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HomeMy WebLinkAboutMINUTES - 02082011 - C.80RECOMMENDATION(S): ADOPT County of Contra Costa Post-Employment Health Care Plan Investment Policies and Guidelines, as recommended by the Post Retirement Health Benefits Trust Agreement Advisory Body. FISCAL IMPACT: The result of the recommendations herein, if implemented, will have a positive impact on the County's Other Post Employment Benefit (OPEB) liability and consequently overall fiscal stability and ability to deliver services. BACKGROUND: On December 14, 2010 the Board of Supervisors adopted Resolution No. 2010/579. The resolution provided for the transfer of assets from the County's Post Retirement Health Benefits Trust to the Public Agencies Retirement Services (PARS) Public Agencies Post-Retirement Health Care Plan Trust. In summary, the action authorized adoption of the PARS Trust, authorized the transfer of plan assets held in the County's Post APPROVE OTHER RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE Action of Board On: 02/08/2011 APPROVED AS RECOMMENDED OTHER Clerks Notes: VOTE OF SUPERVISORS AYE:John Gioia, District I Supervisor Gayle B. Uilkema, District II Supervisor Mary N. Piepho, District III Supervisor Karen Mitchoff, District IV Supervisor Federal D. Glover, District V Supervisor Contact: Lisa Driscoll, County Finance Director (925) 335-1023 I hereby certify that this is a true and correct copy of an action taken and entered on the minutes of the Board of Supervisors on the date shown. ATTESTED: February 8, 2011 David J. Twa, County Administrator and Clerk of the Board of Supervisors By: June McHuen, Deputy cc: C.80 To:Board of Supervisors From:David Twa, County Administrator Date:February 8, 2011 Contra Costa County Subject:County of Contra Costa Post-Employment Health Care Plan - Investment Policies and Guidelines Document BACKGROUND: (CONT'D) Retirement Health Benefits Trust, directed that future contributions be made to the PARS Trust, and authorized the Plan Administrator (County Treasurer-Tax Collector) to take whatever actions are required to administer the County's PARS plan(s). The final action required is to formally establish an investment policy and guidelines for the investment of the County's other post employment benefit assets. The Investment Policies and Guidelines Document (the "Document") is attached. The Document provides for the investment of the trust fund (the "Trust") of the Contra Costa County Post-Retirement Health Benefits Plan (the "Plan"). The purpose of the Document is to assist the Board and the investment managers it employs in effectively supervising, monitoring and evaluating the investment of the Plan's portfolio. The investment of the assets for the Trust shall be in accordance with applicable law. The Document defines the responsibilities, policies and guidelines for investment managers, including reporting requirements, investment objectives, asset allocations, investment guidelines, prohibited investments and the fund selection process. The County has hired HighMark Capital Management, an investment advisor and subsidiary of Union Bank N.A., Trustee of the Public Agency Retirement Systems' Public Agencies Post-Retirement Health Care Plan Trust, to manage the Plan's portfolio beginning effectively January 2011. The Document serves as a contract for services between the County and the HighMark Capital Management. CONSEQUENCE OF NEGATIVE ACTION: County will not be able to provide investment policies and guidelines to Investment Advisor which will delay specified investments and negatively impact future earnings. CHILDREN'S IMPACT STATEMENT: None. ATTACHMENTS Investment Policies and Guidelines Contra Costa County Investment Policies & Guidelines February 2011 1 COUNTY OF CONTRA COSTA POST-EMPLOYMENT HEALTH CARE PLAN INVESTMENT POLICIES AND GUIDELINES DOCUMENT Adopted February 2011 Contra Costa County Investment Policies & Guidelines February 2011 2 Contra Costa County Post-Retirement Health Care Plan Investment Policies and Guidelines Document In response to the Government Accounting Standards Board (GASB) Statement Number 45 disclosure requirements for Other Post-Employment Benefit (OPEB) Plans, Contra Costa County has adopted a Section 115 Trust Plan that seeks to satisfy these liabilities for certain eligible employees. Executive Summary Plan Sponsor: Contra Costa County (County) Advisory Body: Post Retirement Health Benefits Trust Agreement Advisory Body Plan Administrator: Contra Costa County Treasurer-Tax Collector Trust Administrator: