HomeMy WebLinkAbout2019-03-19; City Council; ; Report on Investment Strategies for Corporate Notes� CITY COUNCIL
� Staff Report
Meeting Date:
To:
From:
Staff Contact:
Subject:
March 19, 2019
Mayor and City Council
Scott Chadwick, City Manager
Craig Lindholm, City Treasurer
Treasurer@carlsbadca.gov or 760-602-2473
Report on Investment Strategies for Corporate Notes
Recommended Action
Receive a report on the investment strategies for corporate notes.
Executive Summary
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At the Jan. 8, 2019 City Council meeting, Council Member Bhat-Patel, seconded by Council
Member Hamilton, requested that "the City Manager and staff work with the City Treasurer
regarding shifting investments to companies that are aligned with the City's values but also
have a similar return on investment as companies such as Exxon and Chevron." This report
provides information regarding the City's investment in corporate notes and alternative
investment opportunities.
Discussion
In Jan. 2019 Council asked if there were alternative corporate note investments that could be
incorporated into the city's Pooled Investment Account allocation, potentially replacing
Chevron, Exxon Mobil and Coca-Cola. The request's goal was to align the city investment
strategy with the Climate Action Plan and, if possible, eliminate investments into corporations
involved in the business of fossil fuels and those which did not support healthy lifestyle choices.
The Treasurer for the City of Carlsbad is an elected official and serves in a fiduciary capacity to
invest city funds subject to the prudent investor standard and California Government Code.
The California Debt and Investment Advisory Commission (CDIAC) publishes a document titled
Local Agency Investment Guidelines annually. This publication is available for download at:
www.treasurer.ca.gov/cdiac. These guidelines are intended to assist local officials in the
implementation of existing laws governing the investment of public funds. Pursuant to
Government Code 53600.5, investment priorities are 1. preserving principal, 2. maintaining
liquidity, and 3. achieving a return or yield, in that order. The City Council has these same
fiduciary responsibilities to its citizens as well.
The City of Carlsbad's invested funds are structured to finance its short-term, intermediate
term, and long-term obligations. For example, the city has current and future funding
obligations to provide retirement pension and health benefits for its employees. Additionally,
the city has infrastructure obligations detailed for the next 15 years as shown in the annual
March 19, 2019 Item #4 Page 1 of 4
capital improvement plan. To ensure the city can meet its financial obligations, every dollar
earned must contribute towards meeting its obligations.
Fiscal Analysis
The city's current Investment Policy Statement (IPS) allows up to 30% of the portfolio to be
invested in corporate notes. As of Jan. 31, 2019, corporate notes represented 20.34% of the
portfolio. These corporate notes must be issued by a US entity and have a AA credit rating from
two nationally recognized statistical rating organizations (NRSRO). Fitch Ratings, Inc., Moody's
Investors Service, Inc. and S&P Global Ratings are three examples of an NRSRO. As of the end of
January there were only fifteen issuers of corporate notes that met this credit rating
requirement, limiting the city's ability to fully fund this portion of its asset allocation strategy.
The largest current portfolio allocation is in Government Agencies, at approximately 50%. New
issuances are declining from this sector over recent periods. As a result, reducing potential
investment opportunities at this time is not recommended.
Current Energy Investments
Presently, the city's portfolio owns the following corporate notes:
Company Amount1 Magnitude1
Chevron $14,350,000 Five notes; 1.816% of the entire portfolio
Exxon Mobil $11,250,000 Five notes; 1.423% of the entire portfolio
1. Total energy investment as of Jan. 31, 2019 are $25,600,000, or 3.239% of the entire portfolio.
These corporations have demonstrated strong financial growth over time and have strong
balance sheets. Both firms are investing in alternative and renewable energy solutions:
geothermal, wind, solar projects, and biofuel projects. Their investment into these new
opportunities acknowledges that the future of traditional energy production is rapidly changing.
While incremental changes are already occurring, full-scale deployment will take time due to
the large amounts of funding capital required to implement.
Recommendation: Currently, there are no investment options in the form of sustainable or
renewable energy suppliers that can replace the income potential that this energy investment
allocation currently delivers and meet Local Agency Investment Guidelines. New opportunities
to replace these two traditional firms will continue to be monitored going forward. Meanwhile,
it is recommended the city modify its current Investment Policy Statement, capping the total
portfolio allocation to these energy companies at 4.0% going forward instead of eliminating
them. They are part of the solution to meeting future energy requirements that our country
needs.
