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SR 09-27-2016 3J Ci ty Council Report City Council Meeting : Septembe r 27, 2016 Agenda Item: 3.J 1 of 4 To: Mayor and City Council From: Gigi Decavalles -Hughes, Director , Finance Department, Revenue Subject: Award Contract with RNC Capital Management LLC to Provide Investment Management Services Recommended Action Staff recommends that the City Council au thorize the City Manager to negotiate and execute a five -year professional services agreement with RNC Capital Management LLC, a California -based company, to provide investment management services for the Cemetery and Mausoleum Perpetual Care Funds. Fees depend on the value of the funds under management and additional pass -through amounts for investments in certain instruments . Based on the value of the portfolio as of June 30, 2016, staff estimates annual fees would be approximate ly $69,000 . Executive S ummary The City requires consulting services to manage investment of the Woodlawn Cemetery and Mausoleum perpetual care funds, which are subject to different requirements than other City funds. Council approved Nelson Capital Management (Nelson Capital) a s the investment manager in June 2014. RNC Capital Management LLC (RNC) served as the former investment manager, from 1992 through 2014. Following operational and ownership changes at Nelson Capital that affect the consultant’s ability to meet City needs , staff recommends that the City enter into a new agreement with RNC Capital for perpetual care fund investment management. The new contract would be for a total of five years, ending in 2021, with a $69,000 estimated annual cost . Background The City o wns and operates Woodlawn Cemetery and Mausoleum. A portion of the sale of each burial plot, crypt, or niche is set aside for perpetual care services and is deposited into the Cemetery or Mausoleum p erpetual care fund, as appropriate. The income from the se funds is used to pay for perpetual care costs. Perpetual care funds have a distinct set of investment guidelines, which are set by Council rather than by 2 of 4 State law as is the case for other City investments, and which therefore require the specialized i nvestment expertise and continuous monitor ing of an investment manager. RNC managed the City’s investments for the Cemetery and Mausoleum perpetual care funds from 1992 until 2014 . On April 8, 2014 , Council authorized the City’s current agreement with N elson Capital following a c ompetitive process (Attachments A, B ). The current agreement provides a term o f five years, ending in 2019. Discussion Staff recommended Nelson Capital as the firm best able to meet the City’s needs following the 2014 Request for Proposal process. Specific decision factors included Nelson Capital’s approach to developing an investment plan for the portfolio consistent with the Cemetery and Mausoleum’s long -term goals, the ability to tailor the portfolio to meet these goals, a nd the firm’s expertise in the areas of socially responsible investing. At the time of the agreement, Nelson Capital was a wholly owned but separately operated subsidiary of Wells Fargo Bank. In May 2016, Nelson Capital advised the City that it would mer ge into the Wells Fargo Private Bank Wealth and Management Group (Wells Fargo) as of June 30, 2016. This change would require the City to modify and re -sign the agreement, as Nelson Capital no longer exists as an entity, and provides the option to reconsi der and potentially terminate the agreement. The change would also result in the Cemetery and Mausoleum portfolio and the City’s overall portfolio being handled by the same custodian. After a review and analysis of the changes that would occur under new management, and ta king into consideration the preference to maintain some diversification in the City’s various investment activities, staff recommends that the City enter into a new agreement rather than transferring the current contract. Staff further re commends that the City enter into a new agreement with RNC Capital Management LLC (RNC). The factors leading to the selection of Nelson Capital no longer apply following the elimination of Nelson Capital and the departure of the Senior Portfolio Manager responsible for managing these funds . Staff therefore recommends that the City terminate its current agreement and award the contract for investment services to RNC , based on the strength of its proposal and long -term, successful relationship with the 3 of 4 Cit y. RNC was the second ranked firm in the June 2014 competitive process, and managed the Cemetery and Mausoleum portfolios from 1992 through 2014. RNC has agreed to honor its 2014 proposal terms, including a fee at the current rate of 0.6% of the value of the portfolio. The term of the contract w ould be five years. Vendor Selection Staff created a qualified list of vendors to provide perpetual care fund investment services through the 2014 competitive process. Due to this recent process, s taff was able to select from a n existing qualified list of vendors, rather than reissuing a request for proposals . RNC ’s proposal was the second choice of the S election C ommittee out of six bidders in 2014 (Attachment C ), and has a strong record of investment performa nce. As a former manager of the Cemetery and Mausoleum Perpetual Funds from 1992 through 2014 , RNC is very familiar with the goals and objectives of the portfolio , including the socially responsible guidelines. RNC’s experience during its tenure included implementing prior divestment of City funds from South Africa, Myanmar, and Arizona based companies , and the current policy of fossil fuel divestment. RNC currently manages over $4 billion in assets. Financial Impacts and Budget Actions The annual fee for the investment management services will not change from the current rate of 0.6% of the value of the portfolio. Certain additional pass -through fees could apply if investments are made in certain products , such as mutual funds. The value of the accou nt as of June 30, 2016 was approximately $11.5 million. Therefore, annual fees at the current portfolio value would be approximately $69,000 ($11.5 million x 0.6%). Fees in subsequent years will vary based on the value of the investment portfolio. Funds are available in the FY 2016 -17 budget in division 37641. The agreement will be charged to 37641.555060. Future funding is contingent on Council approval and budget adoption. 