Public Agency Retirement Systems (PARS) Trustee: Union Bank N.A. Investment Advisor: Union Bank N.A., as trustee has hired its investment management subsidiary, HighMark Capital Management (Portfolio Manager), to serve as investment advisor Investment Authority: Full Investment Authority Account Number: To be determined Current Assets: $51,070,366.18 (initial contribution) Annual Contributions: Evaluated annually Risk Tolerance: Moderately Aggressive Objective Time Horizon: Long-Term Assumed Earnings Rate: 6.25% Investment Objective: The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth below. The Plan’s targeted rate of return is 6.25%. The asset allocation ranges for the Plan is listed below: Strategic Ranges: Cash: 0 - 5% Cash Fixed Income: 35-55% Equity: 45-65% Communication Schedule: See Portfolio Reporting Requirements Income Needs/Cash Flow Required: To be determined annually by the Plan Administrator. Unique Needs and Circumstances: None Known Communication Schedule: Committee meetings semi-annually Monthly statements. HCM Portfolio Manager: Andrew Brown, CFA 415-705-7605 Andrew.Brown@Unionbank.com HCM Back up -Portfolio Manager: Anne E. Wimmer, CFA 310-550-6457 Anne.Wimmer@Unionbank.com UB Administrative Officer: Fran Schoenfeld, 949-553-7961 Fran.Schoenfeld@Unionbank.com The managing director for HighMark Capital Management is Kevin Rogers, he can be reached at 949-553-2580 Contra Costa County Investment Policies & Guidelines February 2011 3 Portfolio Constraints Income Needs/Cash Flow Required: Income needs are expected to be minimal in the initial years of the Plan Client (Signature): Date: HCM Portfolio Manager: Date: UB Administrative Officer: Date: Contra Costa County Investment Policies & Guidelines February 2011 4 I. INTRODUCTION The Board of Supervisors (the “Board”) of the County of Contra Costa has established the following Investment Policies and Guidelines Document (the “Document”) for the investment of the trust fund (the “Trust”) of the Contra Costa County Post-Retirement Health Benefits Plan (the “Plan”). The Board reserves the right at any time and from time to time to amend, supplement or rescind this document. II. OVERVIEW The purpose of this Document is to assist the Board and the Investment manager in effectively supervising, monitoring and evaluating the investment of the Plan’s portfolio. The investment program is defined in the various sections of the Document by: A. Stating the Board’s attitudes, expectations, objectives and guidelines for the investment of all assets. B. Setting forth an investment structure for managing the Plan’s portfolio. This structure includes various asset classes, investment management styles, asset allocation and acceptable ranges that, in total are expected to produce an appropriate level of overall diversification and anticipated total investment return over the investment time horizon. C. Encouraging effective communications between the Board and the Investment manager. D. Complying with all applicable fiduciary, prudence and due diligence requirements experienced investment professionals would utilize, and with all applicable laws, rules and regulations of various local, state and federal entities that may impact the Plan’s assets. III. AUTHORITY The investment of the assets for the Trust shall be in accord with applicable law, including but not limited to the following: A. Investments shall be solely in the interest of, and for the exclusive purposes of providing benefits to the participants in the Plan and their beneficiaries, minimizing the contributions of employers thereto, and defraying the reasonable expenses of administering the Trust (Cal. Gov. Code Sec. 31595 (a)). B. Investments shall be made with the care, skill prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims (Cal. Gov. Code Sec. 31595 (b)). C. Investments shall be diversified so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent not to do so (Cal. Gov. Code Sec. 31585 (c)). D. In considering potential investment managers, it is the policy of the Board not to exclude managers from consideration based on ethnic background or gender, and not to arbitrarily exclude an emerging firm if, in the opinion of the Board, that firm has equal or superior capabilities to other candidates. E. It shall be the policy of the Board that an Economically Targeted Investment (ETI) can be considered if and only if it has return and risk circumstances attractive in comparison to other alternatives. Contra Costa County Investment Policies & Guidelines February 2011 5 