Coca-Cola
Presently the city's portfolio owns the following corporate notes:
Company Amount Magnitude
Coca-Cola $5,100,000 Two notes; 0.645% of the entire portfolio
March 19, 2019 Item #4 Page 2 of 4
This corporation owns the fifth most powerful brand in the world according to lnterbrand's
2018 brand rankings. As a producer of a wide number of products they have been actively
changing the composition of their product lineup. Today, carbonated beverages account for
50% of their total sales. Coffee, orange juice, and water make up the other 50%. Coca-Cola is
the largest purchaser of fresh oranges in the world. They have established a 2024 target to
recycle the equivalent of 100% of all plastic used in the manufacturing and transportation of all
products produced.
Recommendation: It is recommended that the two existing positions presently owned are held
to maturity. As the dates of maturity approach for these corporate notes, the company's
progress towards their stated goals will be reviewed prior to any reinvestment.
Additional IPS Recommendations
The Treasurer recommends modifying the city's IPS to allow investment into corporate notes
that have a split credit rating of AA/ A. Under this approach, an investment would need a AA
credit rating from one NRSRO and a A credit rating from the second NRSRO. This differs from
the current requirement to have a AA credit rating from both NRSROs. All investments must still
be a US issuance.
This new guideline would increase the total number of investable corporate notes to 25 firms,
an increase of 11 firms from the current portfolio list. Adopting this change would also provide
a greater opportunity for diversification in the portfolio. Lastly, adopting a split AA/ A credit
rating guideline is still more conservative than the Local Agency Investment Guidelines which
permit investments in corporate notes having a A credit rating or higher.
Next Steps
The recommendations in this report will be brought back to City Council for their consideration
as formal changes to the Investment Policy Statement.
Environmental Evaluation (CEQA)
Pursuant to Public Resources Code Section 21065, receiving a report does not constitute a
"project" within the meaning of CEQA in that it has no potential to cause either a direct physical
change in the environment, or a reasonably foreseeable indirect physical change in the
environment, and therefore does not require environmental review.
Public Notification
This item was noticed in accordance with the Ralph M. Brown Act and was available for public
viewing and review at least 72 hours prior to the scheduled meeting date.
Exhibits
1. Resident email titled "Carlsbad Eyes Fossil Fuel Divest."
March 19, 2019 Item #4 Page 3 of 4
From:
To:
Subject:
Date:
Laura Johnson
Council Internet Email; Manager Internet Email; Treasurer
Carlsbad Eyes Fossil Fuel Divest
Wednesday, January 16, 2019 4:41:20 PM
Carlsbad City Council Members, City Manager, and Treasurer
I am writing in response to an article in the January 14, 2019 San
Diego Union-Tribune titled "Carlsbad Eyes Fossil Fuel Divest."
Exhibit 1
The article indicates that two council members have suggested that
the city's investment policy be revised to exclude investments related to
fossil fuels so that the investment policy is more closely aligned to the
Climate Action Plan. If the $750 million in the investment portfolio were
my personal funds I might apply this line of thought. However, in this
situation I believe that the City Council has a fiduciary responsibility to
invest the city's resources to the highest level possible.
The article sited the California Public Employees' Retirement System
(PERS) as an organization which has adopted "conscious" investment
policies but the article did not go far enough. The result of investing for
social responsibility as opposed to return is that PERS is woefully
underfunded and has even put public agencies in peril of bankruptcy. A
huge part of the reason PERS is underfunded is because their
investment projections simply cannot be met. An individual is
completely free to apply their personal ethics to personal funds but I do
not feel that a city council has that same freedom. However, a socially
responsible instrument with a proven record of anticipated returns in an
equivalent range could be a good compromise to meet the goals of
social/environmental good as well as a fiduciary responsibility.
While a city with a portfolio of $750 million is certainly in no danger of
a large revenue loss by divesting itself of fossil fuel instruments it is also
rather short term thinking. If the council is so secure in its ability to fund
the future perhaps the tax rate collected from residents should be
reduced.
Thank you for your consideration.
