HomeMy WebLinkAbout14 - Adding a Fifth Investment AdviserCITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. 14
November 12, 2002
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Administrative Services Department
Dennis Danner, Director, ext. 3123, ddanner @city.newport- beach.ca.us
SUBJECT: Adding a Fifth Investment Adviser
ISSUE:
Consistent with Finance Committee guidance, staff has identified a fifth investment
adviser. We are prepared to open an account with cash and securities initially valued at
$15.1 million. This agenda item requests City Council authorization to proceed.
RECOMMENDATION:
Authorize the City Manager to sign a contract establishing an investment adviser
relationship between the City and MBIA Municipal Investors Service Corporation.
DISCUSSION:
The City's investment portfolio has grown over the past few years. This is partly the
result of City Council policy and budgetary action establishing a stronger cash reserve
posture, and partly the result of cash infusion connected with the Newport Coast
annexation.
For eleven years, the City's practice has been to employ investment advisers to handle
the 75% to 90% of the investment portfolio that is in relatively long -term investment
accounts. Four separate investment advisers each manage a share of these assets,
which are held in separate institutional custodial accounts to which the advisers
themselves do not have direct access. The managed accounts have varied over the
years from a low of $8 million to about $24 million each. Current balances average
about $20 million. Although we have made some changes in the past, we are satisfied
with the performance of our current stable of advisers at this time.
For about ten months, the City has had $15 million available that could tentatively be
added to the long -term managed accounts. Pending the outcome of several issues,
primarily the Assessment District Relief in the Newport Coast area, this money was kept
in a separate custodial account (with the Bank of New York) temporarily managed
directly by City staff.
Adding a Fifth Investment Adviser
November 12, 2002
Page 2
The Finance Committee previously expressed a preference for adding a fifth investment
adviser account, rather than increasing the amounts with the present advisers much
beyond the levels already experienced. To that end, staff made inquiries and received
interest from several firms who would like to do this work for the City. Unfortunately, we
have found it difficult to identify firms who meet our basic minimum criteria, which
consist of experience and a detailed working knowledge of laws and conventions
regarding investment of municipal funds. Municipal investing is different from other
institutional investment, and we simply do not want to be providing training to someone
who would like to get into it. There were several quality firms who could provide almost
the same type of service we receive from our current advisers, but each wanted us to
establish a slightly different relationship and day -to -day working procedure than we had
in mind.
We only found one firm (other than the four we already employ) that comfortably met
our criteria. The good news is that that firm is well qualified; and they have proposed a
rate structure (10 basis points (.10 %) of funds under management) which is consistent
with what we are paying the other four. That firm is MBIA Municipal Investors Service
Corporation. This is a subsidiary of MBIA, the largest Municipal Bond Insurance
Company in the United States.
MBIA is active in a number of other aspects of municipal finance as well; to include
various revenue identification and debt related services. We have done business with
them in the past, but not in the particular area of investment management. They also
provide this same service, as well as similar services, for other municipalities. We
called three of their current clients, all of whom provided positive telephonic
endorsements.
Environmental Review:
There is no environmental impact related to this action.
Public Notice:
None required (for Finance Committee).
Funding Availability:
Funding is available. Investment Adviser fees are paid as an abatement to investment
earnings.
Alternatives:
The alternatives are to increase the amounts managed by the existing investment
advisers, or for staff to continue to invest the funds directly.
Adding a Fifth Investment Adviser
November 12, 2002
Page 3
Prepared by: Submitted by:
Richard C. Kurth, Deputy Director Dennis C. Danner, Director
MBIA MUNICIPAL INVESTORS SERVICE CORPORATION
Investment Advisory Agreement— Discretionary
This Agreement, dated as of the day of 2002 (the "Agreement "), is
by and between MBIA Municipal Investors Service Corporation (the "Adviser ") and the City of
Newport Beach (the "Client "). The parties agree as follows:
1. Appointment
The Client hereby appoints the Adviser as the investment adviser of those assets designated by
the Client (the "Advisory Account ").
2. Duties of the Adviser
The Adviser shall invest the assets of the Advisory Account in strict accordance with the written
investment objectives, policies and restrictions of the Client. The Client shall provide the
Adviser with an initial Investment Policy or list of authorized investments which shall be
incorporated in Exhibit A.
