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HomeMy WebLinkAbout04. Authorize GM to execute contract with PFM Asset Management (PFMAM) for investment management and advisory services for a five year termPage 1 of 5 Item 4. DCENTRALSAN MEETINGDATE: JULY11,2024 BOARD OF DIRECTORS POSITION PAPER SUBJECT: AUTHORIZE THE GENERAL MANAGER TO EXECUTE A CONTRACT WITH PFM ASSET MANAGEMENT (PFMAM) FOR INVESTMENT MANAGEMENT AND ADVISORY SERVICES FORA FIVE-YEAR TERM SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHILIPLEIBER, DEPUTYGM -ADMINISTRATION Roger S. Bailey General Manager ISSUE Board authorization is requested for the General Manager to execute a contract with PFM Asset Management (PFMAM) for investment management and advisory services for up to a five-year term, with an estimated start date of August 1, 2024. BACKGROUND On August 17, 2023, consistent with prior direction of the Board, staff brought forth additional information and recommendations related to implementing an in-house treasury function for Central San. Staff provided the following deliverables to support this recommendation: • An internal controls risk assessment over the proposed "to be" banking function, • Draft banking and treasury policy and administrative procedures applicable for the proposed "to be" treasury structure, • Proposed project implementation plan After a presentation summarizing the highlights of these deliverables, the Board voted unanimously in favor of staff continuing to pursue the in-house treasury function consistent with the risk assessment, draft policies and procedures, and project implementation plan. The project implementation plan highlighted seven key phases, as follows: July 11, 2024 Special Board Meeting Agenda Packet - Page 25 of 41 Page 2 of 5 1. Project discovery, 2. Risk Assessment and Board direction/action on treasury structure, 3. Policy development, 4. Request for proposals (RFP) for banking services, 5. RFP for investment management services, 6. Enterprise Resource Planning (ERP) system implementation and configuration changes, 7. Withdrawal from County Treasury Pool. Following the Board's authorization to proceed with project implementation as recommended by staff, the first four (4) phases of the project were completed earlier in 2024, with the next project phase focusing on the solicitation for investment management/advisory services. I n accordance with this plan, with the support of project consultant Eide Bailly, staff developed an RFP for investment management/advisory services which was issued on March 20, 2024 with a proposal submission deadline of May 1, 2024. The RFP provided a background of Central San's history, operations, fiscal health, and current treasury arrangement, and requested investment management/advisory institutions submit proposals providing information about their firm, team, and service costs demonstrating their ability to meet Central San's investment needs. The RFP disclosed that proposing firms would be evaluated on the following criteria: • Understanding the needs and operational requirements of Central San • Scope of services offered • Relevant experience managing similar services with governmental agencies • Professional experience and qualifications of the individuals assigned to the account • Responsiveness to proposal format and inclusion of all required exhibits/reports • Local decision -making authority to handle ongoing needs • Ability to provide services as outlined in the Scope of Services and quality of the proposal • Quality of references • Proposed cost Central San received six (6) proposals from the following banking institutions: Cantella & Co., Chandler Asset Management, Garcia Hamilton & Associates, Meeder Public Funds, PFMAM, and Public Trust Advisors. With the advice of Central San's project consultants from Eide Bailly, the evaluation committee assessed the proposal responses in accordance with the evaluation criteria specified in the RFP, narrowing the top proposals down to Chandler Asset Management, Meeder Public Funds, and PFMAM. The evaluation then scheduled and held interviews with each of the top three proposers on May 22 and May 23, 2024. As a result of the evaluation committee's assessment of written proposals and virtually held interviews, PFMAM was tentatively selected for further negotiations on an investment management/advisory services agreement on June 7, 2024. The evaluation committee found PFMAM to be the best fit for Central San in consideration of all evaluation criteria included in the RFP, particularly regarding PFMAM's reputation, amount of assets already under management, consistent competitive composite portfolio performance, size of client support resources, price proposal, references from like municipal agencies, and understanding of Central San's unique needs implementing a treasury function. Shortly after the evaluation committee's decision was publicized, staff and representatives from PFMAM began discussing the desired scope of service, terms, and conditions to be included in Central San's professional