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SR-903-001 (5) . {R3-t/C/ -", r-;.; .)~i)L: "-14 APR 2 2 1986 GS:SES:NM:ak Gounc11 Meeting: Ap r 11 22, 1986 Santa Monica, Cal1fornia TO: Mayor and City Council FROM: City Staff SUBJECT: Recommendation to Allow Investment Manager of the Cemetery Perpetual Care Fund to Modify the Investment Mix of the Fund, to Direct City Attorney to Codify Establishment of Mausoleum Care Fund and DIrect G~ty Manager to Shift Investments of Mausoleum Care Fund From City to the Investment Manager Introduction This 1S a recommendation that the investment mix of securities ln the Cemetery Perpetual Care Fund be changed to allow a maximum of 75% of the funds to be invested 1n common stocks (cost basls) wlth the balance to be luvested in bonds, treasury bllls and other money market lnstruments at the dlscretion of the Clty'S Investment Manager with concurrence of the City Treasurer. It 15 further recommended that Councll direct the City Attorney to prepare an ordlnance establishing a Mausoleum Perpetual Care Fund and that the Mausoleum Perpetual Care Fund be placed wlth the Clty'S Investment Manager. The current instructions state that funds are to be invested in a mix of 40% stocks, 40% bonds and 20% short term securities (less than S1X months). Bac~ground In 1971 the City Council approved the retention of Scudder. Stevens and Clark, Inc. as the Investment Manager for the Clty'S Cemetery Perpetual Care Fund. At that time the City Council directed Scudder, Stevens and Clark to pursue the following investment objectlves: (,-At( APR 22 J...." - 1 - . . A. General objective of maXlmum 1ncome consistent w1th conservation of cap~tal. 1. Strive for ultimate balance of not less than 50% in bonds and other fixed 1ncome securit1es; and 2. the remalnder 1n equ1ties with ob]ect1ve of capltal appreciation cons1stent with conservation of capital. At that time the Cemetery Perpetual Care Fund was approximately $1.1 million. In 1976, Council changed the investment object1ves to .emphasize the investment in short-term, hlgh-Yleld securltles and approved an lnvestment mix of 20% liqu~d investments, 40% bonds and 40% eqult1es." Council's objective at that time appears to have been to allow 5 s&e the flexib~llty of taklng advantage of hlgh lnterest rates, then being achieved in the short term markets. However, the requirement that 20% of the portfolio be invested 1n short term, l~quid lnvestments is currently hurting the potent1al performance of the portfolio. Current short term investments are Yleldlng less than 8% per annum while longer term lnvestments and stocks are currently perform~ng much better. However, staff agrees that 1n the interest of prudent portfolio management, a llmit should be placed on the percentage of the portfollo that is invested ln stocks due to the h~gher risk associated with this type of Per Clty contract #1997 (eCS) November 3, 1971 Per Counc11 m1nutes of February 17, 1976 meet1ng - 2 - j . . investment. Staff therefore recommends the establishment of a 75% maximum l1mit for investment in stocks as estab11shed by Council in 1971. Staff further recommends that other restrict10ns on the mix between short term and long term investments for the balance of the portfolio be e11m1nated so that the C1ty'S Investment Manager can take maximum advantage of the swings in 10terest rates between long and short term investments. Staff sees no increase in risk by provid1ng our Investment Manager th~s option. Due to the nature of the Perpetual Care Fund. the earn1ngs of the fund can only be used to cover Perpetual Care expenses. Current projections indicate that interest and d1vidend earnings from the 1nvested princ1pal are suff1c1ent to cover foreseable perpetual care expenses, hence there is no Cemetery operations need for the increase liquidity prov1ded by short-term investment 1nstruments. Currently, the C1ty'S Cemetery Perpetual Care Fund has a princ1pal balance (cost basis) of approx1mately $2.2 million. Under the current 20/40/40 formula, Scudder, Stevens & Clark has been able to produce an annual average rate of return* of more than 13% Over the past five years. Both Scudder, Stevens & Clark officials and C1ty staff agree that an even higher rate of return could have been ach1eved and can be achieved in the future with *Def~ned as investment earn1ng (1nterest and dividends) plus capital appreciation. - 3 - . . the proposed investment guidellnes. Under the current investment formula more than $425,000 of the fund 1S invested 1n short term investments yielding less than 8% (or approx1mately ~32,OOO) annually. If a 50% stock and 50% other investment 1nstruments formula were in place, $212,500 of the $425,000 could be 1nvested in stocks (currently growing at more than 20% annually) and $212,500 could be in longer term investment Y1elding near 10% annually. The difference in earn1ngs potentlal to the Perpetual Care Fund between the current investment mix and the proposed formula could be as much as an additional $25,000 per year. Further, Staff bel1eves that since the Fund Manager's fee is based on a percentage of the market value of the prlncipal amount of the portfolio, that S S&C has a built in 1ncent1ve to maX1m1ze the rate of fund growth with the proposed investment guidelines. Mausoleum Perpetual Care Fund The City