The Adviser will provide to the Client monthly a written report detailing transactions for the
period and an inventory of the investments in the Advisory Account. It is agreed that the
Adviser, in the maintenance of records, does not assume responsibility for the accuracy of
information furnished by the Client.
Any additional investment management services the Adviser shall provide to the Client are
listed in Exhibit B.
3. Discretionary Authority
The Adviser, with full investment authority and discretion, and consistent with all applicable state
and federal laws, as well as the Client's investment objectives, policies and restrictions referred
to above, may buy or sell securities and place orders for the execution of such transactions with
or through such brokers, dealers, or issuers as the Adviser may select, from the group of
brokers and dealers the Client has pre- approved, in writing. All transactions are to be at "arms
length," and Adviser will receive no compensation, discount, or other incentive from brokers,
securities dealers, or any other party, directly or indirectly, involving trades or transactions for
Client's advisory account, that are not fully credited to that account for the benefit of Client.
The words, "other incentive" in the previous paragraph are not intended to include research
material and other data received by the Adviser from brokers and dealers, which is used by the
Adviser for the benefit of the Client and its other clients.
4. Changes in Investment Policies or Assets in the Account
The Client is required to notify the Adviser promptly in writing of any modifications to the
investment objectives, policies or restrictions applicable to the Advisory Account. The Client
agrees to notify the Adviser promptly of any withdrawal of securities from the Advisory Account
initiated by the Client.
5. Allocation of Brokerage
When placing orders for the execution of transactions for the Advisory Account, the Adviser will
take into consideration not only the available prices but also other relevant factors such as,
without limitation, execution capabilities and safekeeping arrangements. The Adviser will
exercise good faith in obtaining the best price and execution for each transaction for the
Advisory Account.
6. Safekeeping and Custody
The Adviser will not have custody or possession of the assets of the Advisory Account of the
Client. The Client shall select and authorize a custodian bank or brokerage firm to hold the
assets of the Advisory Account in safekeeping for the Client. The Client shall be solely
responsible for all fees involved with any custodial arrangements.
7. Fees
The compensation of the Adviser for its services under this Agreement shall be calculated and
paid in accordance with the Fee Schedule in Exhibit C, as the same may be amended from time
to time by mutual agreement of the Client and the Adviser.
8. Limitation of Liability
The Adviser will not be liable for any error in judgment or any acts or omissions to act except
those resulting from the Adviser's negligence, willful misconduct or disregard of its duties and
obligations under this Agreement.
9. Services to Other Clients
It is understood that the Adviser performs investment advisory services for other clients. The
Client agrees that the Adviser may give advice and take action with respect to any of its other
clients which may differ from advice given, or the timing, or nature of action taken, with respect
to the Advisory Account.
10. Representations by the Client
The Client represents that the terms of this Agreement do not violate any obligation by which
the Client is bound, whether arising by contract, operation of law, or otherwise, and that this
Agreement has been duly authorized by appropriate action and is binding upon the Client in
accordance with its terms.
11. Acknowledgment of Receipt of Brochure (Form ADV Part II)
The Client hereby acknowledges receipt of the Adviser's Brochure (Form ADV Part II) at least
48 hours prior to the date of execution of this Agreement in compliance with Rule 204 -3 of the
Investment Advisers Act of 1940 (the "Act ").
12. Notice
All notices shall be deemed effective when received, in writing, at the address appearing below.
Receipt of written notice shall be presumed if mailed postpaid first class mail to the appropriate
address specified below. . Each party shall be entitled to presume the correctness of such
address until notified in writing to the contrary.
13. Termination; Assignment; Amendment
This Agreement may be terminated, without cause, at any time by either party giving to the
other at least thirty (30) days' prior notice of such termination confirmed in writing. If any fees
have been paid in advance, the Adviser will refund to the Client a prorata share of the fee. No
assignment, as that term is defined in the Act, of this Agreement shall be made by either party
without the prior written consent of the other. This Agreement may be amended or modified at
any time by mutual agreement in writing.
14. Counterparts
This Agreement may be executed in two or more counterparts, each one of which shall be
deemed to be an original.
