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HomeMy WebLinkAbout04.f. Statement of Investment Policy and Investment Guidelines for GASB 45 TrustCentral Contra Costa Sanitary District ' BOARD OF DIRECTORS ' POSITION PAPER Board Meeting Date: September 4, 2014 Subject. REVIEW AND READOPT THE STATEMENT OF INVESTMENT POLICY FOR DISTRICT ASSETS AND INVESTMENT GUIDELINES FOR THE GASB 45 OTHER POST - EMPLOYMENT BENEFITS TRUST Submitted By. Initiating DeptJDiv.: Thea Vassallo, CPA, CMA Administrative / Finance & Accounting Finance Manager REVIEWED AND RECOMMENDED FOR BOARD ACTION. i• K. Alm Roger S. Bailey Counsel for the District General Manager ISSUE: The District's investment policies for District assets and the Government Accounting Standards Board (GASB) 45 Other Post - Employment Benefits Trust (Trust) are reviewed and approved annually by the Board of Directors in accordance with District investment policy. RECOMMENDATION: Review and readopt the District's Statement of Investment Policy for District assets (Board Policy No. 005), and approve the Investment Guidelines Document for the GASB 45 Trust. FINANCIAL IMPACTS: None. ALTERNATIVES /CONSIDERATIONS: Additional investment options could be added for District investments which fall within the permissible investments prescribed by the Government Code of the State of California. The current moderate investment strategy previously adopted by the Board for the GASB 45 Trust could be changed to a less or more aggressive strategy. The Board could change the investment policy to allow for outside financial advisors to invest excess funds, however, the County could not guarantee compliance with the Government Code and internal District policy requirements. BACKGROUND: Section 53646 of the California Government Code, which covers District investments, states that the Treasurer or Chief Fiscal Officer of the local agency may annually render to the legislative body of that local agency and any oversight committee of that local agency a statement of investment policy, which the legislative body of the local agency shall consider at a public meeting. Any change in the policy shall also be considered by the legislative body of the local agency at a public meeting. Also, a quarterly report may be rendered to the legislative body of the local agency showing the type of investment, issuer, date of maturity, amount of deposit, current market value, rate of interest and such data as may be required by the local agency. Page 1 of 3 POSITION PAPER Board Meeting Date: September 4, 2014 subject: REVIEW AND READOPT THE STATEMENT OF INVESTMENT POLICY FOR DISTRICT ASSETS AND INVESTMENT GUIDELINES FOR THE GASB 45 OTHER POST - EMPLOYMENT BENEFITS TRUST Although no longer required, it has been the District's practice and policy to render an annual statement of investment policy to the District's governing Board for review and approval (see Attachment 1) as well as a monthly investment report. These provisions were previously incorporated into our investment policy. Staff recommends that a quarterly report for the GASB 45 Trust investments also be reviewed by the Finance Committee. District Counsel and staff review annually the current California Government Code and Local Agency Investment Guidelines issued by the California Debt and Investment Advisory Commission for changes. The 2014 Local Agency Investment Guidelines incorporates the following statutory changes: SECTIONS 53501.8 AND 53535x8 Chapter 228, Statutes of 2013 (AB 279) amended, repealed, and added to Government Code Sections 53601.8 and 53635.8 to authorize local agencies to invest up to 30 percent of their surplus funds in deposits at a commercial or savings bank, savings and loan, or credit union using a private sector deposit placement service. These changes broaden the use of placement services to include deposits as opposed to previously being limited to the placement of certificates of deposit (CDs). Local agencies may now invest a total of 30 percent of their surplus funds in a combination of placement service - assisted "deposits ", including CDs, and negotiable CDs. The amount of agency funds that may be submitted to any one private sector placement entity for deposit are limited, however, to 10 percent. This single placement entity limitation does not apply to the placement service assisted CDs. Both sections sunset on January 1, 2017 unless legislation is enacted to either delete or extend the sunset date. The California Government Code provides for special districts and other local governments to use the County as their treasury function. The District uses the County exclusively as they ensure that the District invests not only within the Government Code and limits, but also within the District's internal investment policy. When the County makes an investment for the District, they look for the highest rate of return with the least amount of risk for the time period specified by the District. They look at the various options like U.S. Treasuries, CDs