services contract template. While contract negotiations are still underway, major elements of the investment management/advisory services contract will include the following elements contained in PFMAM's proposal: • Scope of Services: The proposed investment management and advisory services contract with PFMAM covers all the services needed by Central San as specified in the RFP. Key services covered in the proposed contract, to be provided on a discretionary basis, include, but are not limited to, the following: July 11, 2024 Special Board Meeting Agenda Packet - Page 26 of 41 Page 3 of 5 • Investment policy review, • Cash flow analysis and portfolio segmentation, • Investment strategy development, • Ongoing portfolio management, • Continuous monitoring and evaluation of investment creditworthiness, • A comprehensive reporting package via access to PFMAM's portfolio reporting website, and • Providing periodic training and education for Central San staff. Engagement Team: Monique Spyke, Managing Director and Head of PFMAM's California Practice, will provide engagement oversight, while Justin Resuello, Client Relations Manager, will serve as Central San's day-to-day contact and relationship manager. Director Lesley Murphy will serve as Central San's relationship liaison and be in close contact with Central San at the outset of the engagement and periodically thereafter to introduce new services as appropriate. Chris Harris, CFA, CAIA, Director and Head of PFMAM Portfolio Strategies Group will assist in developing Central San's overall portfolio strategy. Robert Cheddar, CFA, Head of Portfolio Management, will oversee the management of the portfolio to help ensure it meets Central San's customized investment strategy. No sub -contractors will be utilized for the engagement. Cost: Under the discretionary management and fiduciary model, which staff recommends for Central San, PFMAM charges an asset -based fee for services. On average, Central San's daily investment portfolio balances throughout the year are approximately $120.5 million, excluding LAI F. Additionally, PFMAM will not charge fees based on hourly rates or charge reimbursable expenses (i.e., travel, lodging, printing, etc.). PFMAM's proposal emphasized the following discounted fees would apply to Central San's services arrangement • First $50 million - 7 basis points, or 0.07% (versus 9 basis point standard fee) • Next $50 million - 6 basis points, or 0.06% (versus 7 basis point standard fee) • Next $100 million - 5 basis points, or 0.05% (versus 6 basis point standard fee) • Over $200 million - 4 basis points, or 0.04% (versus 5 basis point standard fee) Fees would remain fixed for a three-year term, with the option to negotiate a fee adjustment in line with the consumer price index after the third year. • Term: The proposed contract would commence on approximately August 1, 2024, and extend for a five-year term ending July 31, 2029. Entering into an agreement with PFMAM for the aforementioned services is an important step towards the Board supported initiative of implementing an in-house treasury structure. Continuing to make progress on this significant initiative is in line with two strategies of Goal 7 of Central San's FY 2023-24 Strategic Plan, including to "be adaptable, resilient, and responsive" and "implement organization -wide optimization." Lastly, under the proposed contract with PFMAM, staff is confident Central San will achieve better diversity of its investment portfolio, increase overall performance, and save staff time related to the investment function allowing for greater time spent on other operational and strategic priorities. ALTERNATIVES/CONSIDERATIONS Investment management and advisory services will be essential in an in-house treasury services structure, providing the benefits of an actively managed investment portfolio and allowing District staff to focus on other critical operational tasks and strategic priorities. The Board could select another investment management and advisory services firm that submitted a proposal. This is not recommended as PFMAM was selected in a competitive process and has been responsive to Central San's stated needs. The Board could propose different terms in the investment management and advisory services contract such as those relating to cost parameters, the duration of agreement, or the scope of work. One consideration of the evaluation committee was whether PFMAM could remain independent while July 11, 2024 Special Board Meeting Agenda Packet - Page 27 of 41 Page 4 of 5 providing investment management and advisory services to Central San due to it being acquired by US Bank in 2021. It was questioned whether this could raise a concern as US Bank was recently selected by Central San to provide banking and investment safekeeping/custodial services and best practice publication of the Government Finance Officers' Association (GFOA) states that governments should use an independent third -party custodial service for safekeeping of investments. However, the GFOA publication