HomeMy WebLinkAbout2024-09-24; City Council; Resolution 2024-215RESOLUTION NO. 2024-215
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORN IA, APPROVING THE CITY'S PENSION INVESTMENT POLICY DATED
SEPT.24,2024
WHEREAS, the City Council of the City of Carlsbad, California, has determined that financial
policies are central to a strategic, long-term approach to financial management; and
WHEREAS, on Sept. 12, 2023, the City Council approved the establishment of a what is known
as a Section 115 trust, or the city's Pension Trust, to assist in stabilizing the potential impact of pension
cost volatility on the city's operating budget.
WHEREAS, the City Council adopted a Pension Trust Investment Policy dated Sept. 12, 2023, to
govern the management of the assets in the Pension Trust; and
WHEREAS, the city's Pension Trust, established for the sole purpose of benefiting the general
public, has available funds to invest in accordance with principles of sound treasury management; and
WHEREAS, the city invests funds in accordance with provisions of California Government Code
Section 53600 et seq.; and
WHEREAS, the City Council will review and adopt the Pension Trust Investment Policy at least
annually to determine whether stated investment objectives are still relevant and the continued
feasibility of achieving the same; and
WHEREAS, the City Council sha ll review and adopt this investment policy at a public meeting.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1. That the above recitations are true and correct.
2. That the City Council accepts the Investment Policy dated September 24, 2024 for the
Pension Trust, Attachment A.
Policy No. 98
Date Issued Sept. 24, 2024
Resolution No.
Subject: Pension Trust Investment Policy
Purpose
The city established a Section 115 Trust with Public Agency Retirement Services (PARS) to assist
in stabilizing the potential impact of pension cost volatility on the city’s operating budget. The
city intends to use the trust to pre-fund pension costs and proactively address any unfunded
liability. The city’s goal is to have sufficient assets in the trust to maintain an 80% funded ratio
or status and to fund the additional costs associated with a potential future reduction in
CalPERS discount rate from 6.8% and 6.25%.
Account Name: City of Carlsbad Pension Trust
Investment Authority: Full Investment Authority
Current Assets: $11.1 million
Time Horizon: Long-Term
Target Rate of Return: 6.25%
Communication Schedule: Meetings will be conducted at least once per year
Investment Manager: PFM Asset Management
Investment Objective: “Balanced”
This investment objective is designed to provide a moderate amount of current income with
moderate growth of capital. Investors should have sufficient tolerance for price and return
volatility and substantial periodic declines in investment value. This objective is recommended
for investors with a long-term time horizon.
The strategic asset allocation ranges and tactical targets for this objective are listed below:
Asset Class Range
Benchmark
Target
Fixed Income 35-45%40%
Equities 49-59%54%
Real Estate 4-8%6%
Commodities n/a 0%
Cash n/a 0%
Attachment A
Sept. 24, 2024 Item #1 Page 9 of 14
City Council
POLICY STATEMENT
Pension Trust Investment Policy
Sept. 24, 2024
Page 2
Background
The city provides a defined benefit pension to its employees through the California Public
Employees' Retirement System (CalPERS). CalPERS uses a formula to calculate retiree pensions
based on an employee’s age, earnings, and years of service. It funds these pensions by a
combination of employer contributions, employee contributions and investment earnings. Each
year, CalPERS determines the employer’s contributions based on actual investment returns and
actuarial assumptions including expected investment returns (known as discount rates),
inflation rates, salaries, retirement ages and life expectancies.
In recent years, CalPERS has twice lowered its discount rate, thereby increasing the likelihood of
achieving the target rate of return, but consequently increasing the city’s pension costs. First, at
their Dec. 21, 2016, meeting, the CalPERS Board of Administration voted to lower the CalPERS
discount rate assumption from 7.5% to 7.0% incrementally over three years. This was driven by
poor investment returns during the Great Recession and actuarial assumption changes
increasing the gap between pension assets and liabilities, resulting in the CalPERS funded ratio
falling below desired levels. Then in November 2021, CalPERS completed its quadrennial Asset
Liability Management process, which reviewed investment strategies and actuarial
assumptions. The fiscal year 2020-21 investment gain of 21.3% triggered CalPERS’ Funding Risk
Mitigation Policy, prompting the CalPERS Board to approve another discount rate reduction
from 7.0% to 6.8% at the November 15-17, 2021, meetings. When CalPERS achieves certain
levels of return in excess of their target rate, their policy directs portions of the return to be
used to relieve pressure on the target rate in future periods. Again, while lowering the discount
rate increases the likelihood of CalPERS achieving their target rate of return, the city’s costs
increase as a result.