acqulred the Mausoleum in 1976. Th1s purchase lncluded the acquisition of an Endowment Care Fund for the Mausoleum. Accordlng to a 1975 staff report concerning thlS acquisition, a proposal was made that the Mausoleum Endowment Care Fund be adminlstered by Scudder, Stevens and Clark. However, no further actlon was taken to hire Scudder, Stevens & Clark to adm1n1ster the fund. Consequently, the Mausoleum Endowment Care Fund which currently 18 valued at approxlmately $119,000 has remalned with the C1ty and has been invested under the same guidelines as other City controlled funds. These Clty gUldellnes are more conservative than those which have gU1ded the lnvestment of the Cemetery Perpetual Care Funds. Also, C1ty ordinances covering - 4 - . . the Cemetery have not been amended to formally establish the Mausoleum Endowment Care Fund (in the form of a Mausoleum Perpetual Care Fund). Staff proposes that Council d1rect the C~ty Attorney to prepare an ordinance to establish the Mausoleum Perpetual Care Fund. Staff also proposes that upon formal establishment of the Mausoleum Perpetual Care Fund that the City Manager be authorized to transfer these funds to the Investment Manager for 1nvestment under the same revised guidelines as proposed in this staff report. Summary Staff proposes that the current investment instruct~ons to the Investment Manager of the Cemetery Perpetual Care Fund be changed to: A maximum of 75% of the portfol~o (cost basis) invested in stocks consistent with the C1ty'S South African divestment po11cy, and with concurrence of the Clty Treasurer; - The balance of the portfollo to be lnvested 1n long and short term bonds and other lnvestment instruments at the discretion of the Investment Manager; The Investment Manager shall maximlze the total rate of return to the Perpetual Care Fund uSlng the gUldellnes stated above. Staff proposes these changes for the following reasons: - There is no foreseable flnancial need to maintaln short-term llquldlty withln the fund. - Total return to the fund can be increased if the 20% llquid investment requlrement is lifted and if the max~mum investment level in stocks is increased to 75% (cost basis) of the portfollo. - 5 - . . - The Investment Manager has a built ~n incent1ve to max1mize the market value of the fund due to the fee schedule. The Investment Manager 18 in a better posit1on to take advantage of rapid changes 1n financial markets than C~ty Staff and therefore should be given more flexib1lity to sh~ft the 1nvestment mix 1n accordance with the proposed gu~delines. Staff also proposes that the establishment of a Mausoleum Perpetual Care Fund be cod1fied, and that upon such cod1ficat~on funds held by the City from the old Mausoleum Endowment Care Fund be transferred to the City's Investment Manager for 1nvestment in accordance w~th the rev~sed gUldelines recommended in th1S report. Budget/Fluanc1al Impact By implementing the proposed 1nvestment policy there is potential for lncreas~ng the rate of return to the Cemetery Perpetual Care Fund and the Mausoleum Perpetual Care Fund in certain f~nancial envlronments. Recommendation Staff recommends that Councll: 1. Adopt the attached resolution changing the investment instructions to Scudder, Stevens and Clark, the Investment Manager of the Cemetery Perpetual Care Fund; 2. Dlrect the Clty Attorney to prepare an ordlnance establ18hlng a Mausoleum Perpetual Care Fund, and; 3. Authorize the Clty Manager to transfer funds held by the Clty ~n the current Mausoleum Endowment Care Fund to the Investment Manager. Scudder. Stevens & Clark. Attachments: Resolution for Adopt~on Prepared by: Stan Scholl Neil Miller - 6 - , . . . RESOLUTION NO. (City Council Series) A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SANTA MONICA ESTABLISHING INVESTMENT GUIDELINES FOR THE CEMETERY PERPETUAL CARE FUND THE CITY COUNCIL OF THE CITY OF SANTA MONICA DOES RESOLVE AS FOLLOWS: WHEREAS. C~ty Council prev10usly adopted investment guidelines for the City's Cemetery Perpetual Care Fund of 20% cash or l1quid 1nvestments. 40% bonds and 40% equ1ties; and WHEREAS. the total rate of return to the fund could be 1ucreased by e11minat~ng the requ1rement for short-term liqu1d1ty and increas1ng to 75% the amount of the fund that may be invested in equ~ties; and WHEREAS, only the earnings of the fund can be used to pay for perpetual care activities, and therefore there is not a need to ma1nta1n short-term liquid1ty 1n the pr1nc1pal of the fund, NOW. THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA MONICA DOES RESOLVE AS FOLLOWS: SECTION 1. That the 1nvestment gU1de11nes for the Cemtery Perpetual Care Fund shall be: 1. A maximum of 75% of the portfolio (cost bas1s) 1nvested in equ1ties (stocks) consistent with the . . . . C1ty'S South African d1vestment policy, and, with the concurrence of the City Treasurer; 2. The balance of the portfo110 to be invested in long and/or short term bonds and certificates at the discretion of the Investment Manager; 3. The Investment Manager shall maximize the total rate of return to the Cemetery Perpetual Care Fund using the gU1del~nes stated above. SECTION 2. The C~ty Clerk shall cert1fy to the adopting of this resolution, and thenceforth and thereafter the same shall be in full force and effect. APPROVED AS TO FORM: (~A- k. ~ (C~ty Attorney)