15. Governing Law
To the extent federal law does not apply, this Agreement shall be construed in accordance with
and governed by the laws of the State of California.
Page 2
16. Entire Agreement
This Agreement constitutes the entire agreement of the parties with respect to the management
of the Advisory Account. The Exhibits referenced herein are incorporated into the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by
their respective representatives as of the date first above written.
City of Newport Beach
APPROVED BY:
Homer Bludau
City Manager
ADDRESS: 3300 Newport Boulevard
Newport Beach, CA 92663
MBIA Municipal Investors Service Corporation
Mi
Randy Palomba, CFA
Vice President
ADDRESS: 1700 Broadway, Suite 2050
Denver, CO 80290
Page 3
Exhibit A
STATEMENT OF INVESTMENT POLICY
PURPOSE
To set forth the City's policy concerning the investment of temporarily idle funds. It is the policy
of the City to invest funds not required for immediate expenditures. Investments will be in
compliance with governing provisions of law and the policy contained herein. Primary
investment goals are security of principal, adequate liquidity maintenance, and yield, in that
order. Investments shall be placed only in securities as outlined below. The balance between
various investment instruments may change in order to provide the City with the best
combination of yield, liquidity, and a consideration for other factors, such as placement of an
appropriate percentage of available investment funds locally. It shall be the main responsibility
of the City Council, in adopting this policy and reviewing the investment holdings on a monthly
basis, to preserve the investment principal.
INVESTMENT AUTHORITY
Under the direction of the City Manager, the investment authority has been delegated to the
Director of Administrative Services, who is responsible for administration of the City's
investment program. This authority shall be renewed annually as part of the review and update
of this Policy. In addition to the monthly investment report that is submitted to the City Council,
the Administrative Services Director shall provide more detailed investment information to the
City Council as requested. The City Council shall be briefed directly by the City's investment
advisors on a quarterly basis whenever possible.
Sections 53600 -53601 of the California Government Code provide basic investment limits and
guidelines for government entities. In the event an apparent discrepancy is found between this
policy and Sections 53600 - 53601, the more restrictive parameters will take precedence.
FINANCIAL INSTITUTIONS
The City shall not deposit funds with any financial institution not receiving a minimum overall
satisfactory rating for meeting the credit needs of California Communities in its most recent
evaluation ( §53635.2).
LIQUIDITY
Sufficient funding to accommodate at least two- week's projected cash outflow is to be
maintained in immediately available investments, such as the State Local Agency Investment
Fund, maturing certificates of deposit, or similar liquid instruments. An analysis of cash flow
must be conducted at least weekly to serve as the basis for determining appropriate maturities
for investments. At no time shall the liquid cash on hand be less than 5 percent of the City's total
investment portfolio. For purposes of this policy, cash on hand includes all cash and
investments accessible within 48 hours.
ACCEPTABLE INVESTMENT INSTRUMENTS
The follov :Ing are types of investments made
each. In all cases, investments shall be made
states, in part, that:
by the City and the guidelines for investing in
in the context of the "Prudent Man" rule, which
"When investing, reinvesting, purchasing, acquiring, exchanging, selling, and
managing public funds, a trustee shall act with care skill prudence, and
diligence under the circumstances then prevailing,
a like capacity and familiarity with those matters
funds of a like character and with like aims, t o
maintain the liquidity needs of the agency. Withi
Page 4
nthat a prudent person acting in
would use in the conduct of
safeguard the principal and
the limitations of this section
and considering individual investments as part to (sic) an overall investment
strategy, a trustee is authorized to acquire investments as authorized by law."
In this light, the City of Newport Beach does not purchase or sell securities on margin.
Additionally, any institution, which holds either the collateral or the investment instruments
themselves in safekeeping for the City, must maintain at least one billion dollars
($1,000,000,000) in assets.
A. Certificates of Deposit
Only fully collateralized certificates of deposit with FDIC insured institutions will be utilized in
investment of City funds. Government securities having a market value of 110 percent of the
total amount of investment are acceptable as collateral. Non collateralized CD investments may
be made in amounts less than $100,000 so long as they are fully insured by the FDIC.
