Investment advisors with assets under management of $30 million or more are registered with and regulated by the Securities and Exchange Commission (SEC), under the Investment Advisors Act of 1940 (Act). The Act requires investment advisors to file an initial application, known as the "Uniform Application for Investment Advisor Registration" or "Form ADV," with the SEC. They also must file an annual updating amendment, as well as an amendment any time a significant change has occurred at the firm. The SEC requires investment advisors to maintain extensive records, and has the authority to sanction advisors who break the law or rules established under the Act.
There are a number of reasons that a public agency chooses to employ the services of an investment advisor. Some of those reasons are:
· Expertise of the investment advisor's ability to provide the service professionally and appropriately in a manner that will save the public agency time and safeguard the agency's funds;
· Anticipation of greater returns available from full-time expert management of the investment program;
· Increased access to broker offerings;
· Lack of City resources and expertise to devote to corporate credit review;
· Lack of City market information systems, such as Bloomberg;
· Lower net cost to use the services of an investment advisor rather than hiring additional internal staff to provide the same function.
· More efficient use of existing City staff to assist in managing City finances.
In addition to the above reasons, there are several advantages to using an investment advisor. An investment advisor devotes their time almost entirely to investment management activities and monitoring the market, unlike most typical local agency investment officials who have limited time to devote to investment activities. This allows local agency investment officials to focus on long-term investment goals and oversight of the investment program. Investment advisors deal with numerous brokers/dealers on a regular basis and have access to real time pricing from multiple broker/dealers at any given time often receiving better pricing of securities transactions. Their special training and expertise in the field of investment management provides the local agency clients with superior investment strategies. An independent advisor, as compared to a broker/dealer, does not have an inventory of securities to sell. Therefore, certain potential conflicts of interest (such as selling a security from the firm's own inventory at a less favorable price than its fair market value) would be avoided.
Selection of the Investment Advisory Firm
The City issued an RFP on March 25, 2014 and closed the RFP on April 21, 2014. A Selection Committee composed of the Director of Finance/Treasurer; Assistant Director of Finance, Finance Manager and Treasury Manager was formed to evaluate the proposals. There were a number of selection factors to be considered when evaluating the proposals. All selection factors were articulated in the RFP. A discussion of the selection factors follows.
There were minimum qualifications established that the firm must meet in order for the firm to be considered by the City. If the minimum qualifications were not met then the proposal was not considered. The minimum set of qualifications that were established follow:
· Currently manage domestic fixed income assets for public entities that are of a similar size or larger than the City.
· Manage a minimum of 10 portfolios comprising California local agency assets.
· Assign a portfolio manager and a relationship manager who each have a minimum of ten years experience providing investment advice to California public entities.
· Be familiar with all applicable California statutes with regard to qualified investments for public entities.
· Be registered with the Securities and Exchange Commission under the Investment Advisor's Act of 1940.
· Be financially solvent and appropriately capitalized to be able to provide service for the duration of the contract.
· Adhere to the Code of Professional and Ethical Standards as described by the CFA Institute.
If the proposing firm met the minimum qualifications then their proposal was further evaluated based on the following criteria:
Understanding of the work required by the City and the overall investment program objectives.
Relevant experience managing fixed-income funds.
Response to a Proposer Questionnaire (43 questions).
Proposed approach to managing the portfolio.
Quality, clarity and responsiveness of the proposal.
Demonstrated competence and professional qualifications necessary for successfully performing the work required by the City.
Recent experience in successfully managing similar sized investment portfolios with similar investment objectives.
References.
Background and related experience of the specific individuals to be assigned to this account.
Proposed compensation. Contract award was not based solely on price, but on a combination of factors as determined to be in the best long-term interest of the City.
As a result of the RFP, the City received four proposals for investment management services. The Selection Committee reviewed each of the proposals submitted based on the minimum qualifications and the criteria listed above. After the review was completed, it was determined that one of the proposals was non-responsive to the RFP. The remaining three firms were invited for interviews. After interviewing the three firms, PFM Asset Management LLC (PFMAM) was selected as the successful firm.
About PFM Asset Management LLC
The Selection Committee recommends PFMAM as best suited to work with the City because of the following important factors.
PFMAM is nationally recognized as one of the leading investment advisory firms, specializing in assisting public agencies with their investment needs.
Public Sector Experience. PFMAM's focus is on providing independent investment advice to public agencies. PFMAM currently manages approximately $50 billion of short- and intermediate-term investment-grade fixed income assets for public clients nationwide. PFMAM has helped clients like the City develop forward-looking, long-term investment strategies that can weather market cycles, as well as shorter-term tactical strategies that can take advantage of certain market cycles or anomalies.
Understanding of the City's Overall Investment Program. PFMAM currently manages over $10.4 billion for California public agencies, including $2.7 billion for California cities. The City will benefit from PFMAM's in-depth knowledge of California investment statutes and expertise in California local agency investment practices. They are aware that this is the first time the City has used an investment advisor and has helped many public agencies with the transition from in-house management to the effective use of an investment advisor.
PFMAM's goal is to function as an extension of City staff, assuming responsibility for many time-consuming, day-to-day activities related to investing, portfolio accounting, and reporting so that more time is available to focus on the City's other financial responsibilities.
Resources and Expertise. The engagement team proposed to work with the City includes senior professionals with extensive experience working with California cities. The engagement team can also draw upon PFMAM's 178 professionals dedicated to supporting clients in all aspects of investing public funds, including portfolio management for operating funds and bond proceeds, compliance with the California Government Code and the City's Investment Policy, specialized technical analysis, and accounting.
The primary contact for the City will be Sarah Meacham who is the Director of the Los Angeles office.
DECISION-MAKER CONFLICT
Staff has reviewed the decision contemplated by this action and has determined that it is not site specific and consequently, the 500-foot rule found in California Code of Regulations section 18704.2(a)(1), is not applicable to this decision. Staff is not independently aware, and has not been informed by any City Council member, of any other fact that may constitute a basis for a decision maker conflict of interest in this matter.
LINK TO STRATEGIC GOALS
The City's Strategic Plan has five major goals: Operational Excellence, Economic Vitality, Healthy Community, Strong and Secure Neighborhoods and a Connected Community. Employing an independent Investment Advisor supports the goal of Operational Excellence because it ensures that the City is utilizing professional resources to enhance the return on the City's investment pool without sacrificing safety of principal.
CURRENT YEAR FISCAL IMPACT
There is no net impact to the General Fund. It is anticipated that a professionally managed investment portfolio should increase earnings on the portfolio and therefor offset the cost of the contract.
PFMAM's fee is based on an annual asset management fee which is approximately between 7 and 8 basis points [one basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form], a small percentage of the assets under management. Based on a $120 million portfolio, the fee would be $92,000 per year. This fee will vary depending on the amount of assets under management. The fee will be paid from the investment earnings on the City's investment portfolio. The fee will be allocated in proportion to the amounts that the various governmental and enterprise funds have in the portfolio.
ONGOING FISCAL IMPACT
There is no net impact to the General Fund. It is anticipated that a professionally managed investment portfolio will generate earnings on the portfolio and therefor offset the cost of the contract.
PFMAM's fee is not expected to change for the duration of the contract term. It is anticipated that the fee will be approximately $92,000 annually but the actual amount paid in future years will be based on a percentage of actual assets under management
ATTACHMENT
PFMAM Two Party Agreement