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council Meeting: July 27, 1993 Santa Monica, California
TO: Mayor and City Council
FROM: City staff
SUBJECT: Recommendation to Approve a Resolution Revising the
Allowable Investment Mix of the Cemetery and Mausoleum
Perpetual Care Funds
INTRODUCTION
This staff report recommends that the allowable investment mix of
securities in the Cemetery and Mausoleum Perpetual Care Funds be
changed from a maximum of 50% to a maximum of 60% of common stocks
(cost basis) and from 50% to 40% for various fixed income securities
such as treasury bonds, corporate bonds, or money market instruments.
This change is consistent with s~milar guidellnes followed by other
major California governmental investment agencles and will increase
long-term earnings thereby strengthening the ability of these Funds to
finance perpetual care of the Cemetery and Mausoleum facilities.
BACKGROUND
The Cemetery and Mausoleum Perpetual Care Funds which now total $4.3
million were established to provide funds to finance perpetual care of
these facilities when no further burials or lnternments could occur.
Over the years, the investible balance of these Funds has come from a
portion of all sales at the Cemetery and Mausoleum and increased
through interest and dividend earnings. Hence, no public funds are
involved. These Funds are invested and managed by an outside
Investment Manager in order to invest in common stocks consistent with
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South African investment restrictions previously adopted by the city
Council. Under State law, city staff are not allowed to manage the
investments in common stocks.
During the last twenty-plus years, the Council has periodically
revised the allowable investment mix in these Funds to take advantage
of expected market changes. For example, in 1971 the Council
authorized a maximum of 50% in common stocks, wi th the Objective of
capital appreciation, and a minimum of 50% in fixed income securities.
Subsequently in 19761 the Council changed the investment mix to 20% in
short term investments, 40% in bonds, and 40% in common stocks. This
change was made to allow the Investment Manager the flexibility to
take advantage of high short-term interest rates. In 1986, the city
Council returned the investment mix to its original 50% common
stocks/50% fixed income mix because short term interest rates had been
declining since the early 1980s, and common stocks had produced
returns in excess of 15 to 20% on average over the previous three
years.
CURRENT SITUATION
Staff believes that a modification of the investment mix would now be
prudent and reasonable. During the twentieth century, return on
common stocks have averaged from 11% to 12%, while return from fixed
income securities have averaged about 6%. Therefore, historically,
stocks have been the highest returning investment vehicle. Since the
Cemetery and Mausoleum "Perpetual" Care Funds are II long termll by
definition, an investment mix designed to take advantage of these long
term investment return trends would be appropriate and prudent.
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In 1992, the city hired RNC Capital Management of Los Angeles to
replace Scudder, stevens & Clark, Inc. as Investment Manager for the
two perpetual care funds. As of March 31, 1993, RNC Capital's
investment return on common stocks since taking over was 24.9%, versus
15.8% for the Standard & Poors 500 Index and 9.0% for the Dow Jones
Industrial Average.
Assuming future investment returns of at least 12% for stocks and 6%
for fixed income securities, the current 50%{50% mix would result in a
total annual return of $387,000. However, if the mix were changed to
60%/40%, the estimated total annual return would increase to $413,000,
or an increase of $26,000.
Staff also believes a 60%{40% mix would be consistent with similar
investment guidelines currently followed by other major California
publlC investment agencies. The following is a list of varlOUS
agencies' limits on common stocks:
-L.A. Fire & Police Pension System ($5.3 Billion) .................70%
-L.A. city Employees Retirement System ($3.8 Billion) .............60%
-L.A. Department of Water & Power Retirement Plan ($2.5 Billion) ..70%
-Public Employee's Retirement System Fund (PERS) ($70 Billion) ....55%
BUDGET/FINANCIAL IMPACT
By changing the allowable investment mix to 60%/40%, the rate of
return to the Cemetery and Mausoleum Perpetual Care Funds is likely to
increase thereby enhancing the financial ability of these Funds to
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provide for the perpetual care of the Cemetery and Mausoleum
facilities.
RECOMMENDATION
Staff recommends that Council adopt the attached resolution revising
the investment mix of the Cemetery and Mausoleum Perpetual Care Funds.
Prepared by: Mike Dennis, Director of Finance
Ralph Bursey, city Treasurer/Revenue Manager
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FIN:CMD:RB:mw:invmixr2
city council Meeting: July 27, 1993 Santa Monica, California
RESOLUTION NO. 8628(CCS)
(City Council Series)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SANTA
MONICA ESTABLISHING INVESTMENT INSTRUCTIONS FOR THE
CEMETERY AND MAUSOLEUM PERPETUAL CARE FUNDS
WHEREAS, City council previously adopted investment
instructions for the City's Cemetery and Mausoleum Perpetual Care
Funds of up to 50% in equities, with the balance in fixed income
securities; and
WHEREAS, the total rate of return to the fund could be
increased by increasing the maximum investment in equities from 50% to
60%; and
WHEREAS, the earnings of the fund can only be used to pay
perpetual care activities, and therefore there is a need to maintain a
long-term investment horizon for the principal of the fund,
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA MONICA
DOES RESOLVE AS FOLLOWS:
SECTION 1. That the investment instructions for the
Cemetery and Mausoleum Perpetual Care Funds shall be:
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1. A maximum of 60% of the portfolio (cost basis) invested
in equities (common stocks) consistent with the city's
south African invesment restrictions previously adopted.
2. The balance of the portfolio to be invested in fixed
income securities (long and/or short term) , at the
discretion of the Investment Manager;
3. The Investment Manager shall maximize the total rate of
return to the Cemetery and Mausoleum Perpetual Care
Funds consistent with protection of the invested
principal.
SECTION 2. The city Clerk shall certify to the adopting of
this resolution, and thenceforth and thereafter the same shall be in
full force and effect.
APPROVED AS TO FORM:
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Adopted and approved this 27th day of July, 1993
Clef-
I hereby cert1fy that the foregoing Resolution No 8628 (CCS)
was duly adopted by the Clty Councll of the Clty of Santa Monica
at a meetlng thereof held on July 27, 1993 by the followlng
COUDCll vote:
Ayes. Councl1members: Abdo, Genser, Greenberg,
Holbrook, Olsen, Rosensteln,
Vazquez
Noes: Councilmembers: None
Abstaln: Councilmembers: None
Absent: Councllmembers None
ATTEST:
c-_a~1 fQ~
City Clerk!
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