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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 CA Review W l,, 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.