Over the last six years, the city has taken proactive steps to address pension contribution
volatility and manage the unfunded liability. Since fiscal year 2016-17, the city has contributed
$56.4 million in additional discretionary payments to CalPERS, which has significantly helped
increase the plan’s funded status. While contributing additional funds to CalPERS saves the city
future interest costs, there is also a higher risk of pension rate volatility during periods of poor
investment performance by CalPERS. To mitigate this risk as well as the potential for CalPERS to
further reduce its discount rate, the city has established a Section 115 Trust.
Statement of policy
SECTION 1: OVERVIEW
This document defines the investment policy, guidelines and performance objectives applicable
to the assets of the City of Carlsbad’s Section 115 Trust. The goal of this Policy is to create an
investment framework within which the assets can be actively yet prudently managed.
Sept. 24, 2024 Item #1 Page 10 of 14
Pension Trust Investment Policy
Sept. 24, 2024
Page 3
The purpose of this document is threefold:
• First, it will set forth an investment structure for managing the Portfolio assets. This
structure is expected to produce an appropriate level of overall diversification and total
investment return over the investment time horizon.
• Second, it will serve to encourage effective communications between the organization
and parties involved with investment management decisions.
• Third, it will provide a framework to measure ongoing investment performance.
Within the constraints imposed by this Policy, Investment Managers are expected to comply
with all applicable fiduciary and due diligence requirements under the “prudent investor” rules,
which state: “Investments shall be made with judgment and care, under circumstances then
prevailing, which persons of prudence, discretion and intelligence exercise in the management
of their own affairs, not for speculation, but for investment, considering the probable safety of
their capital as well as the probable income to be derived.” All applicable laws, rules and
regulations from various local, state, federal and international political entities that may impact
the Portfolio are to be adhered to.
SECTION 2: DIVERSIFICATION
The Investment Manager is responsible for maintaining the balance between the various asset
classes based on the investment objective’s strategic asset allocation. As a general policy, the
Investment Manager will maintain reasonable diversification at all times by asset class, credit
quality, issuer, sector, industry, and country.
The following parameters shall be adhered to in managing the portfolio:
Fixed Income Assets
• The fixed income investments are to maintain intermediate-term average weighted
duration, between three and seven years.
• At the time of purchase, no single fixed-income issuer shall exceed 2% of the total market
value of the Portfolio, except for U.S. Treasury or Agency obligations.
• The direct high-yield portion shall constitute no more than 10% of the total market value
of the Portfolio.
• Hedged fixed-income positions shall constitute no more than 10% of the total market
value of the Portfolio.
Equity & Growth Assets
• The domestic equity investments are expected to be diversified at all times by size,
industry, sector, and style (Large Cap, Mid Cap, and Small Cap).
Sept. 24, 2024 Item #1 Page 11 of 14
Pension Trust Investment Policy
Sept. 24, 2024
Page 4
• At the time of purchase, no individual equity security shall exceed 3% of the total market
value of the Portfolio.
• The international equity investments (including emerging markets) shall constitute no
more than 25% of the total market value of the Portfolio.
• The real estate investments shall be captured through the use of diversified mutual funds
or ETFs investing in REITs; and shall constitute no more than 15% of the total market value
of the Portfolio.
• The commodities investments shall be captured through the use of diversified mutual
funds or ETFs; and shall constitute no more than 10% of the total market value of the
Portfolio.
• Hedged equity positions shall constitute no more than 10% of the total market value of
the Portfolio.
