MEMORANDUM
DATE: July 19, 2022
TO: Christine Daniel, City Manager
FROM: Brad Farmer, Finance Director
SUBJECT: Resolution Of The City Council Of The City Of Emeryville Authorizing The City Manager To Enter Into A Professional Services Contract For Investment Advisory Services With Chandler Asset Management For Fiscal Year 2022-2023, With The Option To Extend For Two Additional Years, For A Total Amount Not To Exceed $260,000
RECOMMENDATION
Staff recommends the City Council review and approve by the above-entitled resolution a contract with Chandler Asset Management (Chandler) for a one-year period, with the option to extend for two additional years, to provide investment advisory services for the City’s investment portfolio.
BACKGROUND
California Government Code Section 53607 establishes the City’s authority to invest public funds:
“The authority of the legislative body to invest or to reinvest funds of a local agency, or to sell or exchange securities so purchased, may be delegated for a one-year period by the legislative body to the treasurer of the local agency, who shall thereafter assume full responsibility for those transactions until the delegation of authority is revoked or expires, and shall make a monthly report of those transactions to the legislative body. Subject to review, the legislative body may renew the delegation of authority pursuant to this section each year.” The City’s investment portfolio is currently managed by the City Treasurer (Finance Director) with oversight from the City Manager in accordance with the City Council’s adopted investment policy. The general investment strategy set forth in the investment policy includes the following order of priorities for investing and managing the City’s public funds: Safety of Principal, Liquidity and Rate of Return (Yield).
Each month the City Council is provided a copy of the Treasurer’s Report which details the City’s cash and investments. The report indicates how funds are invested and the return on those investments, including the estimated market value and the estimated annual income. The December 31, 2021, report shows $74.9 million invested with the state of California’s Local Agency Investment Fund (LAIF), $500,000 in two certificates of deposit, $8 million in Government Agency issues and $84.7 million on money market funds.
In 2021, the City retained a new auditing firm to provide audit services for the City. As part of their review of the City’s investments, they noted that the City is not currently in compliance with the adopted investment policy in terms of the maximum investment in Money Market Mutual Funds since the investment policy establishes a limit of 20% of the portfolio for investment in those types of funds. Funds have been held in these investments in excess of the maximum investment percentage in large part due to the cost associated with the purchase of individual investments and the length of time investments would had to have been held to yield a meaningful return. In the current investment environment, this could have sacrificed safety and liquidity instead of yield. Nevertheless, the mutual fund percentage does exceed the policy limit and those investments need to be managed in a fiscally prudent way.
Staff considered whether utilizing an investment advisor would reduce the individual purchase costs for investments, as the fees are based upon the total amount invested annually, provide a more reliable method of ensuring compliance with the City’s investment policy, and increase returns while maintaining the safety of the principle. Staff issued a Request for Proposals earlier this year, as described in more detail below, and is presenting this report for the City Council’s consideration of retaining an investment advisor to manage a portion of the City’s investment portfolio.
DISCUSSION
The City’s Finance Director/Treasurer has historically overseen the investment of the City’s asset portfolio, in addition to the other duties of their office. The tools and expertise required to properly invest the available portfolio requires a great deal of attention, knowledge of available resources, and the ability to regularly monitor changes in the market.
This approach has generally sufficed in terms of providing the necessary liquidity for City operations. However, the City has not been able optimize the investment program to its full potential while also addressing safety and return.
Additionally, while the City is able to source governmental securities from its limited number of brokers, it has not fully taken advantage of various asset types allowed by California Government Code, which are prudent for the investment of public funds, simply because the City lacks the resources needed to adequately analyze the risks involved.
In the past, the City has worked with only one or two brokers. An investment advisor, however, may work with over 45 institutional broker/dealers, many of which are primary dealers. This will allow the City to achieve more favorable pricing and higher yields by having more competitive options for purchase.