Not more than 10 percent of the City's investment portfolio shall be invested in certificates of
deposit with any one institution. CD's will not be placed for a period of longer than one year.
Further, an institution must meet the following criteria to be considered by the City:
1. The institution must maintain at least $1 billion in assets ($100 million for fully insured CD's of
$100,000 or less).
2. The institution must have been in business at least three years.
3. The institution must have a net worth to asset ratio of at least 6 percent.
4. The institution must place and maintain on file with the City an audited financial statement not
more than one year old.
5. Interest shall be paid to the City on a monthly basis.
B. Negotiable Certificates of Deposit
As a matter of policy, the City invests in Negotiable Certificates of Deposit only with U.S. Banks
whose underlying securities are rated A -1 or P -1 by one of the top two rating agencies and
having assets in excess of $10 billion, so as to insure security and a large, well - established
secondary market. Ease of subsequent marketability is further ascertained prior to initial
investment by examining currently quoted bids by primary dealers and the acceptability of the
issuer by these dealers. No one issuer shall exceed more than 10 percent of the portfolio, and
maturity shall not exceed one year. The California Government Code Section 53601 limits
investment in negotiable certificates of deposit to 30 percent of the portfolio.
C. Bankers Acceptances
The City may invest only in Bankers Acceptances issued by the 100 largest banks in the world,
which are eligible for purchase by the Federal Reserve System, the short term paper of which is
rated at the highest category by Moody's and Standard & Poor's. In the case of foreign banks,
the Bankers Acceptances must be written by their U.S. branches. Maximum maturity shall be
180 days. No more than 30 percent of the City's overall investment portfolio shall be placed in
Bankers Acceptances, with no more than 10 percent of the City's portfolio invested in the
banker's acceptances of any one commercial bank.
D. U.S. Treasury Issues
The City may invest in treasury notes, bills and bonds. Safekeeping documentation of these
instruments in an acceptable and secure account in the City's name is required. Maximum
maturity of any U.S. Treasury issue shall be five years.
E. Federal Agency Securities
Securities of this type that are acceptable for the City's investments are Federal- Home Loan
Bank notes, Federal National Mortgage Association notes, Federal Farm Credit Bank notes, or
any other U. S. Government Agency security. Security requirements and maturity limitations are
the same as those for U.S. Treasury issues.
Page 5
F. Commercial Paper
The City may only invest in commercial paper issued by large, exceptionally well - established
firms (firms with assets greater than $1 billion and their subsidiaries) organized and operating in
the United States with the highest Moody's or Standard & Poor's ratings (A1 /P1). Commercial
paper shall be used solely as a short-term investment not to exceed 270 days. No more than 25
percent of the City's portfolio may be invested in commercial paper. Security requirements are
the same as those listed above. Investment in commercial paper of any one issuer shall not
exceed 10 percent of the portfolio.
G. Repurchase Agreements ( Repos) and Reverse Repurchase Agreements
Repos and reverse repos shall be used solely as a short-term investment not to exceed 30
days. The institution from which the City purchases a Repo must deliver adequate collateral to
the City's safekeeping account (either directly or through a third party safekeeping agent),
consisting of U.S. Treasury or Agency securities at the rate of 102 percent of the face value of
the repo. The amount of this collateral must be sufficient to compensate for fluctuating market
conditions. Repos will only be purchased from Primary Dealers.
The City must own assets for more than 30 days before they can be used as collateral for a
reverse repurchase agreement. No more than 10 percent of the portfolio can be involved in
reverse repos.
H. Passbook Savings Accounts
Savings accounts may be used as a repository for customer deposits, or for similar purposes.
Consistent with the requirements for CD investments, funds deposited in savings accounts must
either be FDIC insured or collateralized.
I. Local Agency Investment Fund (LAIF) (State of California)
State Regulation currently limits any one City's investment in this fund to $30 million at any one
time, and prohibits more than 15 transactions (deposits or withdrawals) per month. Investment
in this Pool is intended to be used as a temporary repository for short-term funds used for
liquidity purposes.