and Commercial Paper. Several issuers are called for rates. The list of who is regularly called for investment purchases includes Bank of America, Bank of Nova Scotia, Union Bank, RABO Bank, UBS, City Group, and General Electric, to name a few. As a result of the Benchmark Study prepared in 2013, the GASB 45 Trust Investment Guidelines Document (IGD) was revised and the level of fees charged by both HighMark Capital Management and Public Agency Retirement Services (PARS) was lowered by approximately 10 percent on an annual basis. The 10 percent discount is on all tiered fund levels. The IGD document was updated to more clearly specify the scope and purpose, investment objectives and constraints, and duties and Page 2 of 3 POSITION PAPER Board Meeting Date: September 4, 2014 Subject: REVIEW AND READOPT THE STATEMENT OF INVESTMENT POLICY FOR DISTRICT ASSETS AND INVESTMENT GUIDELINES FOR THE GASB 45 OTHER POST - EMPLOYMENT BENEFITS TRUST responsibilities of the plan sponsor, trustee and investment manager of the Trust. The 2013 revised GASB 45 Trust IGD is attached (see Attachment 2). PARS is the Trust Administrator responsible for record keeping /sub -trust accounting, plan compliance relative to GASB 45 /state laws, monitoring contributions and processing disbursements; US Bank is the Trustee and custodian of assets; HighMark Capital Management is the sub - adviser, hired by US Bank to invest the Plan assets according to the Moderate investment strategy chosen by the Board of Directors in 2008. As Discretionary Trustee, US Bank is also responsible to ensure compliance with the District's risk tolerance objective. RECOMMENDED BOARD ACTION: Review and readopt the District's Statement of Investment Policy (Board Policy No. 005) for District assets with no changes, and approve the Investment Guidelines Document for the GASB 45 Trust, also with no changes. Attached Supporting Documents: 1. Board Policy No. 005 — Statement of Investment Policy 2. GASB 45 Trust Investment Guidelines Document — October 2013 Page 3 of 3 Number: BP 005 Authority: Board of Directors Effective: September 1, 2011 Revised: September 4, 2014 Reviewed: Initiating Dept. /Div.: Finance BOARD POLICY ATTACHMENT? Central Contra Costa Sanitary District STATEMENT OF INVESTMENT POLICY PURPOSE The investment policy of the Central Contra Costa Sanitary District governs the District's temporary investments. A separate investment policy governs the District's GASB 45 Trust. This investment policy is embodied in the following eleven sections: POLICY Statement of Objectives The temporary investment portfolio of the District will be managed to ensure that normal cash needs, as well as scheduled extraordinary cash needs can be met. Therefore, adequate liquidity will be the first priority. Second priority will be the safety of the portfolio ensuring that the investments could be readily converted to cash if needed without causing a material change in the value of the portfolio. Lastly, the portfolio will be invested to attain a market average rate of return, after meeting the first two previously stated objectives. Permissible Investments Within the constraints prescribed by the Government Code of the State of California for permissible investments, the District's investment portfolio will only be invested in the following instruments: United States Treasury Bills and Notes, and obligations of government agencies for which the full faith and credit of the United States are pledged. • Bankers Acceptances, drawn on and accepted by a commercial bank, which are eligible for purchase by the Federal Reserve System. BP 005 Page 2 of 4 • Collateralized Certificates of Deposit issued by a Federal or State chartered bank or a Federal or State chartered savings and loan association. • Negotiable Certificates of Deposit issued by a Federal or State chartered bank or a Federal or State chartered savings and loan association. • Commercial Paper of prime quality limited to corporations with assets over $500,000,000. • Medium Term Notes of a maximum of five years maturity issued by U. S. corporations or any Federal or State depository institution. • Local Agency Investment Fund of the State of California. III. Bank and Dealers The District will use the services of the Treasurer's Office of the County of Contra Costa which will transact the District's investment decisions in compliance with the requirements described in this investment policy. The County Treasurer's Office will execute the District's investments through such brokers, dealers and financial institutions as are approved by the County Treasurer, and through the State Treasurer's Office for investment in the Local Agency Investment Fund. IV. Maturities The maximum maturity for investments of the District is one year. Prior approval of the Board of Directors must be obtained to acquire investments with maturities beyond one year. However, investments in Treasury Notes and the Local Agency Investment Fund would not be subject to the one -year maximum