further clarifies that an independent third -party in a safekeeping arrangement may either be a financial institution separate from where the depository cash assets are being held, or that it may be a separate division of that same named institution. Pursuant to further inquiries from the evaluation committee, representatives from US Bank's International Trust & Custody (IT&C) group and PFMAM attested that they are separate divisions managed by entirely different teams and subject to different regulations. Additionally, PFMAM and US Bank IT&C are subject to different regulatory regimes. PFMAM is registered as an investment adviser with, and is regulated by, the U.S. Securities and Exchange Commission (SEC). US Bank IT&C, as a division of US Bank, is regulated primarily by the Office of the Comptroller of the Currency (OCC). Accordingly, compliance with the GFOA best practice recommendation is met. However, as an unavoidable theoretical perception of non -independence may exist, the Board could direct staff to enter into an agreement with the runner up proposer to PFMAM, which the evaluation deemed to be ChandlerAsset Management. ChandlerAsset Management also submitted a competitive proposal and was deemed more than qualified to provide investment management and advisory services to Central San. This is not recommendation by staff, however, as it is anticipated Central San would benefit from operational efficiencies in utilizing US Bank for investment safekeeping and custodial services and PFMAM via reduced transaction fees (no wire fees), faster inter -divisional correspondence, and integrated reporting. Other factors separating PFMAM from the runner up were the size of its governmental portfolio currently under management ($230 billion versus $36 billion), slightly lower cost of services, and firm -wide employee resources available (296 versus 47 total employees). Lastly, in prior discussions with the Board pertaining to investment management services, the possibility of remaining with the County Treasury for investment management services, while maintaining a separate bank account was considered. While County Treasury has a long-standing "all in or all out" policy for being a voluntary pooled treasury participant, the previous (now retired) County Treasurer had suggested to Central San's Deputy General Manager of Administration at a Contra Costa County Treasury Oversight Committee meeting that the County may be interested in reconsidering the policy in the future. Over the past several months, prior to and following the issuance of Central San's investment management RFP, staff had been in contact with County Treasury staff and no interest was expressed to Central San staff about amending the County's current policy. Even if the County had considered amending its policy, the scope of the investment management services contract includes additional support surpassing what the County has historically provided to Central San including: helping manage an active investment strategy tailored to Central San's needs, assistance with short- and long-term cash flow forecasting, in-depth market and economic updates at Board Finance Committee meetings, and access for staff to an online investment management platform allowing for more efficient paperless processing and report running. Accordingly, remaining with the County for investment management services while maintaining a separate independent bank account is not considered a viable alternative for Central San at this time. FINANCIAL IMPACTS While total fees are expected to be well below the contract threshold requiring Board approval, the Board's approval of this contract is warranted given the significance of investment management and advisory services to Central San's strategic objectives and as a component of establishing an in-house treasury function. Fees for investment management and advisory services provided by PFMAM would be charged based on the daily net assets under management on an amortized cost basis each month in accordance with the proposed fee schedule shown previously (excluding LAI F balances). Based on the historical non- LAI F portion of Central San's investment portfolios it is estimated that the total annual fee would be July 11, 2024 Special Board Meeting Agenda Packet - Page 28 of 41 Page 5 of 5 approximately $75,000 to $80,000. If authorized by the Board to proceed with the recommended staff action, contract terms and conditions will be finalized by the General Manager and staff. Any material deviations from this position paper, though not expected, will be disclosed to the Board at a later date. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its June 25, 2024, meeting and recommended Board approval. RECOMMENDED BOARD ACTION Authorize the General Manager to execute a contract with PFMAM for investment management and advisory services for a term of five years. Strategic Plan re -In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability and sustainability July 11, 2024 Special Board Meeting Agenda Packet - Page 29 of 41