J. County Investment Funds
Los Angeles County provides a service similar to LAW for municipal and other government
entities. This Fund is available to certain cities outside of Los Angeles County, including
Newport Beach. Investment in this pool is intended to be used as a temporary repository for
short-term funds used for liquidity purposes. At no time shall more than 5 percent of the City's
total investment portfolio be placed in this Pool.
The City shall not invest funds with the Orange County Pool.
K. Medium Term Corporate Bonds /Notes
Investments of this type will normally only be in corporations rated in the top three note
categories by two of the three largest nationally recognized rating services. Maximum term to
maturity for individual securities shall not exceed five years, and not more than 25 percent of the
portfolio shall be invested in medium term notes of maturity greater than 2 years. No more than
30 percent of the City's investment funds shall be placed in securities of this type. As an
additional restriction, not more than 10 percent can be invested in "A," rated securities, and
none of those investments shall exceed two years to maturity.
L. Asset - backed Securities
Investment in asset - backed securities is limited to those collateralized with consumer
receivables, rated "AAA," or the equivalent, by Moody's Investor Services or Standard & Poor's,
Page 6
Inc., and which have a final, stated maturity of five years or less from the date of purchase. No
more than 10 percent of the City's investment funds shall be placed in securities of this type.
M. Municipal Bonds
Municipal bonds rated AAA, or AA and insured, are acceptable investments for the City. Not
more than 15 percent of the portfolio shall be in investments of this type.
N. Money Market Funds
The City may invest in Money Market Funds subject to the following constraints. Investment in
these funds is primarily intended for short-term "sweep account" purposes, not for longer -term
investments.
1. Shares of beneficial interest issued by diversified management companies that are money
market funds registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 (15 U.S.C. Sec. 80a -1.)
2. The company shall have met either of the following criteria:
a. Attained the highest ranking or the highest letter and numerical rating provided by not less
than two nationally recognized statistical rating organizations.
b. Retained an investment adviser registered or exempt from registration with the Securities and
Exchange Commission with not less than ten years' experience managing money market
mutual funds with assets under management in excess of one billion dollars ($1,000,000,000).
3. The purchase price of shares of beneficial interest purchased shall not include any
commission that the companies may charge.
4. No more than 20 percent of the City's investment portfolio shall be invested in money market
funds.
5. The City shall not invest in funds the market value of which is or has been less than $1 per
share.
PROHIBITED INVESTMENTS
Consistent with California Government Code 53601.6, inverse floaters, range notes, mortgage
derived interest -only strips, or any security that could result in zero interest accrual if held to
maturity are specifically prohibited, except to the extent that they are shares of diversified
management companies registered under the Investment Company Act of 1940.
The City shall not purchase any security rated Al and or A+ or below if that security has been
placed on "credit watch" for a possible downgrade by either Moody's Investor Services or
Standard and Poor's.
Investments not specifically approved by this policy are prohibited.
ASSET /INVESTMENT MANAGEMENT AGREEMENTS
The City may employ the services of asset/investment management companies. Such
companies must have a history of producing no losses and relatively high net returns. They
must also be well established and exceptionally reputable. Members of the staffs of such
companies who will have primary responsibility for managing the City's investments must have
a working familiarity with the special requirements and constraints of investing municipal funds
in general and this City's funds in particular. They must contractually agree to conform to all
provisions of governing law and the collateralization and other requirements contained herein.
At no time shall more than 30 percent of the City's total investment portfolio be placed in any
one investment management account. In order to implement this requirement, the City's
portfolio assets will be reallocated annually among its investment managers.
SAFEKEEPINGITHIRD PARTY CUSTODIANS
Cash and securities in the City's portfolio, which are being managed by private sector
asset/investment management companies, will not be in the custody of those companies. The
City will contract separately with major banks or other well - established, reputable financial
Page 7
institutions, which provide custodial services to maintain custody of cash and securities in this
category. In the case of a major financial institution, the City may have an asset/investment
management relationship, and a custodial relationship, with the same entity. However, the
services must be provided by separately managed departments within that entity, and the City's
portfolio must be completely separate and distinct from the assets of the institution and from all
other portfolios managed by the institution.
BOND PROCEEDS
The investment of bond proceeds will be made in accordance with applicable bond indentures.