maturity. V. Diversification To minimize the risk of loss through default, the total amount invested in a single issuer will not be greater than 10 percent of the District's investment portfolio value, except that the 10 percent limitation will not apply to United States Treasury Bills and Notes and investment in the Local Agency Investment Fund. BP 005 Page 3 of 4 V1. Risk Credit and market risks will be minimized through adherence to the list of permissible investments, a limit on maximum maturities, and the limitation on the total investment in a single issuer. VII. Delegation and Authority The District Finance Manager will be responsible for investment transactions which should be made in accordance with this investment policy and within the internal controls described in Section IX. VIII. Prudence Prudent judgment must be exercised by the District Finance Manager responsible for investment transactions undertaken in accordance with this investment policy. IX. Controls The District Finance Manager will establish subsidiary accounting records of each investment which will enable the determination of income earned monthly and through maturity, and the balancing of the principal amounts to a control account in the general ledger. Internal control procedures require the Finance Manager to sign all transactions, which are then countersigned by the General Manager. Such internal controls are to be reviewed by the District's independent auditors annually. X. Reporting The District Finance Manager will annually render a statement of investment policy to the Board of Directors. Also, annually, the GASB 45 Trust Investment Policy will be brought before the Board. The Finance Manager will submit a monthly report to the District's General Manager and Board of Directors showing the type of investment, issuer, date of maturity, par (or face), dollar amount invested, current market value of all securities, and the source of this same valuation, and a statement of compliance of the portfolio with the investment policy. XI. Performance Evaluation A performance evaluation will be completed by the District's independent auditors every year, commencing with the 2004 -2005 fiscal year, to determine whether the investment objective of achieving a market - average rate of return is being realized. In determining the market - average rate of return, the average return, of three -month U.S. Treasury Bills will be used as a BP 005 Page 4 of 4 comparison. The weighted average of the portfolio will be calculated each month and compiled to determine the annual yield. Results of the comparison between the District's portfolio and the three -month Treasury-Bill benchmark will be reported to the Board annually. ATTACHMENT 2 'Ir 1w 14IGHMARKQD CAPITAL MANAGEMENT Investment Guidelines Document Central Contra Costa County Sanitary District GASB 45 / Other Post - Employment Benefits Trust R } October 2013 Investment Guidelines Document Scope and (Purpose The purpose of this Investment Guidelines Document is to: Facilitate the process of ongoing communication between the Plan Sponsor and its plan fiduciaries; • Confirm the Plan's investment goals and objectives and management policies applicable to the investment portfolio identified below and obtained from the Plan Sponsor; • Provide a framework to construct a well - diversified asset mix that can potentially be expected to meet the account's short- and long - term needs that is consistent with the account's investment objectives, liquidity considerations and risk tolerance; • Identify any unique considerations that may restrict or limit the investment discretion of its designated investment managers; • Help maintain a long -term perspective when market volatility is caused by short -term market movements. • Assist the Plan Sponsor in formulating an Investment Policy Statement ( "IPS ") for the account. Key Plan Sponsor Account Information as of October 23, 2013 Plan Sponsor: Central Contra Costa County Sanitary District Governance: Board of Directors of the Central Contra Costa County Sanitary District Plan Name ("Plan" j: Central Contra Costa County Sanitary District GASB,45 /0th-er Post- Employment Benefits Trust Trustee: US Bank Contact: Fran Schoenfeld, 949- 224 -7204 fran.schoenfeld@usbank.com Account Number ( "Account "):6746030600 Type of Account: GASB 45 /Other Post - Employment Benefits Trust ERISA Status: Not subject to ERISA Market Value of Account: $32,000,000 Investment Manager. US Bank, as discretionary trustee, has delegated investment management responsibilities to HighMark Capital Management, Inc. ( "Investment Manager"), an SEC- registered investment adviser Contact: Andrew Brown, CFA, 415 -705 -7605 Andrew.brown 0 highmarkcapitai.com Central Contra Costa County Sanitary District — GASB 45 /Other Post - Employment Beneilts Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v_ 4/26/2043 - cis) Investment Authority: Except as otherwise noted, the Trustee, US Bank, has delegated investment authority to HighMark