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HomeMy WebLinkAbout2023-09-12; Council Policy No. 98 - Pension Trust Investment PolicyCity Council POLICY STATEMENT Subject: Pension Trust Investment Policy • Purpose Policy No. Date Issued 98 Sept. 12, 2023 Resolution No. 2023-240 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 Account Number: XXXXXXXX Investment Authority: Full Investment Authority Current Assets: $0 Time Horizon: Long-Term Target Rate of Return: 6.25% Communication Schedule: Meetings will be conducted at least once per year Investment Manager: Vanguard Institutional Advisory Services 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: Benchmark Asset Class Range Target Fixed Income 35-45%40% Equities 49-59%54% Real Estate 4-8%6% Commodities n/a 0% Cash n/a 0% Pension Trust Investment Policy Sept. 12, 2023 Page 2 Background The city provides a defined benefit pension to its employees through the California Public Employees' Retirement System {CalPERS). Cal PERS 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 Cal PERS Board of Administration voted to lower the Cal PERS 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 Cal PERS 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 Cal PERS 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 Cal PERS 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 Cal PERS 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 215 Trust. The goal of this Policy is to create an investment framework within which the assets can be actively yet prudently managed. Pension Trust Investment Policy Sept. 12, 2023 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. E.9.!!l!Y. & 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). Pension Trust Investment Policy Sept. 12,2023 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 Pension Trust Investment Policy Sept. 12, 2023 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. Pension Trust Investment Policy Sept. 12, 2023 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.