SR-903-001 (5)
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APR 2 2 1986
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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:
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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
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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.
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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
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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.
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- 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
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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
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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)