Capital Management, an SEC-registered investment adviser. Investment Manager has full investment discretion over the managed assets in the account. Investment Manager is authorized to purchase, sell, exchange, invest, reinvest and manage the designated assets held in the account, all in. accordance with account's investment objectives, without prior approval or subsequent approval of any other party(ies). Investment Objectives and Constraints The goat of the Plan's -investment program is to generate adequate long -term returns that, when combined with contributions, will result in sufficient assets to pay the present and future obligations of the Plan. The following objectives are intended to assist in achleving this goal: The Plan should earn, on a long-term average basis, a rate of return equal to or in excess of the target rate of return of 6.25 %. The Plan should seek to earn a return in excess of its policy benchmark over the long- term, The Plan's assets will be managed on a total return basis which takes into consideration both investment income and capital appreciation. While the Plan Sponsor recognizes the importance of preservation of capital, it also adheres to the principle that varying degrees of investment risk are generally rewarded with compensating returns. To achieve these objectives, the Plan Sponsor allocates its assets (asset allocation) with a strategic, long- term perspective of the capital markets. Investment Time Horizon: Long -term Anticipated Cash Floats: Approximately $200,000 to $300,000 in monthly contributions. Distributions are expected to be modest in the early years of the Plan. Target Rate of Return: 6.260/a annual target Investment Objective. The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth herein. The investment objective the Plan Sponsor has selected is the Moderate Objective, which has a dual goal to seek moderate growth of income and principal Risk Tolerance: Moderate The account's risk tolerance has been rated moderate, which demonstrates that the account can accept average, or moderate, price fluctuations to pursue its investment objectives. Central Contra Costa County Sanitary District — GASB 45/Other Post - Employment Benefits Trust Investment Guidelines Document — HighMark Capltal Management, Inc. (v. 4/2512013 - cis) Strategic Asset Allocation: The asset allocation ranges for this objective are listed below: Strategic Asset Allocation Ranges Cash Fixed Income Equity 0 -20% 40 % -60 %d 40 % -60% Policy, 5% Policy, 45% Policy: 50% Market conditions may cause the account's asset allocation to vary from the stated range from time to time. The Investment Manager will rebalance the portfolio no less than quarterly andlor when the actual weighting differs substantially from the strategic range, if appropriate and consistent with your objectives. Security Guidelines: E uitie With the exception of limitations and constraints described above, Investment Manager may allocate assets of the equity portion of the account among various market capitalizations (large, mid, small) and investment styles (value, growth). Further, Investment Manager may allocate assets among domestic, international developed and emerging market equity securities. Total Equities 40 % -60% Equity Stjde Ran e Domestic Large Cap Equity 15 % -45% Domestic Mid Cap Equity 0 °k -10% Domestic Small Ca Equity 0 % =15% International E uit incl Emerging Markets) 1 0 %° -15% Real Estate Investment Trust (REIT) 1 0 %° -15% Fixed Income In the fixed income portion of the account, investment Manager may allocate assets among various sectors and industries, as well as varying maturities and credit quality that are consistent with the overall goals and objectives of the portfolio. Total Fixed Income 40 % -60% Fixed income S to Ran e Long-term bonds maturities >7 ears) 0 % -25% Intermediate -term bonds (maturities 3 -7 ears ) 25 %-60% Short-Term bonds (maturities ¢3 y ears ) 0 % -25 °k High Yield bonds 0 0/0-10% Convertible bonds 0 % -10% Central Contra Costa County sanitary District — GASB 4510ther Post - Employment Benefits Trust Investment Guidelines Document — HighMark Capital Mlanagement, Inc. (v. 412612013 - cis) Performance Benchmarks: The performance of the total Plan shall be measured over a three and five -year periods. These periods are considered sufficient to accommodate the market cycles experienced with investments. The performance shall be compared to the retum of the total portfolio blended benchmark shown below. Total Portfolio Blended Benchmark 26.60% S &P500 5.00% Russell Mid Cap 7.50 °k Russell 2000 3.25% MSCI EM FREE 6.00% MSCI EAFE 1.750/a Wilshire REIT 33.50% BC US Aggregate 10.0011% ML 1 -3 Year US Corp/Govt 1.50% US High Yield Master it 5.000/0 a9i 1 Mth T -Bill Asset Class /Style Benchmarks Over a market cycle, the long -term objective for each investment strategy is to add value to a market benchmark. The following are the benchmarks used to monitor each investment strategy. Large Cap Equity S &P 500 Mid Cap Equity