SECTION 3: PERMITTED ASSET CLASSES AND SECURITY TYPES
Fixed Income & Cash Equivalent Investments:
• Domestic Certificates of Deposit (rated A-1/P-1 or better)
• Domestic Commercial Paper (rated A-1/P-1 or better)
• Floating Rate Notes
• Money Market Mutual Funds
• U.S. Treasury Bonds, Bills and Notes
• U.S. Agency (and Instrumentality) Discount Notes, Notes, and Bonds
• Treasury Inflation-Protected Securities (TIPS)
• Municipal Bonds and Notes
• Corporate Bonds
• Mortgage-Backed Bonds (MBS)
• Asset-Backed Bonds (ABS)
• High-Yield Bonds (rated B-/B3 or better)
• Dollar denominated Foreign Bonds and Notes
• Bond Mutual Funds
Equity Investments:
• Common & Preferred Stocks
• American Depository Receipts (ADRs)
• Domestic and International Equity Mutual Funds (Open and Closed)
• Emerging Market Equity Funds or Exchange Traded Funds (ETFs)
Alternative Investments:
• Commodities Mutual Funds or Exchange Traded Notes (ETNs)
• REIT Investment or Pooled Strategy or Fund of REITs
• Registered Hedge Funds or Hedge Fund of Funds
Sept. 24, 2024 Item #1 Page 12 of 14
Pension Trust Investment Policy
Sept. 24, 2024
Page 5
SECTION 4: PROHIBITED ASSET CLASSES AND TRANSACTIONS
The Investment Manager is prohibited from purchasing or holding any of the following types of
investments:
• Partnerships unless investing in Master Limited Partnerships invested in a mutual fund
and limited in scope and allocation of Portfolio based on asset class limitations of table
above
• Letter stock and other unregistered securities; physical commodities or other commodity
contracts; and short sales or margin transactions
• Investments in the equity securities of any company with a record of less than three years
of continuous operation, including the operation of any predecessor
• Investments for the purpose of exercising control of management
• Direct or indirect exposure to cryptocurrencies
• Leveraged securities, other than registered Hedged Equity and Hedged Fixed Income
positions
SECTION 5: DUTIES AND RESPONSIBILITIES
1) CITY OF CARLSBAD CITY COUNCIL
a) Establish, approve, and maintain investment objectives, guidelines, and policies.
b) Appoint Investment Managers who can be reasonably expected to adhere to the
investment guidelines and meet the investment objectives as established.
c) Monitor the investment performance of the Portfolio and compare actual investment
performance relative to an appropriate benchmark index given the stated investment
guidelines and objectives set forth in this Policy.
d) Conduct a formal review of the Portfolio’s asset allocation, investment structure and
performance annually or more frequently as the need arises.
e) Periodically review the Portfolio performance against objectives.
2) INVESTMENT MANAGER
The Investment Manager will be responsible for carrying out the activities related to the
Portfolio in accordance with the Policy including:
a) Manage the day-to-day investment of Portfolio assets in accordance with the Policy
guidelines and objectives included herein.
b) Exercise full investment discretion and prudence in the selection and diversification
of investments.
c) Promptly bring to the attention of the City Treasurer or designee any investment that
is subsequently downgraded and fails to meet the quality guidelines, along with a
recommendation of retention or disposal.
Sept. 24, 2024 Item #1 Page 13 of 14
Pension Trust Investment Policy
Sept. 24, 2024
Page 6
d) Provide on a quarterly basis the following investment reporting:
(i) Year-to-date rate of return
(ii) Annualized one, three, five, etc. rates of return
SECTION 6: INVESTMENT POLICY STATEMENT REVIEW
The City Council will review and adopt this Investment Policy Statement at least annually to
determine whether stated investment objectives are still relevant and the continued feasibility
of achieving the same. It is not expected that the Policy will change frequently. In particular,
short-term changes in the financial markets should not require adjustments to the Policy.
If at any time the Investment Manager finds the above guidelines too restrictive or possibly
injurious to investment returns, they should communicate that information immediately to the
City Council.
Sept. 24, 2024 Item #1 Page 14 of 14