REPORT TO COUNCIL
SUBJECT
Title
Action on Amendment No. 1 with PFM Asset Management LLC for Investment Management Services
Report
COUNCIL PILLAR
Manage Strategically Our Workforce Capacity and Resources
BACKGROUND
In July 2020, the City Council approved an agreement with PFM Asset Management LLC (PFMAM) to provide investment advisory and portfolio management services after a competitive Request for Proposal (RFP) process. The initial term of the agreement is three years ending on July 31, 2023, plus two option years for a total of five years if all options are exercised.
Under the agreement, PFMAM serves as the City’s external investment manager for a pooled portfolio with a value of $847 million as of March 31, 2023. Of this amount, approximately $69 million is invested with the State’s Local Agency Investment Fund (LAIF) and California Asset Management Program (CAMP) to meet the City’s liquidity needs. PFMAM provides investment advice on City’s overall portfolio strategy and actively manages a core securities portfolio.
Prior to engagement of PFMAM, the City’s portfolio was internally managed and staff conservatively invested City funds mainly in Treasury and Government Agency Notes due to limited capacity and resources. Under PFMAM, the portfolio has diversified into other allowable investments, in accordance with applicable California State Codes, with higher yield potential, such as corporate notes, asset-backed securities, and municipal notes.
Under PFMAM’s management, the City’s core securities portfolio has generated over $30 million in interest earnings with total returns outperforming the ICE BofAML 1-5 Year U.S. Treasury Index, City’s benchmark, by 20 basis points.
DISCUSSION
PFMAM was contracted by the City as part of an investment strategy transition from an internally managed portfolio that was 100% allocated to federal government-issued U.S. Treasuries and Federal Agency Securities, to one that leverages the expertise of a professional firm to diversify the City’s portfolio and expand yield, where possible. It has taken a good portion of the original three-year initial term to transition the City’s portfolio to one that is diversified in risk, balanced, and maximizes yield.
Staff is requesting authority to extend the initial term by five years to July 31, 2028, plus two option years for a total of 10 years if all options are exercised. Because the current agreement contains two one-year options with increasing fees, staff negotiated with PFMAM to keep pricing the same, with the potential to add another year to the contract. The proposed Amendment No. 1 will enable the City to take advantage of a competitive fee schedule and realize total savings of $30,000 in years 4 and 5 when compared to the original agreement. Further, the amendment will allow the continuity and efficiency of keeping PFMAM for additional time, while continuing to enhance yields and total returns for the City’s portfolio.
In proposed Amendment No.1, the fee basis points (bps) has been reduced from 5.2 bps to 4.9 bps after the initial term and held at 4.9 bps for the remainder of the agreement, including optional years. The maximum annual fee will increase from $305,000 to $325,000 and be capped at $325,000 for the next five years, which provides the City with price stability. The proposed fee cap increase is commensurate with recent inflation figures and is below the $340,000 level that was in the included in the original option years. The fee cap is subject to an annual Cost-of-Living Adjustment (COLA) in optional years 9 and 10, based on Consumer Price Index, with the COLA capped at 3.64% per annum. Staff compared the fees and fee cap to several Bay Area local agencies with comparable portfolios managed by external investment managers to confirm City’s favorable terms.
The proposed compensation is detailed below:
|
Original Fee Schedule |
Original Not-to-Exceed Total Fees |
Amendment No. 1 Fee Schedule |
Amendment No. 1 Not-to-Exceed Total Fees |
|
Year 1: 4.2 bps (0.042% of the portfolio value) |
$ 255,000 |
Year 1: No Change |
$ 255,000 |
|
Year 2: 4.7 bps (0.047% of the portfolio value) |
$ 280,000 |
Year 2: No Change |
$ 280,000 |
|
Year 3: 5.2 bps (0.052% of the portfolio value) |
$ 305,000 |
Year 3: No Change |
$ 305,000 |
|
Total Initial Term |
$ 840,000 |
|
|
|
Year 4: 5.2 bps (0.052% of the portfolio value) Option Year 1 |
$ 340,000* |
Year 4: 4.9 bps (0.049% of the portfolio value) |
$ 325,000 |
|
Year 5: 5.2 bps (0.052% of the portfolio value) Option Year 2 |
$ 340,000* |
Year 5: 4.9 bps (0.049% of the portfolio value) |
$ 325,000 |
|
Total July 1, 2020 - July 31, 2025 |
$1,520,000* |
|
$1,490,000 |
|
|
|
Year 6: 4.9 bps (0.049% of the portfolio value) |
$ 325,000 |
|
|
|
Year 7: 4.9 bps (0.049% of the portfolio value) |
$ 325,000 |
|
|
|
Year 8: 4.9 bps (0.049% of the portfolio value) |
$ 325,000 |
|
Total July 1, 2020 - July 31, 2028 |
|
Total Amended Initial Term |
$2,465,000 |
*Estimated amounts
|
Original Fee Schedule |
Original Not-to-Exceed Total Fees |
Amendment No. 1 Fee Schedule |
Amendment No. 1 Not-to-Exceed Total Fees |
|
|
|
Year 9: 4.9 bps (0.049% of the portfolio value) Option Year 1 |
$ 337,000 |
|
|
|
Year 10: 4.9 bps (0.049% of the portfolio value) Option Year 2 |
$ 349,000 |
|
Total July 1, 2020 - July 31, 2030 |
|
Estimated Maximum Compensation |
$3,151,000 |
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to section 15378(b)(4) of Title 14 of the California Code of Regulations as the proposed services are administrative activities that have no potential for resulting in either a direct or indirect physical change in the environment.
FISCAL IMPACT
The agreement has an amended not-to-exceed amount of $2,465,000 for the initial term through July 31, 2028 and total of $3,151,000 including the two optional years. The costs have been included in the FY 2023/24 & 2024/25 Proposed Biennial Operating Budget. Funding for the remaining term will be incorporated into future budgets.
COORDINATION
This report has been coordinated with the City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. Approve and authorize the City Manager to execute Amendment No. 1 to the Agreement with PFM Asset Management LLC for Investment Management Services to extend the initial term of the Agreement to end on July 31, 2028 and increase compensation by $1,625,000 for a revised total maximum amount not to exceed $2,465,000, subject to the appropriation of funds; and
2. Authorize the City Manager to exercise options, by an amendment of the Agreement subject to review and approval as to form by the City Attorney, to extend the term of the Agreement for two additional years to July 31, 2030 and increase compensation by $686,000 for a revised total maximum amount not to exceed $3,151,000, subject to the appropriation of funds.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Jōvan D. Grogan, City Manager
ATTACHMENTS
1. Amendment No. 1 with PFM Asset Management LLC
2. Agreement with PFM Asset Management LLC