RATING AGENCY CHANGES
In the event a security held by the City is the subject of a rate drop which brings it below
accepted minimums specified herein, or the security is placed on negative credit watch, where
downgrade could result in a rate drop below acceptable levels, the investment advisor who
purchased the security will immediately notify the Administrative Services Director or Deputy
Director of that fact. The course of action to be followed will then be decided on a case by case
basis, considering such factors as the reason for the rate drop, prognosis for recovery or further
drop, and market price of the security. The City Council will be advised of the situation and
intended course of action by e-mail or fax.
REPORTING REQUIREMENTS
In addition to the Monthly Investment Report, the City Council shall receive a detailed quarterly
listing of all investments in the City portfolio. The report must show the type of investment,
issuer, date of maturity, par and dollar amount of deposit/investment, and rate of interest.
Quarterly reports from outside investment managers must also include market valuation of
assets under their management and the source of that valuation, and shall also include a
statement of compliance with investment policy. Current ratings of non - government securities,
either Moody's or Standard & Poor's, will be included.
In his report to Council, the Director of Administrative Services shall include a statement
denoting the ability of the City to meet its expenditures for the next six months, and shall also
include a statement of compliance with investment policy for assets under his direct
management. In addition, the City Council shall be notified whenever 5 percent or more of the
total portfolio is invested, withdrawn, or moved from one Investment Advisor or Pool to another.
Adopted - April 6, 1959
Amended - November 9, 1970
Amended - February 11, 1974
Amended - February 9, 1981
Amended - October 27, 1986
Rewritten -October 22, 1990
Amended - January 28, 1991
Amended - January 24, 1994
Amended - January 9, 1995
Amended - April 22, 1996
Corrected - January 27, 1997
Amended - February 24, 1997
Amended - May 26, 1998
Reaffirmed - March 22, 1999
Reaffirmed - March 14, 2000
Amended & Reaffirmed - May 8, 2001
Amended & Reaffirmed -April 23, 2002
Page 8
Exhibit B
Work to be Performed
MBIA Municipal Investors Service Corporation will provide the following services for the City of
Newport Beach:
1) Provide full -time discretionary management of the Advisory Account.
2) Develop and implement investment strategies for the Advisory account that will enhance
portfolio performance under current and future market conditions within the parameters
of the investment policy and cash flow needs.
3) Provide technical and fundamental market research including yield curve analysis.
4) Obtain and document competitive prices for securities transactions.
5) Assist with trade settlements.
6) Provide monthly investment reports for the portfolio detailing securities holdings, portfolio
composition and sector analyses, portfolio return and weighted average maturity, and
daily transaction activity.
7) Provide quarterly performance reports that include custom benchmarks as agreed upon
with the City.
8) Perform due diligence reviews of current and proposed broker /dealers.
9) Monitor the creditworthiness of the City's depository and custodian banks
and investments in the portfolio.
10) Evaluate safekeeping and custodial procedures and agreements.
11) Review and recommend updates to the City's investment policy and written investment
procedures.
12) Work with the City's staff to develop and update cash flow projections.
13) Provide training to staff on cash and investment management subjects.
14)Attend meetings with the City's finance director, finance committee and /or governing
body upon request.
Page 9
Exhibit C
Fee Schedule for Investment Advisory Services
The annual fee for providing investment advisory services for the City of Newport Beach is as
follows:
10 basis points (.10 %) per annum
The fees for investment advisory services shall be calculated and paid monthly based on the
average value (cost basis) of assets in the Advisory Account. A prorata portion of the annual fee
(1/12) is billed each month based on the average asset value of the portfolio for the month. The
fee shall be payable upon receipt of billing from the Adviser.
Fees are calculated monthly based upon the average daily historical cost value of the portfolio.
Average Daily Historical Cost includes original Principal dollars and any accrued interest
purchased (up until the first coupon payment).
The Average Daily Historical Cost figure is then multiplied by the annual fee rate (10 basis
points) and divided by 12 to derive a monthly figure.
Example: Average Daily Historical Cost for Newport Beach ($19,951,938.45) for the month of
November:
$19,951,838.45* .10% = $19,951.84 (annual fee), / 12 = $1,662.65 (November monthly fee)
Page 10