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HomeMy WebLinkAboutSubmittal-Back Up Document-Financial Advisor AnalysisR.E. 3 Resolution for Investment Advisory and Portfolio Advisory Services Analysis Background The City of Miami, (the "City"), in accordance with its Investment Policy, "(the "Policy") is tasked with investing City funds in investments that preserve principal, minimize risk, provide a reasonable return, which is accomplished through a diversified portfolio. Based on a review of the City's investment for the last ten fiscal years, approximately 93% of the City's long-term investments were in Federal Agencies. Additionally, approximately, 97% of the City's short-term investments were in Commercial Paper. This strategy has resulted in a lack of diversification and exposure to interest rate risk and excessive extension risk. Additionally, when compared to industry benchmarks and best practices, the portfolio has underperformed. Furthermore, during the 2013 fiscal year, with key vacancies (the Finance Director, the Treasurer, and Finance Manager), following prior investment strategy, the City's portfolio was invested into long-term, callable, Federal Agencies. As a result of the decline in interest rates of Federal Agencies, to avoid a loss on sale, the City has held its securities while closely monitoring the securities and the City's cash needs. The City currently has a position (Finance Manager/Treasury Manager) in the budget responsible with evaluating, monitoring, reviewing, and managing the City's investments. The last time this position was filled, the salary and related fringe benefits were approximately $165,000. This excludes additional costs as training, development, and other related costs. A service such as Bloomberg, which would be necessary to effectively review the status of current investments and evaluate potential investments costs are approximately $24,000 per year. Analysis The City has been evaluating the investment strategies and process. The evaluation entailed analyzing and reviewing hiring a Finance Manager or contracting with a Financial Advisor who would act as an extension of staff and perform the functions of the Finance Manager. With the latter, oversight, authority, and responsibility of the City's portfolio would still remain with the City. The Financial Advisor, (the "Advisor") would be responsible for evaluating investment options, with approval from the City, implement investment strategies that would minimize risk, preserve principal, meet or exceed governmental investment best practices key performance indicators, while maximizing return. 11-WITTED 'NT(' ' D ���1CFQET: 14- 6uGif- S03, mitrU1- NiCic Vp DoLoyne1+— 10 43.aoiq. The City's investment strategy has primarily been to invest in Federal Agencies and hold the investment until maturity. This limits flexibility with regards to liquidity, response to changes in the economy and effectively managing cash flow needs. Conversely, the Financial Advisor would develop an investment strategy that leverages their resources, including the competitive purchasing/selling of investments with over 40 approved brokers. They would provide significant greater market access with over $2.0 billion in daily trades and improve cash flow analysis timing. Historically, the Financial Advisors composites have outperformed benchmarks indicative of the City's current portfolio management strategies. The different options were evaluated by the Finance Committee during several meetings. On August 28, 2014, the Finance Committee approved the Financial Advisor concept and the piggyback contract with PFM. Furthermore, upon approval by the City Commission, (the "Commission"), the Office of Management and Budget ("OMB") will freeze the Finance Manager position and will remove it from the Finance Department's budget during the mid -year amendment. The related funding would be used to fund the Financial Advisor. Below is cost comparison of the investment options. Financial Advisor City of Miami Investment Option Cost Comparison 175,500 (1) Finance Manager Bloomberg Other related Total annual cost (1) Based on portfolio of $270 million and 6.5 basis points (2) Based on cost of most recently filled position $ 165,000 $ 24,000 $ 5,000 $ 194,000 (2) In addition to the cost comparison, consideration was given to resources available to the Financial Advisor versus the Finance Manager. The Financial Advisor will provide more experience, better risk management, greater competitiveness, significant market access, credit research, better liquidity management, and historical outperformance. The Financial Advisor's engagement staff with the City of Miami will consist of over 30 professionals in various disciplines including portfolio management, arbitrage rebate, investment advisory, accounting, and compliance. Additionally, the contract with the Financial Advisor may be terminated with a 30 day notice. MOTH Conclusion The City's request to contract with a Financial Advisor to assist the City in managing its portfolio is based on an extensive review of past investment strategies, current circumstances and what option provides the opportunity to safeguard city funds, minimize risk, ensure compliance, access to higher quality of investments, and achieving or exceeding government investments best practices. Based on the analysis performed, the Financial Advisor would provide the best opportunity for the City to meet its investment goals and objectives with no additional costs. Based on the most current year, the Financial Advisor manages approximately $90 billion in assets for over 230 municipalities nationwide. The Financial Advisors have over 30 years of experience managing public funds. Below is a summary of advantages, previously discussed, of contracting a Financial Advisor. 1. No additional cost to the City; Financial Advisor would be funded from existing budget; the Finance Manager position, tasked with investment responsibilities, would be removed from budget. 2. Higher investment yield with lower risk, improved liquidity, and shorter duration or maturity. 3. 30 day termination. 4. Access to resources; consisting of over 30 professionals in various disciplines. 5. Ensure compliance with Investment Policy. The City is always evaluating its options and which would provide the best opportunity. An example of this is the City's Cost Allocation Plan, ("CAP") required under OMB Circular A-87. Historically, this was prepared by a vendor at an annual cost of approximately $25,000 per year. During the 2014 fiscal year, the City acquired the required software, training, and software maintenance for approximately, the same cost previously paid to the vendor. With a onetime investment, the City will currently, and prospectively, prepare the CAP in-house. SUBMTTED INTO THE DUD ,`' 'i �i nn l i,� riT,M n Li 3 J 004-33*I f.