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Council Meeting: May l3, 1986
Santa Monica, California
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 Authorize City
Treasurer to Shift Investments of Mausoleum Care Fund
From City to the Investment Manager
Introduction
This is a recommendation that the investment mix of securities in
the Cemetery Perpetual Care Fund be changed to allow a maximum of
50% of the funds to be invested in common stocks (cost basis)
with the balance to be invested in bonds, treasury bills and
other money market instruments at the discretion of the City's
Investment Manager. It is further recommended that Council
direct the city Attorney to prepare an ordinance establishing a
Mausoleum Perpetual Care Fund and that the Mausoleum Perpetual
Care Fund be invested by the City's Investment Manager in
accordance with revised Cemetery Perpetual Care Fund investment
instructions.
Cemetery Perpetual Care Fund
In 1971 the city council approved the retention of Scudder,
stevens and Clark, Inc. as the Investment Manager for the City's
cemetery Perpetual Care Fund. At that time, the city council
directed Scudder, stevens and Clark to pursue the following
investment instructions:
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A. General objective of maximum income consistent with
conservation of capital.
l. strive for ultimate balance of not less than 50% in
bonds and other fixed income securities: and
2. the remainder in equities with objective of capital
appreciation consistent with conservation of capital.
At that time, the cemetery Perpetual Care Fund was approximately
$l.l million.
In 1976, Council changed the investment instructions to
n...emphasize the investment in short-term, high-yield securities
and approve an investment mix of 20% liquid investments, 40%
bonds and 40% equities." council1s objective at that time
appears to have been to allow S S&C the flexibility of taking
advantage of high interest rates which were then being achieved
in the short-term markets.
currently, the City1s Cemetery Perpetual Care Fund has a
principal balance (cost basis) of approximately $2.2 million.
Under the current 20/40/40 formula, Scudder, Stevens & Clark has
been able to produce an annual average rate of return (investment
earnings plus capital appreciation) of 16.6% over the past five
years (February 1981 - February 1986). However, both Scudder,
stevens & Clark officials and city staff agree that an even
higher rate of return could have been achieved and can be
achieved in the future with an appropriate change in investment
instructions. This is because the current requirement that 20%
of the portfolio be invested in short term, liquid investments is
hurting the potential performance of the portfolio. Short term
investments are yielding less than 8% per annum while longer term
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investments and/or stocks are performing much better. For
example, under the current investment formula more than $450,000
of the fund is invested in short term investments yielding less
than 7% (or approximately $31,400) annually. If a 50% stock and
50% other investment instruments formula were in place, $225,000
of the $450,000 could be invested in stocks (currently growing at
more than 20% annuallY) and $225,000 could be in longer term
investments yielding near 10% annually. The difference in
earnings potential to the Perpetual Care Fund between the current
investment mix and the proposed formula could be as much as an
additional $36,lOO per year.
However, staff believes that in the interest of prudent portfolio
management, a limit should be placed on the percentage of the
portfolio that is invested in stocks due to the higher potential
risk associated with this type of investment. staff therefore
recommends a return to the 50% maximum limit for investment in
stocks as was previously established the by Council in 1971.
Adoption of this investment limit appears to be consistent with
the investment practice currently being followed by several large
entities as shown below:
Entity
stock Investments
Maximum Allowed Current %
% of Portfolio of Portfolio
Los Angeles City:
City Retirement System
Fire & Police Retirement
System
Water & Power Retirement
system
70%
35%
70%
60%
70%
30% but
expect to move to 50%
San Francisco Retirement
System
None
35% - 40%
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City of San Diego
Retirement System
None*
49%
PERS
None*
35% - 40% but
are increasing
"Prudent Man" rule applies.
Staff also recommends that the remaining restrictions on the mix
between short term and long term investments for the balance of
the portfolio be eliminated so that the City's Investment Manager
can take maximum advantage of the swings in interest rates
between long and short term investments. staff sees no increase
in risk by providing our Investment Manager this option. Due to
the nature of the cemetery Perpetual Care Fund, the earnings of
the fund can only be used to cover Cemetery Perpetual
Care-related expenses. current projections indicate that
interest and dividend earnings from the invested principal are
sufficient to cover current perpetual care-related expenses.