4 of 4 Prepared By: David Carr, Assistant City Treasurer Approved Forwarded to Co uncil Attachments: A. April 8, 2014 Staff Report B. January 7, 2014 Request for Proposals C. RNC Proposal Cemetery and Mausoleum Perpetual Care Funds - City of Santa Monica http://www.smgov.net/departments/council/agendas/2014/20140408/s2014040803-D.htm [9/20/2016 4:31:10 PM] City Council Report City Council Meeting: April 8, 2014 Agenda Item: 3-D To: Mayor and City Council From: Gigi Decavalles-Hughes, Director of Finance Subject: Cemetery and Mausoleum Perpetual Care Funds Investment Manager Agreement with Nelson Capital Management Recommended Action Staff recommends that the City Council authorize the City Manager to negotiate and execute a five-year professional services agreement with Nelson Capital Management, LLC, a California-based company, to provide investment management services for the Cemetery and Mausoleum Perpetual Care Funds. Fees for this contract are determined as a percentage of the value of the funds under management. Based on the value of the portfolio as of January 31, 2014, annual fees would approximate $63,000. In addition, there could be some additional pass-through fees for investments in certain instruments such as mutual funds. Executive Summary The City owns and operates Woodlawn Cemetery and Mausoleum. A portion of the sale of each burial plot, crypt, or niche is set aside for perpetual care services and is deposited into the Cemetery or Mausoleum Perpetual care fund, as appropriate. The income from these funds is used to pay for perpetual care costs. The principal can only be used for investment purposes. Staff recommends the execution of a contract with Nelson Capital Management to provide investment management services. Nelson Capital Management is a wholly owned subsidiary of Wells Fargo and Company and part of the Wells Fargo Asset Management group. The annual fee would be calculated at 0.6% of the value of the portfolio. The term of the contract would be five years. Background RNC Genter Capital Management (RNC ) has been the investment manager for the Cemetery and Mausoleum Perpetual Care funds since 1992. The City’s current agreement with RNC was authorized by Council on February 24, 2009 . The agreement provides a term of three years followed by two options to extend the agreement by one additional year each. The First Modification of the agreement was executed in May 2012 extending the agreement to March 23, 2013. On March 12, 2013, the term of the agreement was extended to March 23, 2014. On February 25, 2014 , Council authorized an extension of the term of the agreement to June 23, 2014 to allow for completion of the RFP process for investment management services. Discussion Investment guidelines for the perpetual care funds, which are set by the City Council, require retention of an investment manager for these funds since, unlike the City’s investment portfolio, a significant portion of the perpetual care funds are invested in equities, which require a degree of investment expertise and continuous monitoring not otherwise available to City staff. Cemetery and Mausoleum Perpetual Care Funds - City of Santa Monica http://www.smgov.net/departments/council/agendas/2014/20140408/s2014040803-D.htm [9/20/2016 4:31:10 PM] Consultant Selection A Request for Proposal (RFP) for banking services was posted on the City’s online bidding website in January 2014. The following six firms submitted proposals: · Angeles Advisors, LLC · Intergenerational Capital Management · Living Benefits Incorporated · Nelson Capital Management/Wells Fargo Asset Management · PFM Asset Management, LLC · RNC Genter Capital Management A panel composed of Finance and Public Works staff evaluated the proposals on the basis of City purchasing guidelines and the following criteria: · Experience and qualifications of firm and individuals that would be assigned to the account; · Record of investment performance; · Recommended approach to management of portfolio; · Familiarity with all applicable regulations; and · Fees As a result of the evaluation, the panel recommends Nelson Capital Management as best able to provide the full range of services that meet the City’s needs. Specific decision factors included Nelson Capital’s approach to developing an investment plan for the portfolio consistent with the Cemetery and Mausoleum’s long term goals, the ability to tailor the portfolio to meet these goals, and their expertise in the areas of socially responsible investing. The firm has authored papers in the areas of fossil fuel divestment and has a current strategic portfolio for “extraction free” investing. Additionally, the firm is signatory to the United Nations Principles for Responsible Investing (UNPRI), The Carbon Disclosure Project (CDP) and The Forest Footprint Disclosure (FFD). It currently manages over $1 billion in assets with socially responsible investing and sustainable mandates Financial Impacts & Budget Actions The annual fee for the investment management services will be 0.6% of the value of the portfolio. Certain additional pass through fees could apply if investments are made in certain products such as mutual funds. The value of the account as of January 31, 2014 was approximately $10.5 million. Therefore, annual fees at the current portfolio value would be approximately $63,000 ($10.5 million x 0.6%). Fees in subsequent years will vary based on the value of the investment portfolio. Funds are available in the FY 2013-14 budget in division 37641. The agreement will be charged to 37641.555060. Future funding is contingent on Council approval and budget adoption. Cemetery and Mausoleum Perpetual Care Funds - City of Santa Monica http://www.smgov.net/departments/council/agendas/2014/20140408/s2014040803-D.htm [9/20/2016 4:31:10 PM] Prepared by: David Carr, Assistant City Treasurer Approved: Forwarded to Council: Gigi Decavalles-Hughes Director of Finance Rod Gould City Manager Reference:    Agreement  No. 10366   (CCS)