City of Culver City, California
Agenda Item Report
Meeting Date: 01/24/2011 Item Number: J-1
JOINT CITY COUNCIL/REDEVELOPMENT AGENCY BOARD AGENDA ITEM:
Approval of a Three Party Professional Services Agreement with Cutwater Asset
Management to Provide Investment Advisory and Portfolio Management Services
Contact Person/Dept.:
Jeff Muir/Finance Department
Phone Number:
(310) 253- 5865
Fiscal Impact: Yes [x] No [] General Fund: Yes [x] No []
Public Hearing: [] Action Item: [x] Attachments: []
Commission Action Required: Yes [] No [X] Date: _______________
Public Notification: (E-Mail) Meetings and Agendas – City Council (01/19/11); (E-Mail)
Meetings and Agendas – Redevelopment Agency (01/19/11); (E-Mail) Cutwater Asset
Management (01/19/11)
Department Approval:
Jeff Muir (01/13/11)
City Attorney Approval:
Carol Schwab (by H. Baker) (01/19/11)
Chief Financial Officer Approval:
Jeff Muir (01/13/11)
City Manager Approval:
John M. Nachbar (01/19/11)
RECOMMENDATION:
Staff recommends the City Council and Agency Board approve a three party
professional services agreement with Cutwater Asset Management to provide
investment advisory and portfolio management services.
BACKGROUND:
Pursuant to the authority granted the City Manager by the City Charter, the City
Manager has appointed the Chief Financial Officer as City Treasurer. Therefore, the
Chief Financial Officer is responsible for the management of the cash and
investment portfolio for the City and Redevelopment Agency. The combined
investment portfolios for the City and Agency at the end of Fiscal Year 2009/2010
were approximately $100 million. While the City and Agency have a significant
amount of cash and investments at any one time, the majority of this is reserved for
particular purposes or projects. Cash to cover short-term operations is kept highly
liquid, while the remainder can be invested with a longer-term approach.
Prior to the approval of the current City Charter by the voters in 2006, there was an
elected City Treasurer until April 8, 2008 responsible for the investment portfolio.
During this time there was also a Deputy City Treasurer that assisted with both the
day-to-day management of the City Treasurer’s Office as well as cash and City of Culver City, California
Agenda Item Report
investment management. With the elimination of the elected City Treasurer and
creation of the Chief Financial Officer position, there continued to be a position
dedicated to the day-to-day management of the investment portfolio and certain
other cash related functions.
With the collapse of the economy and the subsequent budgetary issues for Culver
City, departments were asked to consider ways to reduce costs. One of the
concepts for the Finance Department was the elimination of the staff position
dedicated to the management of the investment portfolio and outsourcing this
function. It was anticipated that at least 50% savings could be achieved by
outsourcing this function versus the dedicated positions. There are numerous cities,
counties and other public agencies that outsource this function to a firm that employs
investment professionals that are 100% dedicated to portfolio management. This
was proposed and ultimately approved by the City Council in the Fiscal Year
2010/2011 Budget.
The Finance Department released a Request for Proposals in September 2010 with
responses due on September 30, 2010. Seventeen firms submitted bids. The firms
that responded, in alphabetical order, were:
1. American Beacon Advisors
2. BlackRock
3. BLX Group LLC
4. Chandler Asset Management
5. Cutwater Asset Management
6. Davidson Fixed Income Management
7. Federated Investors, Inc.
8. First Western Capital Management
9. HighMark Capital Management
10. LoganCircle Partners
11. Main Street Capital Advisors
12. Pacific Investment Management Company LLC
13. Payden & Rygel
14. Ramirez Asset Management
15. StoneRidge Investment Partners
16. The PFM Group
17. Wells Capital Management
The scope of services anticipated in the RFP included:
1. Managing the City and Agency portfolios with discretionary authority.
2. Assisting the City/Agency with cash flow/maturity analysis.
3. Providing credit analysis of investment instruments in portfolio.
4. Providing monthly/quarterly/annual reporting City/Agency funds managed.
5. Attending quarterly meetings (in person or via teleconference) with City staff and
Investment Committee. City of Culver City, California
Agenda Item Report
6. Evaluating market risk and developing strategies that minimize the impact on
the portfolio.
7. Providing assurance of portfolio compliance with applicable policies and laws.
8. Establishing an appropriate performance benchmark.
9. Ensuring that the portfolio structure matches the City/Agency objectives.
10. Reviewing the City’s Investment Policy and making recommendations for
change as appropriate.
11. Assisting the City in establishing an authorized broker/dealer list pursuant to the
Investment Policy.
Pursuant to Culver City Municipal Code Section 3.07.085, the City may award
contracts in any amount for professional services without complying with formal bid
requirements provided the contract is based upon competitive quotations, whenever
feasible. A professional service is a service for which the City is contracting for the
skill, integrity, judgment, and/or special technical ability of the professional.