Hence, there is no Cemetery operations need for the increased
liquidity provided by short-term investment instruments.
Finally, it should be noted that SS&C's fee is based on a
percentage of the market value of the principal amount of the
portfolio. Therefore, by giving the Fund Manager additional
discretion within appropriate limits, an incentive is also
established to maximize the rate of fund growth.
Mausoleum Perpetual Care Fund
The City acquired the Mausoleum in 1976. This purchase included
the acquisition of an Endowment Care Fund for the Mausoleum.
According to a 1975 staff report concerning this acquisition, a
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proposal was made that the Mausoleum Endowment Care Fund be
administered by Scudder, stevens and Clark. However, no further
action was taken to hire Scudder, stevens & Clark to administer
the fund. Consequently, the Mausoleum Endowment Care Fund which
currently is valued at approximately $119,000 has remained with
the city and has been invested under the same guidelines as other
City controlled funds. These City guidelines are more
conservative than those which have guided the investment of the
Cemetery Perpetual Care Fund. Also, city ordinances covering the
Cemetery have not been amended to formally establish the
Mausoleum Endowment Care Fund (in the form of a Mausoleum
Perpetual Care Fund).
staff recommends that Council direct the city Attorney to prepare
an ordinance to establish the Mausoleum Perpetual Care Fund.
Staff also recommends that upon formal establishment of the
Mausoleum Perpetual Care Fund, the City Treasurer be authorized
to transfer these funds to the City's Investment Manager for
investment under the same revised investment instructions as
recommended in this staff report for the Cemetery Perpetual Care
Fund.
Summary
Staff recommends that the current investment instructions to the
Investment Manager of the Cemetery Perpetual Care Fund be changed
to:
- A maximum of 50% of the portfolio (cost basis) invested in
stocks consistent with the City's South African
divestment policy;
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- The balance of the portfolio to be invested in long and
short term bonds and other investment instruments at the
discretion of the Investment Manager: and
- The Investment Manager shall maximize the total rate of
return to the Perpetual Care Fund within the investment
limits stated above.
staff proposes these changes for the following reasons:
- There is no foreseeable financial need to maintain
short-term liquidity within the fund.
- Total return to the fund can be increased if the 20%
liquid investment requirement is lifted and if the maximum
investment level in stocks is increased to 50% (cost
basis) of the portfolio.
- The Investment Manager has a built-in incentive to
maximize the market value of the fund due to the fee
schedule.
- The Investment Manager is in a better position to take
advantage of rapid changes in financial markets than City
staff and, therefore, should be given more flexibility to
shift the investment mix in accordance with the
recommended investment instructions.
staff also proposes that the establishment of a Mausoleum
Perpetual Care Fund be codified, and that upon such codification,
funds held by the City from the old Mausoleum Endowment Care Fund
shall be transferred to the city's Investment Manager for
investment in accordance with the revised cemetery Perpetual Care
Fund investment instructions as recommended in this report.
BUdget/Financial Impact
By implementing the recommended investment instructions there is
a potential for increasing the rate of return to the Cemetery
Perpetual Care Fund and the Mausoleum Perpetual Care Fund.
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Recommendation
Staff recommends that Council:
1. Adopt the attached resolution changing the investment
instructions to Scudder, stevens and Clark, the
Investment Manager of the Cemetery Perpetual Care Fund;
2. Direct the City Attorney to prepare an ordinance
establishing a Mausoleum Perpetual Care Fund; and
3. Authorize the City Treasurer to transfer funds held by
the City in the current Mausoleum Endowment Care Fund to
the Investment Manager, Scudder, stevens & Clark for
investment according to the Cemetery Perpetual Care Fund
investment instructions.