Russell MidCap Index Growth Russell MidCap Growth Value Russell MidCap Value Small Cap Equity Russell 2000 index Growth Russell 2000 Growth Value Russell 2000 Value REiTs Wilshire REIT International Equity MSCI EAFE Investment Grade Bonds BarCap US Aggregate Bond High Yield Credit Suisse High Yield Security Selection Investment Manager may utilize a full range of investment vehicles when constructing the investment portfolio, including but not limited to individual securities, mutual funds, and exchange - traded funds. In addition, to the extent permissible, Investment Manager is authorized to invest in shares of mutual funds in which the Investment Manager serves as advisor or subadviser. Central Contra Costa County Sanitary District — GASB 450her Post-Employment Benefits Trust Investment Guidelines Document— HighMark Capital Management, Inc. (v. 4/28120.18 - cls) Investment Limitations; The following investment transactions are prohibited: • Direct investments in precious metals (precious metals mutual funds and exchange - traded funds are permissible). • Venture Capital • Short sales* • Purchases of Letter Stock, Private Placements, or direct payments • Leveraged Transactions* • Commodities Transactions Puts, calls, straddles, or other option strategies* • Purchases of real estate, with the exception of REITs • Derivatives, with exception of ETFs* "Permissible in diversified mutual funds and exchange- traded funds Duties and Responsibilities Responsibilities of Plan Sponsor The Budget and Finance Committee of the Central Contra Costa Sanitary District is responsible for: ■ Confirming the accuracy of this Investment Guidelines Document, in writing. ■ Advising Trustee and investment Manager of any change in the planlaccount's financial situation, funding status, or cash flows, which could possibly necessitate a change to the account's overall risk tolerance, time horizon or liquidity requirements; and thus would dictate a change to the overall investment objective and goals for the account. ■ Providing Trustee and Investment Manager with an approved IPS for the account and providing any updates to the IPS. • Monitoring and supervising service vendors and investment options, including investment managers. = Avoiding prohibited transactions and conflicts of interest. Responsibilities of Trustee The plan Trustee is responsible for: ■ Valuing the holdings. ■ Collecting all income and dividends owed to the Plan. ■ Settling all transactions (buy -sell orders). Responsibilities of Investment Manager The Investment Manager is responsible for • Assisting the Budget and Finance Committee with the development and maintenance of this Investment Policy Guideline document annually. • Meeting with the Budget and Finance Committee semi- annually to review portfolio structure, holdings, and performance. • Designing, recommending and implementing an appropriate asset allocation consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this statement. ■ Researching and monitoring investment advisers and investment vehicles. ■ Purchasing, selling, and reinvesting in securities held in the account. Central Contra Costa County Sanitary District — GASB 450her Post - Employment Benefits Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v, 42612013 - cis) ■ Monitoring the performance of all selected assets. • Voting proxies, if applicable. • Recommending changes to any of the above. ■ Periodically reviewing the suitability of the investments, being available to meet with the Budget and Finance Committee at least twice a year, and being available at such other times within reason at your request. ■ Preparing and presenting appropriate reports. • Informing the Budget and Finance Committee if changes occur in personnel that are responsible for portfolio management or research. Acknowledgement and Acceptance I/We being the Plan Sponsor with responsibility for the account(s) held on behalf of the Plan Sponsor specified below, designate Investment Manager as having the investment discretion and management responsibility indicated in relation to all assets of the Plan or specified Account. If such designation is set forth in the Plan/trust, I/We hereby confirm such designation as Investment Manager. I have read the Investment Guidelines Document, and confirm the accuracy of it, including the terms and conditions under which the assets in this account are to be held, managed, and disposed of by Investment Manager, This Investment Guidelines Document supersedes all previous versions of an Investment Guidelines Document or investment objective instructions that may have been executed for this account. Gr. 7 Date: 1 Plan S sor Central Contra Cou Sanitary istrict Board President Date: Plan Sponsor. Central Contra County Sanitary District / 3 Date: Investment Manager: Andrew Brown, CFA, Senior Portfolio Manager, (415) 705 -7605 Central Contra Costa County Sanitary District — GASB 45/Other Post - Employment Benefits Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v. 4/26/2013 - cis)