As noted above, the City issued a request for proposal (RFP) on June 16, 2021, for Investment Management and Advisory Services. Responses to the RFP were due July 23, 2021. The City received six responses from the following investment advisory providers:
CS McKee
Chandler Asset Management
PFM Asset Management LLC
Garcia Hamilton Associates LP
Public Trust Advisors
Bank of the West
The responses were analyzed in accordance with the requirements set forth in the RFP including providing information on the firm, experience, personnel, assets under management, Investment approach, reporting, fees, and references. Staff recommends Chandler as the best fit for the City based on their pricing and experience with cities of similar size. Chandler has extensive experience managing local agency investment portfolios including neighboring cities such as Alameda, Danville, Orinda, Pleasant Hill, Orinda, San Leandro, and Vallejo.
Attachment A is the City’s adopted Investment Policy. If the City chooses to work with Chandler as the City’s investment advisor, they will build an investment portfolio consistent with approved policy guidelines. The firm will also conduct a review of the policy, develop recommendations for any modifications, and analyze the risks and returns associated with those changes for the City Council’s consideration.
After analyzing the submitted proposals, staff contacted Chandler to discuss the size of the portfolio to be managed. As noted above, the City currently has almost $75 million invested with LAIF. Staff recommends that amount remain with LAIF as it is a safe and relatively liquid investment vehicle. However, as also noted above, the amount invested in money market mutual funds ($84.7 million) exceeds the cap established by the City’s investment policy which is 20% of the portfolio. As of December 31, 2021, total cash and investments were $178.9 million; 20% of that is approximately $35 million. Accordingly, staff recommends authorizing Chandler to manage and invest $50 million of the City’s funds for one year. That will bring the amount invested in money market mutual funds below the cap, as well as allow the City to assess the performance of the investment advisors over the first year. Prior to the end of the first year, under the terms of the proposed contract, the City may cancel the contract or extend the term of the contract for two additional years.
FISCAL IMPACT
Currently the City is not paying directly for the services of an investment advisor. Rather, the City pays on a per investment basis when it makes a purchase. The current cost is 5 basis points for investments purchased by the City Treasurer. If the City Treasurer were to invest $50 million, that would cost $25,000. Chandler’s pricing is 8 basis points (.08 of 1%) per purchase. Thus, the cost for the first-year of the contract to manage $50 million of the City’s portfolio is $40,000, which was included in the approved City budget for FY 2022-23 (1900-80050). Should the contract be extended for years two and three, the fees for FY 2023-24 and FY 2024-25 would be calculated based upon the amount invested in each year.
Staff does not recommend that Chandler manage all its available funds as the City needs to maintain liquidity in order to manage its daily cash needs. Rather, the contract provides that should it be extended, the City Manager may authorize Chandler to invest up to seventy-five million dollars in year two, and up to one-hundred million in year three. Amounts in excess of that would require City Council authorization. The fees decrease to 6 basis points for amounts between fifty million and one hundred million, and then to 4 basis points for amounts above one hundred million.
The additional cost for this contract is proposed to be offset by the additional investment earnings resulting from active portfolio management (as opposed to passive mutual funds). Chandler’s services will provide the City with a professional asset manager who has a team dedicated to municipal investments, the tools available to anticipate changes in market conditions and the ability to redistribute the portfolio, unlike the current capacity of the City Treasurer.
COMMITTEE
Staff presented the report to the Budget and Governance Committee on February 10, 2022. The Committee recommended that the City Council approve a contract for professional investment advisory services with Chandler Asset Management for a single year with the option of extending the contract for two additional years. The Budget and Governance Committee was presented the costs for the first year. The fees for managed contracts were presented, but not calculated on the total investable value.
CONCLUSION
Staff recommends that the City Council authorize the City Manager to execute a contract for professional investment advisory services with Chandler Asset Management for a one-year period, with the option to extend for two additional years, with a maximum cost of $260,000 Staff will review Chandler’s performance at the end of the first year and provide a report to the Budget and Governance Committee and City Council at that time.
PREPARED BY: Brad Farmer, Finance Director
APPROVED AND FORWARDED TO THE
CITY COUNCIL OF THE CITY OF EMERYVILLE:
Christine Daniel, City Manager
Attachments:
Draft Resolution
Professional Services Agreement – Chandler Asset Management Exhibit A – Part 1 – Scope of Work
Exhibit A – Part 2 – Chandler Proposal
Consulting Service Contract for Investment Advisor Services City Council Meeting | July 19, 2022
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City of Emeryville
CALIFORNIA