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Home My WebLink About09/04/2007, C6 - REQUEST FOR PROPOSALS: INVESTMENT ADVISORY SERVICES council Meedag 9-4-07 acEnba Report e6 CITY OF SAN LUIS OBISPO FROM: Bill Statler, Director of Finance & Information Technolog Carolyn Dominguez, Finance Manager SUBJECT: REQUEST FOR PROPOSALS: INVESTMENT ADVISORY SERVICES CAO RECOMMENDATION Approve a Request for Proposals (RFP) for investment advisory services and authorize the CAO to award the contract to the most responsive proposer. DISCUSSION Background The City's Investment Management Plan establishes strategies, practices and procedures to be used in administering the City's investment portfolio. The primary investment objective is to achieve a reasonable rate of return on public funds while minimizing the potential for capital losses arising from market changes or issuer default. To help achieve the City's investment goals, we recommend engaging an investment advisor. Why Hire an Investment Advisor? By outsourcing certain aspects of portfolio management, the City can benefit from specialized professional expertise, risk management and continuity in the investment function. With today's volatile market and complex investment instruments, a professional investment manager is best suited to achieving the City's investment goals while minimizing portfolio risk. The investment advisor's knowledge of securities and access to the market should also result in enhanced investment earnings.. The City's current portfolio is primarily invested in the State of California Local Agency Investment Fund (LAIF). Over the past couple of years, because of staffing resource limitations and competing priorities, as portfolio investments matured, the proceeds were placed in LAIF rather than reinvested in other instruments. While LAIF is a secure investment that is posting market earnings that meet the City's investment goal, a concentration of the City's portfolio in LAIF does not meet the diversification objective of the Investment Management Plan. Turning to the expertise of an outside professional will allow the City to better diversity its portfolio, using various investment strategies and instruments as appropriate. In addition, outsourcing will provide the City with the additional staffing resources of the advisor firm, freeing up City employees for functions where they can better use their expertise and add e6 Request for Proposals: Investment Advisory Services Page 2 more value. And in times of staffing turnover, continuity in the investment function will be better assured. For these reasons, a number of California cities have moved to contracting for investment advisory services, and have been pleased with the results. Current Investment Portfolio The following summarize the City's investment portfolio of$61.2 million as of July 31, 2007: Portfolib Summary as of July 31, 00 Amount % of Total Investments Held by the City LAIF 51,322,400 84% Federal Agency and US Treasury Issues 2,281,700 4% Collateralized Certificates of Deposit 2,000,000 3% Mutual Funds 1,000,400 2% Total Held by the City 56,604,500 93% Investments Held by Trustees * 4,567,600 7% TOTAL $61,172,100 100% *Bond reserves held by third parry trustees as required by bond indentures Of the$56.6 million held by the City, we estimate that about $50 million is likely to be managed by the investment advisor. Workscope As set forth in the RFP workscope(Attachment 1),the investment advisor responsibilities include: 1. Managing the City's portfolio with discretionary authority. 2. Assisting the City with cash flow/maturity analysis. 3. Providing credit analysis of investment instruments in the City's portfolio. 4. Providing monthly/quarterly/annual reporting City funds managed by them. 5. Attending quarterly meetings (in person or via teleconference) with City staff and Investment Oversight Committee. 6. Evaluating market risk and develop strategies that minimize the impact on the City's portfolio. 7. Providing assurance of the City's portfolio compliance with applicable policies and laws. 8. Establishing an appropriate performance benchmark for the City's investments. 9. Ensuring that the portfolio structure matches City's objectives. 10. Reviewing the City's Investment Management Plan and making recommendations for change as appropriate. The advisor's investment practices and procedures must comply with state law and the City's Investment Management Plan; and they will be expected to perform to the "Prudent Expert Standard"of responsibility. i Request for Proposals: Investment Advisory Services Page 3 Proposal Review and Contract Award Evaluation Process. A proposal review committee consisting of the Assistant CAO, Director of Finance & Information Technology, Finance Manager, Accounting Supervisor and Revenue Supervisor will evaluate proposals and make recommendations to the CAO for contract award based on the criteria set forth in the RFP: 1. Understanding of the work required by the City and the overall investment program objectives. 2. Responses to proposer questionnaire. 3. Proposed approach to managing the portfolio. 4. Quality, clarity and responsiveness of the proposal. 5. Demonstrated competence and professional qualifications necessary for successfully performing the work required by the City. 6. Recent experience in successfully managing portfolios of similar sized California cities. 7. References. 8. Background and related experience of the specific individuals to be assigned to this account. 