Attachments: Resolution for Adoption
Prepared by: stan Scholl, Director of General services
Neil Miller, Assistant Director of General Services
Mike Dennis, Director of Finance
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BEFORE DISTRIBUTION CHECK CONTENT OF ALL
DISTRIBUTION OF RESOLUTION # 7~/.s
CouncIl Meeting Date s: It X/j b
(;-(/
Was It amended? ;0/0
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Agenda Item If
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FOR CITY C}ERKfS ACTION
ORDINANCE If
Introduced:
Adopted~
AU/lAYS PUBLISH A!:Ol"llill ORDINANCES*
*Cross out Attorney's approval
VOTE; Affirmatlve: '5 - 0
Negatlve~
Abstain:
Absent; c< /~ -r- 4-~
~ PROOF VOTE~' Wr'fH ANOTHER PERSON BEFORE A~ryTHING
ul51KIoullvN: ORiGINAL ~O be signed, sealed and filed in Vault.
NEWSPAPER PUBLICATION (Date:
)
)
Department originating staff report (
Management Serv.!~e~ Lynne Barr~tte -vrdinances only
Agency mentioned In document or staff report
SubJect file (agenda packet)
Counter file
Others;
.
Airport
Parking Auth.
Auditorum
Personnel
Building Dept.
Planning
PolIce (en-
forcement ?)
Cullla.lIll ty and Econcmic Dev.
Finance
Purchasing
Fire
Recr/Parks
General Servo
{
Transportation
Library
Treasurer
Manager
SEND FOUP. COPIES OF ALL ORDINANCES- TO:
COD~D SYSTEMS, Attn Peter Maclearie
12_0 ~Iain .f"~r~et '-'
_ AVfll, y~w Jersey_O'Z717 _
SEND FOUR COPIES OF AU. ORDTNANrJlS-io:
~!~fi ~~JtEk MUNICIPAL COURT
,1725 MAIN STREE~ Room llS
SANTA MONICA, CA 90401
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(certifIed?)
1
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*Check CCXie Sections before sendmg.
TOTAL COPIES
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RESOLUTION NO. 72l3(CCS)
(city council Series)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF SANTA MONICA ESTABLISHING INVESTMENT
INSTRUCTIONS FOR THE CElIETERY PERPETUAL CARE
FUnD
WHEREAS, City Council previously adopted investment
instructions for the City's Cemetery Perpetual Care Fund of up to
20% cash or liquid investments, 40% bonds and 40% equities; and
WHEREAS, the total rate of return to the fund could be
increased by eli~inating the requirement for short-term liquidity
and increasing to 50% the amount of the fund that may be invested
in equities; and
WHEREAS, the earnings of the fund can only be used to
pay for perpetual care activities, and therefore there is not a
need to maintain short-term liquidity in the principal of the
fund,
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA
HONICA DOES RESOLVE AS FOLLOW'S:
SECTION 1. That the investment instructions for the
Cemtery ?erpetual Care Fu~d shall be:
1. A maximum of 50% of the~partfolio (cost basis)
inves~ed ln equities (stocks) consistent with the
city's South African divestment policy;
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2. The balance of the portfolio 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 investment instructions stated above.
SECTION 2. The City Clerk shall certify to the
adopting of this resolutionJ and thenceforth and thereafter the
same shall be in full force and effect.
APPROVED AS TO FORM:
(l..r1.r--n- L.-. \.-. < --O-.U - .
(City Attorney)
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Adopted an1 approved thIS 13th ~ay of May, 1986.
I hereby cert1fy that the foregoIng ResolutIon No. 7213(CC8)
was duly aioptej by the C~ty Counc1l of the CIty of Santa MonIca
at a meetIng thereof held on May 13~ 1986 by the followIng
Council vote:
Ayes:
Councllmembers:
Corm, EpstelY1, Jennings, H. Katz
anti Zane
Noes: Cauncllmembers:
None
A8sta11: Councllmembers:
None
Abse1t: ~ouncIlmembers:
A. Katz and Mayor Re€1
ATTEST:
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Li::GJ't. /7 -4/JLc0L~
CIty Clerk