REPORT TO COUNCIL
SUBJECT
Title
Action on Investment Management Services Agreement with PFM Asset Management LLC and Approval of Related Budget Amendment [Council Pillar: Manage Strategically Our Workforce Capacity and Resources]
Report
BACKGROUND
The City of Santa Clara (City) internally manages the investment of its pooled portfolio, which as of May 31, 2020 totaled approximately $770 million. Of this amount, approximately $64 million is invested with the State’s Local Agency Investment Fund (LAIF) to meet the City’s liquidity needs. The City has six approved broker/dealers from which securities are purchased. Portfolio accounting and reporting is currently performed using SunGard software.
The Department of Finance currently manages the investment of the City’s pooled portfolio in accordance with the City’s Investment Policy and state law. With limited capacity and resources to effectively research, analyze, and monitor corporate and other investments, staff has conservatively invested City funds mainly in Treasury and Government Agency Notes and LAIF. Although the pooled portfolio is diversified among Treasury and Agency Notes and LAIF, the City does not have any investments in other allowable investments that could provide higher yields for the City, such as commercial paper, corporate notes, mortgage-backed securities, and municipal notes.
By engaging an outside investment management firm, the City can leverage the firm’s many years of investment experience and dedicated credit and risk management personnel. The City has the potential to generate higher earnings with access to sector specialists and enhanced market insight.
DISCUSSION
On January 21, 2020, the City released a Request for Proposal (RFP) No. 19-20-36 seeking proposals from qualified financial consulting firms to provide investment advisory and portfolio management services to the City. The RFP was published on BidSync, the City’s e-procurement system. A total of 57 firms viewed the RFP, and 10 proposals were received from the following firms:
• Chandler Asset Management, Inc. (San Diego, CA)
• Clearwater Advisors, LLC (Boise, ID)
• FHN Financial Main Street Advisors (Las Vegas, NV)
• Garcia Hamilton & Associates, L.P. (Houston, TX)
• Goldman Sachs Asset Management L.P. (San Francisco, CA)
• Insight North America LLC (New York, NY)
• Meeder Investment Management (Dublin, OH)
• PFM Asset Management LLC (San Francisco, CA)
• Public Trust Advisors, LLC (Los Angeles, CA)
• Russell Investments (Seattle, WA)
The written proposals were evaluated and scored independently by a three-member evaluation team consisting of staff from the Finance Department against the criteria and weights published in the RFP. The proposals were evaluated on proposer qualifications and experience, portfolio management experience, investment management approach, familiarity with reporting, proposal quality and content, and fee schedule.
Chandler Asset Management Inc., PFM Asset Management LLC, Public Trust Advisors, LLC, and FHN Financial Main Street Advisors were invited to oral interviews to demonstrate their knowledge and understanding of the City’s requirements and provide detailed information on how they would deliver comprehensive investment management services for the City’s portfolio. Following oral presentations, staff issued a Best and Final Offer (BAFO) that provided PFM Asset Management a final opportunity to revise its fee schedule. PFM Asset Management improved upon its initial fee schedule providing a savings of $148,000 over the initial three-year term of the proposed agreement.
Staff recommends award of contract to PFM Asset Management LLC (PFM) as the most advantageous and best value proposal based upon the final evaluation ranking. PFM demonstrated a high level of expertise and experience in managing funds for the public sector, with $153 billion in assets nationwide and $48 billion in assets in the State of California (i.e., City of Fremont, City of Hayward, and City of Redwood City). With a dedicated relationship team, PFM has the resources to customize the City’s investment portfolio in accordance with the City’s investment policy as well as support City staff. In addition, PFM has a robust cashflow forecasting model, education and training platform, and a client reporting website that will provide the City full access to daily portfolio holdings, daily transactions and an archive of month-end statements.
Staff conducted reference checks with four cities in similar size with the City, and each reference provided positive feedback and noted that PFM was able to increase their investment returns through portfolio optimization.
Under the proposed agreement, PFM will provide the following:
• Be a fiduciary to the City’s investment portfolio and ensure that investments are in compliance with state law and the City’s Investment Policy.
• Implement prudent investment strategies and ensure sufficient cash liquidity to meet the City’s needs.
• Prepare cashflow analyses and forecasts.
• Assist staff with the annual review and update of the City’s Investment Policy.
• Provide detailed monthly reports of investment portfolio activity, performance, holdings by investment type, maturity, broker, weighted average maturity, duration, benchmark comparison, and other such reports required by the City.
• Work with the City’s custodian for safekeeping of securities and provide services required to execute and settle investment trades.
• Provide education on economic trends and financial markets.
• Hold quarterly meetings with City Staff to discuss portfolio performance results, liquidity requirements, revenue projections, and other financial matters.
The term of the proposed agreement will be a three-year initial term with two additional one-year options to extend at the discretion of the City. PFM’s compensation under the agreement is as follows:
|
Schedule |
Fee Cap |
|
Year 1: 4.2 basis points (0.042% of the portfolio value) |
Not to exceed $255,000 |
|
Year 2: 4.7 basis points (0.047% of the portfolio value) |
Not to exceed $280,000 |
|
Year 3: 5.2 basis points (0.052% of the portfolio value) |
Not to exceed $305,000 |
|
Year 4: 5.2 basis points (0.052% of the portfolio value) |
Not to exceed $305,000 + Cost-of-Living Adjustment based on the Consumer Price Index |
|
Year 5: 5.2 basis points (0.052% of the portfolio value) |
Not to exceed $305,000 + Cost-of-Living Adjustment based on the Consumer Price Index |
Staff expects that enhanced earnings resulting from further diversifying the portfolio will more than offset PFM’s investment management fees. For example, if PFM increases the City’s portfolio return by a modest 0.10% or 10 basis points on a $700 million portfolio, the City will earn an additional $700,000 annually or approximately $420,000 annually net of fees.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of a California Environmental Quality Act (“CEQA”) pursuant to the CEQA Guidelines section 15378(a) as it has no potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment. Furthermore, the action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is a governmental organizational or administrative activity that will not result in direct or indirect changes in the environment.
FISCAL IMPACT
The agreement has a not-to-exceed amount of $840,000 for the initial three-year term. Fees are expected to be paid from additional portfolio earnings. For FY 2020/21, a General Fund budget amendment is recommended to recognize additional interest earnings that will be used to cover the contract costs that are budgeted at $255,000. The necessary revenue and expenditure adjustments will be incorporated into future budgets.
Budget Amendment
FY 2020/21
|
|
Current |
Increase/ (Decrease) |
Revised |
|
General Fund |
|
|
|
|
Revenue |
|
|
|
|
Interest Income |
$ 5,246,000 |
$ 255,000 |
$ 5,501,000 |
|
Expenditure |
|
|
|
|
Finance Department |
$ 16,216,074 |
$ 255,000 |
$ 16,471,074 |
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>.
RECOMMENDATION
Recommendation
1. Approve and authorize the City Manager to execute an agreement with PFM Asset Management LLC for Investment Management Services for an initial three-year term starting on or about August 1, 2020 and ending on July 31, 2023 for a total maximum amount not to exceed $840,000, subject to the appropriation of funds;
2. Authorize the City Manager to execute two one-year options to extend the term of the Agreement through July 31, 2025, subject to the appropriation of funds; and
3. Approve the related FY 2020/21 budget amendment in the General Fund to increase Interest Income revenue estimate by $255,000 and increase the Finance Department appropriation by $255,000 for year 1 of the investment management services agreement.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Deanna J. Santana, City Manager
ATTACHMENTS
1. Agreement with PFM Asset Management LLC