March 19, 2019 Item #4 Page 4 of 4
Craig Lindholm
City Treasurer
March 19, 2019
Report on Investment Strategies for
Corporate Notes
Background
•Jan. 19, 2019 Council asked if there were alternative corporate note investments that could be incorporated into the city’s Pooled Investment Account allocation
•The Treasurer for the City of Carlsbad is an
elected official and serves in a fiduciary
capacity to invest city funds subject to the
prudent investor standard and California Government Code
•City Council has these same fiduciary
responsibilities to its citizens as well
Background (cont.)
•Pursuant to Government Code 53600.5,
investment priorities are, in order:
1.Preserving principal
2.Maintaining liquidity
3.Achieving a return or yield
Background (cont.)
•City has current and future funding obligations
to provide retirement pension and health
benefits for its employees
•The city has infrastructure obligations detailed
for the next 15 years as shown in the annual
capital improvement plan
Background (cont.)
•The current Investment Policy Statement (IPS) allows up to 30% of the portfolio to be invested in corporate notes.
•As of Jan. 31, 2019, corporate notes represented 20.34%
•Notes must be issued by a US entity and have a AA credit rating from two nationally recognized statistical rating organizations (NRSRO)
Fiscal Analysis
•As of January, only fifteen issuers of corporate
notes meet this credit rating requirement
•The largest current portfolio allocation is in
Government Agencies, at approximately 50%
•New issuances are declining from this sector
over recent periods
Fiscal Analysis (cont.)
Current Energy Investments
1 Total energy investment as of Jan. 31, 2019 is $25,600,000, or 3.239% of the entire portfolio
•These corporations have demonstrated strong financial
growth over time and have strong balance sheets. Both
firms are investing in alternative and renewable energy
solutions: geothermal, wind, solar projects and biofuel
projects
Company Amount1 Magnitude1
Chevron $14,350,000 Five notes; 1.816% of entire portfolio
Exxon Mobil $11,250,000 Five notes; 1.423% of entire portfolio
•Full-scale deployment will take time due to the large
amounts of funding capital required to implement
•Recommendation: Currently there are no investment options in the form of sustainable or renewable energy suppliers that can replace the income potential that this energy investment allocation currently delivers and meet Local Agency Investment Guidelines.
Current Energy Investments (cont.)
•It is recommended the city modify its current
Investment Policy Statement capping the total
portfolio allocation to these energy companies
at 4.0% going forward instead of eliminating
them
Current Energy Investments (cont.)
Coca-Cola
•This corporation owns the fifth most powerful brand in the world according to Interbrand’s 2018 brand rankings
•They have been actively changing the composition of their product lineup
Amount Magnitude
$5,100,000 Two notes; 0.645% of the entire portfolio
Additional Inquiry
•Today carbonated beverages account for 50% of their total sales
•Coffee, orange juice, and water make up the other 50%
•Coca-Cola is the largest purchaser of fresh oranges in the world
•Established a 2024 target to recycle the equivalent of 100% of all plastic used in the manufacturing and transportation of all products produced
Additional Inquiry (cont.)
Recommendation
•That the two existing positions presently
owned are held to maturity
•As the dates of maturity approach for these
two corporate notes, the company’s progress
towards their stated goals will be reviewed
prior to any reinvestment
Additional IPS Recommendations
•The Treasurer recommends modifying the city’s IPS to allow
investment into corporate notes that have a split credit rating of AA/A
•The new guideline would increase the number of investable
corporate notes to 25 firms, an increase of 11 firms from the current
portfolio list
•Would provide greater opportunity for diversification in the portfolio
•Adopting a split AA/A credit rating guideline is still more conservative
than the Local Agency Investment Guidelines
•Treasurer will return to Council with the annual report and proposed
revisions to the IPS
Thank you
Currently Eligible Corporate Notes
•Apple
•Alphabet, Inc.
•Automatic Data Processing
•BlackRock, Inc.
•Berkshire Hathaway, Inc.
•Colgate-Palmolive Company
•Chevron Corporation
•Exxon Mobil Corporation
•Johnson & Johnson
•3M Company
•Microsoft Corporation
•Toyota Motor Corporation
•Walmart, Inc.
Additional Eligible Corporate Names
•Bank of America Corporation
•Costco Wholesale Corporation
•Cisco Systems, Inc.
•JP Morgan Chase & Company
•Merck & Company, Inc.
•Oracle Corporation
•Public Service Enterprise Group
•Pfizer, Inc.
•Sempra Energy
•U.S. Bankcorp
•VISA, Inc.