City Council
Report
City Council Meeting: September 27, 2016
Agenda Item: 3.J
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To: Mayor and City Council
From: Gigi Decavalles-Hughes, Director, Finance Department, Revenue Subject: Award Contract with RNC Capital Management LLC to Provide Investment Management Services
Recommended Action
Staff recommends that the City Council authorize the City Manager to negotiate and execute a five-year professional services agreement with RNC Capital Management LLC, a California-based company, to provide investment management services for the Cemetery and Mausoleum Perpetual Care Funds. Fees depend on the value of the funds under management and additional pass-through amounts for investments in certain instruments. Based on the value of the portfolio as of June 30, 2016, staff estimates annual fees would be approximately $69,000.
Executive Summary
The City requires consulting services to manage investment of the Woodlawn Cemetery and Mausoleum perpetual care funds, which are subject to different requirements than other City funds. Council approved Nelson Capital Management (Nelson Capital) as the investment manager in June 2014. RNC Capital Management LLC (RNC) served as the former investment manager, from 1992 through 2014.
Following operational and ownership changes at Nelson Capital that affect the consultant’s ability to meet City needs, staff recommends that the City enter into a new agreement with RNC Capital for perpetual care fund investment management.
The new contract would be for a total of five years, ending in 2021, with a $69,000 estimated annual cost.
Background
The City owns and operates Woodlawn Cemetery and Mausoleum. A portion of the sale of each burial plot, crypt, or niche is set aside for perpetual care services and is deposited into the Cemetery or Mausoleum perpetual care fund, as appropriate. The income from these funds is used to pay for perpetual care costs. Perpetual care funds have a distinct set of investment guidelines, which are set by Council rather than by 2 of 4
State law as is the case for other City investments, and which therefore require the specialized investment expertise and continuous monitoring of an investment manager.
RNC managed the City’s investments for the Cemetery and Mausoleum perpetual care funds from 1992 until 2014. On April 8, 2014, Council authorized the City’s current agreement with Nelson Capital following a competitive process (Attachments A, B). The current agreement provides a term of five years, ending in 2019.
Discussion
Staff recommended Nelson Capital as the firm best able to meet the City’s needs following the 2014 Request for Proposal process. Specific decision factors included Nelson Capital’s approach to developing an investment plan for the portfolio consistent with the Cemetery and Mausoleum’s long-term goals, the ability to tailor the portfolio to meet these goals, and the firm’s expertise in the areas of socially responsible investing.
At the time of the agreement, Nelson Capital was a wholly owned but separately operated subsidiary of Wells Fargo Bank. In May 2016, Nelson Capital advised the City that it would merge into the Wells Fargo Private Bank Wealth and Management Group (Wells Fargo) as of June 30, 2016. This change would require the City to modify and re-sign the agreement, as Nelson Capital no longer exists as an entity, and provides the option to reconsider and potentially terminate the agreement. The change would also result in the Cemetery and Mausoleum portfolio and the City’s overall portfolio being handled by the same custodian. After a review and analysis of the changes that would occur under new management, and taking into consideration the preference to maintain some diversification in the City’s various investment activities, staff recommends that the City enter into a new agreement rather than transferring the current contract. Staff further recommends that the City enter into a new agreement with RNC Capital Management LLC (RNC).
The factors leading to the selection of Nelson Capital no longer apply following the elimination of Nelson Capital and the departure of the Senior Portfolio Manager responsible for managing these funds. Staff therefore recommends that the City terminate its current agreement and award the contract for investment services to RNC, based on the strength of its proposal and long-term, successful relationship with the 3 of 4
City. RNC was the second ranked firm in the June 2014 competitive process, and managed the Cemetery and Mausoleum portfolios from 1992 through 2014. RNC has agreed to honor its 2014 proposal terms, including a fee at the current rate of 0.6% of the value of the portfolio. The term of the contract would be five years.
Vendor Selection
Staff created a qualified list of vendors to provide perpetual care fund investment services through the 2014 competitive process. Due to this recent process, staff was able to select from an existing qualified list of vendors, rather than reissuing a request for proposals.
RNC’s proposal was the second choice of the Selection Committee out of six bidders in 2014 (Attachment C), and has a strong record of investment performance. As a former manager of the Cemetery and Mausoleum Perpetual Funds from 1992 through 2014, RNC is very familiar with the goals and objectives of the portfolio, including the socially responsible guidelines. RNC’s experience during its tenure included implementing prior divestment of City funds from South Africa, Myanmar, and Arizona based companies, and the current policy of fossil fuel divestment. RNC currently manages over $4 billion in assets.
Financial Impacts and Budget Actions
The annual fee for the investment management services will not change from the current rate of 0.6% of the value of the portfolio. Certain additional pass-through fees could apply if investments are made in certain products, such as mutual funds. The value of the account as of June 30, 2016 was approximately $11.5 million. Therefore, annual fees at the current portfolio value would be approximately $69,000 ($11.5 million x 0.6%). Fees in subsequent years will vary based on the value of the investment portfolio.
Funds are available in the FY 2016-17 budget in division 37641. The agreement will be charged to 37641.555060. Future funding is contingent on Council approval and budget adoption.
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Prepared By: David Carr, Assistant City Treasurer
Approved Forwarded to Council
Attachments:
A. April 8, 2014 Staff Report
B. January 7, 2014 Request for Proposals
C. RNC Proposal