Investment advisory and portfolio management services are considered a
professional service.
DISCUSSION:
Because of the large number of proposals, an initial ranking was completed based
on price. Based on this ranking, staff completed an in-depth review of the top five
proposals that included:
1. American Beacon Advisors
2. BLX Group LLC
3. Cutwater Asset Management
4. Davidson Fixed Income Management
5. Main Street Capital Advisors
Finance Department staff reviewed all proposals and evaluated them based on:
• Understanding of the work required by the City and the overall investment
program objectives.
• Proposed approach to managing the portfolio
• Quality, clarity and responsiveness of the proposal
• Experience and qualifications
• Recent experience in managing portfolios of similar sized California cities.
• References
• Background of assigned individuals
• Proposed Compensation
After careful consideration, it was determined that Cutwater Asset Management
(Cutwater) is the firm that can provide the greatest level of service and expertise to
the City and Agency. City of Culver City, California
Agenda Item Report
American Beacon Advisors manages significant equity, however they appear to
handle almost exclusively institutional accounts. They did not list any references
where they provided discretionary portfolio management to a city government in any
state. Staff did not feel they were qualified to provide the services required.
BLX Group LLC does have California city government clients, however the portfolio
size they manage is smaller than the other top five proposers, and the internal
resources of the company were not as broad as the top two proposers. Main Street
Capital Advisors also provided a good response and has existing clients where they
perform the requested services. However, the majority of the portfolio managed by
Main Street is concentrated in one client. Davidson Fixed Income Management also
has a number of city clients where they provide the services requested. However,
they are based in Oregon and the majority of their client base appears to be located
in the Oregon/Washington area. While they do work for the State of California, the
only other California client reference they provided was a water district. Staff felt
that while BLX Group LLC, Davidson Fixed Income Management, and Main Street
Capital Advisors could perform the services, the expertise and demonstrably larger
client base for discretionary portfolio management of Cutwater made it the best
alternative for the City.
Cutwater has provided fixed income portfolio management services primarily to the
public sector for 20 years. They have nearly $42 billion in fixed income assets under
management for governmental clients in California and throughout the country.
Cutwater is a leading provider of investment management services nationwide and
specializes in investment strategies for operational funds, capital project funds, self
insurance funds, bond proceeds, and local government investment pools. Their
California client list includes cities such as Arcadia, Lancaster, Murrieta, Rancho
Cordova, Newport Beach, Lathrop, Westminster, San Pablo, San Mateo, San Rafael
and Poway.
Cutwater staff is experienced and knowledgeable of the California Government
Code Section 53601 which restricts how local agency funds can be invested. Our
main representative is located in San Diego, so quarterly, in-person meetings can be
accommodated with no additional travel costs. They are a full-service firm, meaning
they do not engage outside parties.
Cutwater will receive compensation for its investment management activities solely
through direct advisory fees paid by the City. Cutwater does not have any ‘soft
dollar’ arrangements with brokers. Investment transactions are coordinated through
the City’s custodial accounts with Union Bank. While Cutwater will be authorized to
make certain investment decisions, they will never have custody or possession of
City funds.
The services provided by Cutwater will include a careful analysis of the City’s current
and projected cash flow needs. Based on this analysis, the portfolio can be City of Culver City, California
Agenda Item Report
efficiently invested in securities with proper and varying durations to ensure the
safety and liquidity needs of the City and Agency are met, while maximizing the
available yield within these constraints. Staff does not have the expertise that
Cutwater does in analyzing and researching investments, particularly in the area of
corporate notes. Quarterly investment reporting will greatly improve, and staff will
only need to provide oversight to the investment function. More efficient investment
of the portfolio will be achieved with Cutwater, and additional yield will be picked up
that would not have otherwise been achieved. While there is a cost for Cutwater’s
services, the Chief Financial Officer believes the additional yield will exceed the cost
of the agreement over the long term.
FISCAL ANALYSIS:
Cutwater’s annual fee schedule is all-inclusive and is as follows:
Assets up to and including $60 million……………….0.80%
Assets over $60 million…………………….…………...0.60%
The combined portfolio for the City and Agency is over $100 million. Therefore the 6
basis point fee would apply. With a portfolio of $100 million, for example, the annual
cost would be $60,000. The City will be invoiced monthly. The total cost of the
position that was eliminated in the Fiscal Year 2010/2011 budget was over $150,000
annually. Therefore the 50% savings assumption will be exceeded. The monthly fee
will be split accordingly between the City and Redevelopment Agency based on the
total share of the value of the portfolio for the period being invoiced.
MOTION:
That the City Council and Agency Board:
1. Approve a three party professional services agreement with Cutwater
Asset Management; and
2. Authorize the City Attorney and Agency General Counsel to
review/prepare the necessary documents; and,
3. Authorize the City Manager/Executive Director to execute such documents
on behalf of the City and Agency.