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HomeMy WebLinkAbout03.a. Approve a minor revision to the Investment Guidelines Document (IGD) for the GASB 45 Other Post -Employment Benefits (OPEB) Trust adopted September 7, 2017Page 1 of 10 Item 3.a. CENTRAL SAN BOARD OF DIRECTORS I _ POSITION PAPER DRAFT MEETING DATE: DECEMBER 12, 2017 SUBJECT: APPROVE A MINOR REVISION TO THE INVESTMENT GUIDELINES DOCUMENT (IGD) FOR THE GASB 45 OTHER POST -EMPLOYMENT BENEFITS (OPEB) TRUSTADOPTED SEPTEMBER 7, 2017 SUBMITTED BY: INITIATING DEPARTMENT: THEAVASSALLO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHIL LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ISSUE Central San's HighMark Capital Management OPEB IGD contains a minortypo which requires a revision to the IGD and also requires Board President signature. BACKGROUND At the September 7, 2017 Board meeting, the OPEB and Pension IGDs were revised and approved by the Board. As part of the September quarterly review of the OPEB Trust, Investment Manager Andrew Brown of HighMark Capital Management, noted a typo in the IGD that was executed. The established blended benchmark section had a typo and instead of a 3.25% MSCI Emerging Market Index exposure, the executed copy showed 9.25%. This 6% difference has been revised to 3.25% and is highlighted on page 5 of the attachment. ALT ERNAT IVES/CONSIDERAT IONS None. FINANCIAL IMPACTS None. COMMITTEE RECOMMENDATION This item was reviewed by the Administration Committee at its December 12, 2017 meeting. The Committee recommended approval of the OPEB IGD change. December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 3 of 72 Page 2 of 10 RECOMMENDED BOARD ACTION Approve the revision to the OPEB I GD as recommended. Strategic Plan Tie -In GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct Long -Range Financial Planning, Strategy 2 - Manage Costs ATTACHMENTS: 1. GASB 45 OPEB Trust IGD (with proposed revision highlighted) December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 4 of 72 Page 3 of 10 HIGHMARKO CAPITAL MANAGEMENT Investment Guidelines Document Central Contra Costa County Sanitary District GASB 45 / Other Post -Employment Benefits Trust June 2017 December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 5 of 72 Page 4 of 10 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 June 1, 2017 Plan Sponsor., Central Contra Costa County Sanitary District Governance: Board of Directors of the Central Contra Costa County Sanitary District Plan Name ("Plan'): Central Contra Costa County Sanitary District GASB 45/Other Post -Employment Benefits Trust Trustee: US Bank Contact: Susan Hughes, 949-224-7209 Susan. Hughes(@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: $52,000,000 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@highmarkcapital.com Central Contra Costa County Sanitary District — GASB 45/Other Post -Employment Benefits Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v. 6/2/17 ARB) 2 December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 6 of 72 Page 5 of 10 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 goal 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 achieving 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 Flows: Approximately $200,000 in monthly contributions. Distributions are expected to be modest in the early years of the Plan. Occasionally an additional one-time payment may also be made as determined by the Central San Board. Target Rate of Return: 6.25% 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 Capital Management, Inc. (v. 6/2/17 ARB) 3 December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 7 of 72 Page 6 of 10 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% 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 and/or when the actual weighting differs substantially from the strategic range, if appropriate and consistent with your objectives. Security Guidelines: Equities 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 Style Range Domestic Large Cap Equity 15%-45% Domestic Mid Cap Equity 0%-10% Domestic Small Cap Equity 0%-15% International Equity (incl Emerging Markets) 0%-15% Real Estate Investment Trust (REIT) 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% If individual fixed income securities are purchased for the Plan, the following guidelines will be adhered to in the management of the fixed income segment: Eligible Investments • Debt obligations of the U.S. Government, its agencies, and Government Sponsored Enterprises • Mortgage -Backed Securities (MBS) • Asset Backed Securities (ABS) • Collateralized Mortgage Obligations (CMO) • Commercial Mortgage -Backed Securities (CMBS) Central Contra Costa County Sanitary District — GASB 45/Other Post -Employment Benefits Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v. 6/2/17 ARB) December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 8 of 72 Page 7 of 10 Corporate debt securities issued by U.S. or foreign entities including, but not limited to, limited partnerships, equipment trust certificates and enhanced equipment trust certificates • Eligible instruments issued pursuant to SEC Rule 144(a)* • Municipal Bonds Quality The portfolio will maintain a minimum weighted average quality of A- at all times. Individual securities shall have a minimum quality rating of Baa3 by Moody's or BBB- by Standard & Poor's (S&P). Duration The manager will maintain the portfolio duration within +/- 25% of the benchmark duration at all times. Diversification • No more than 5% of the portfolio assets may be invested in any individual issuer, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and Government Sponsored Enterprises. • No more than 10% of the portfolio may be invested in securities issued under Rule 144A*. * Note: Rule 144A is an administrative rule under the SEC allowing, under certain circumstances, for qualified institutional investors to trade certain securities with other institutional investors without registering the trade with the SEC. Specifically, the rule allows private companies, both domestic and international, to sell unregistered securities, also known as Rule 144 securities, to qualified institution buyers (QIBs) through a broker-dealer. 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 return of the total portfolio blended benchmark shown below. Total Portfolio Blended Benchmark 26.50% S&P500Index 5.00% Russell Mid Cap Index 7.50% Russell 2000 Index 3.25% MSCI Emerging Market Index 6.00% MSCI EAFE Index 1.75% Wilshire REIT Index 33.50% Bloomberg Barclays US Aggregate Bond Index 10.00% ML 1-3 Year US Corp/Gov't Index 1.50% US High Yield Master II 5.00% Citi 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 Central Contra Costa County Sanitary District — GASB 45/Other Post -Employment Benefits Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v. 6/2/17 ARB) December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 9 of 72 Page 8 of 10 market benchmark. The following are the benchmarks used to monitor each investment strategy: Large Cap Equity S&P 500 Index Mid Cap Equity Russell Mid Cap Index Growth Russell Mid Cap Growth Index Value Russell Mid Cap Value Index Small Cap Equity Russell 2000 Index Growth Russell 2000 Growth Index Value Russell 2000 Value Index REITs Wilshire REIT Index International Equity MSCI EAFE Index Investment Grade Bonds Bloomberg Barclays US Aggregate Bond Index High Yield US High Yield Master II 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. 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 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 plan/account'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 all service vendors and investment options, including investment managers. ■ Avoiding prohibited transactions and conflicts of interest. Central Contra Costa County Sanitary District — GASB 45/Other Post -Employment Benefits Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v. 6/2/17 ARB) December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 10 of 72 6 Page 9 of 10 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 Finance Committee with the development and maintenance of this Investment Policy Guideline document annually. ■ Meeting with the 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. ■ 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 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 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. Central Contra Costa County Sanitary District — GASB 45/Other Post -Employment Benefits Trust Investment Guidelines Document — HighMark Capital Management, Inc. (v. 6/2/17 ARB) December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 11 of 72 Page 10 of 10 Date: Plan Sponsor: Central Contra County Sanitary District Board President 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. 6/2/17 ARB) December 12, 2017 Regular ADMIN Committee Meeting Agenda Packet - Page 12 of 72