9. Proposed compensation. As reflected above, contract award will not be based solely on price, but on a combination of factors as determined to be in the best interest of the City. Proposal Evaluation Schedule. The following outlines the anticipated schedule for proposal review and contract award: Task Due Date Issue pre-proposal letter of interest 8/10/07 Issue RFP 9/5/07 Conduct pre-proposal teleconference 9/24/07 Receive proposals 10/10/07 Complete written proposal evaluation 10/15/07 Conduct finalist interviews 10/24/07 Finalize award recommendation 10/31/07 Execute contract 11/15/07 Electronic Process. We recommend using an electronic process under which we will email the RFP to prospective proposers (Attachment 2) and receive proposals via email. This flexibility is provided under our purchasing policies, and we have used this approach successfully in the past for similar professional service selections. CONCURRENCES The Investment Oversight Committee (composed of the City Administrative Officer, Assistant CAO, Director of Finance & Information Technology/City Treasurer, Finance Manager and the City's Independent Certified Public Accountant) has reviewed the City's portfolio management practices and concurs that it is in the best interest of the City to retain an investment advisor. e& -3 Request for Proposals: Investment Advisory Services Page 4 FISCAL IMPACT Although there are a variety of methods advisors could use to structure a fee for service arrangement, we anticipate that proposals will recommend a sliding percentage based on the value of the portion of the portfolio they manage, not the number of transactions conducted. Typically, the increase in investment yield realized from using an outside expert will more than offset the fee charged. ALTERNATIVE 1. Do not contract with an investment advisor and retain portfolio management in-house. Due to limited staff resources, assuring appropriate portfolio diversity without professional assistance will be challenging in light of competing priorities and anticipated staffing changes. Additionally, based on the experience of other cities, there is significant potential for increased investment earnings in contracting with an investment advisor. Accordingly, we do not recommend this alternative. 2. Negotiate directly with an investment advisory firm. Since there are several firms capable of providing this service, we believe that a competitive RFP process will result in the best selection result for the City. ATTACHMENTS 1. Workscope excerpt from RFP for Investment Advisory Services 2. Proposers List AVAILABLE FOR REVIEW IN THE COUNCIL READING FILE RFP for Investment Advisory Services G:Investment Services/Invutment Advisor RFP CAR 9-4-07 Attachment Section A DESCRIPTION OF WORK The City of San Luis Obispo is soliciting proposals from investment Advisory firms for portfolio management services for approximately $50 million in operating and capital funds (non-pension funds). The portfolio is currently passively managed with a high concentration in the California Local Agency Investment Fund (LAIF). Specific services, although not all-inclusive,to be performed are as follows: 1. Manage the City's portfolio with discretionary authority. 2. Assist the City with cash flow/maturity analysis. 3. Provide credit analysis of investment instruments in portfolio. 4. Provide monthly/quarterly/annual reporting City funds you manage. 5. Attend quarterly meetings (in person or via teleconference) with City staff and Investment Oversight Committee. 6. Evaluate market risk and develop strategies that minimize the impact on the portfolio. 7. Provide assurance of portfolio compliance with applicable policies and laws. 8. Establish an appropriate performance benchmark. 9. Ensure that the portfolio structure matches the City's objectives. 10. Review the City's Investment Management Plan and make recommendations for change as appropriate. Investment practices and procedures must comply with state law and the City's Investment Management Plan. The investment advisory firm will be expected to perform to the Prudent Expert Standard. The City's primary investment objective is to achieve a reasonable rate of return on public funds while minimizing the potential for capital losses arising from market changes or issuer default. Although the generation of revenues through interest earnings on investments is an appropriate City goal, the primary consideration in the investment of City funds is capital preservation in the overall portfolio. As such, the City's yield objective is to achieve a reasonable rate of return on City investments rather than the maximum generation of income, which could expose the City to unacceptable levels of risk. In determining individual investment placements, the following factors shall be considered in priority order: safety, liquidity and yield. ABOUT THE CITY With a population of approximately 44,200, the City is located eight miles from the Pacific Ocean and is midway between San Francisco and Los Angeles at the junction of Highway 101.and scenic Highway 1. San Luis Obispo is the County seat, and a number of federal and state regional offices and facilities are located here. The City of San Luis Obispo is a Charter City. This means we have more"local home rule"authority than cities that incorporate under the "general laws" of the State of California. As set forth in the City Charter, the City operates under the"Council-Mayor-Administrative Officer"form of government. Although the City uses a two-year budget, the Council legally adopts budgets annually by resolution. The City's adopted budget for 2007-08 for all funds is$95 million. Section B of the 2007-09 Financial Plan set s forth the City's Budget and Fiscal Policies, including investment policies. The budget document can be reviewed on the City's website at: http://www.slocity.org/finance/finplan.asp. -I- C& _S. C C Attachment In addition, the Investment Management Plan and Monthly Investment Reports are also posted on the City's website and available for review as follows: Investment Management Plan http://www.slocity.orgtfinance/download/investmentmana zementolan.12df Monthly Investment Reports hnp://www.sloci!y.orp,/finance/investment.as PROPOSERS LOST Attachment INVESTMENT ADVISORY SERVICES—SPECIFICATION NO.90706 Chandler Asset Management Mia Conal 9255 Towne Center Dr. Ste 350 San Diego, CA 92121-3039 Phone No. (800) 317-4747 Fax No. (858) 546-37 10 E-mail: mia.corral@chandlerasset.com Higgins Capital Management,Inc. Raymond L. Higgins 2223 Avenida de la Playa, Ste. 210 La Jolla, CA 92037 Phone No. (800)716-6510 Fax No. E-mail: Raymond.Higgins@HigginsCapital.com MBIA Asset Management Gay Eichhoff 11460 Grassy Trail Drive San Diego, CA 92127 Phone No. (858)521-0295 Fax No. (858) 521-0297 E-mail:gay.eichhoff@mbia.com PFM Asset Management Michelle Durgy 633 West 5`h Street Los Angeles, CA 90071 Phone No.(213)489-4075 Fax No. (213)982-4513 E-mail: durgym@pfm.com BondLogistiX Janice Salvato Address San Francisco, CA Phone No. (650) 577-8067 Fax No. E-mail: dblaney@bondlogistix.com