IV. COUNTY PLAN ADMINISTRATOR’S RESPONSIBILITIES A. On behalf of the Board, execute all legal and administrative documents pertaining to a trust fund, and take whatever actions are necessary to maintain the County’s participation in the trust fund, including compliance with any relevant regulation issued or as may be issued. B. Oversee the investment portfolio and monitor performance by means of regular reviews to assure objectives are met and the policy and guidelines are being followed. C. Provide the investment manager with all relevant information on the Plan, and shall notify him/her promptly of any changes to this information. D. Advise the investment manager of any change in the Plan’s circumstances, such as a change in actuarial assumptions, which could possibly necessitate a change to the overall risk tolerance, time horizon or liquidity requirements; and thus would dictate a change to the overall investment objective and goals of the portfolio. V. PORTFOLIO MANAGERS’ RESPONSIBILITIES, POLICIES AND GUIDELINES All portfolio mangers hired by the County will be registered investment advisors with the Securities and Exchange Commission, or will be trust companies that are regulated by State and Federal Banking authorities. Such portfolio managers will maintain proper and adequate insurance coverage including errors & omissions, surety bond and fiduciary liability. In addition, portfolio managers agree to notify the Board and Plan Administrator in writing if they are unable to continue acting in the capacity of a fiduciary or investment advisor. Portfolio Managers’ Responsibilities The portfolio manager is expected to manage the Plan’s portfolio in a manner consistent with this Document and in accordance with State and Federal law and the Uniform Prudent Investor Act. The portfolio manager is a registered investment advisor and shall act as such until the Board decides otherwise. The portfolio manager shall be responsible for: 1. Designing, recommending and implementing an appropriate asset allocation consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this statement. 2. Advising the Plan Administrator about the selection of and the allocation of asset categories. 3. Identifying specific assets and investment managers within each asset category. 4. Monitoring the performance of all selected assets. 5. Recommending changes to any of the above. 6. Periodically reviewing the suitability of the investments, being available to meet with the Board and Plan Administrator at least once each year, and being available at such other times within reason at the Board’s request. 7. Preparing and presenting appropriate reports. 8. Informing the Board and Plan Administrator of changes occurring in personnel that are responsible for portfolio management or research. Contra Costa County Investment Policies & Guidelines February 2011 6 Investment Manager Policies and Guidelines The investment policies governing each investment manager hired by the County are as follows: 1. The investment manager is required to accept the responsibilities stated above. These responsibilities include acting as a prudent expert and agreeing to be a fiduciary to the County. The manager will seek to satisfy the County’s investment objectives. If a problem exists with these objectives, it is the manager’s responsibility to formally discuss these problems in a written communication to the Advisory Body and Plan Administrator. Also, the manager agrees to satisfy the County’s prescribed requirements outlined in a subsequent section. 2. Under any and all capital market environments, the investment manager agrees to maintain the investment approach that it is was hired to implement. Significant changes to the manager’s investment decision-making process are to be immediately reported in writing to the Board and Plan Administrator. It is the responsibility of the investment manager to fully educate the Board and Plan Administrator as to the specifics of its investment process and internal research that may lead to changes in the firm’s investment approach. 3. An investment portfolio constructed for the Board is expected to generally conform to other portfolios managed by the investment organization, exclusive of specific investment guidelines. When the Board guidelines require the investment manager to manage a portfolio significantly different than its other portfolios, it is the responsibility of the manager to communicate in writing the potential impact of the Board’s guidelines on the portfolio. 4. The manager will otherwise treat the Plan’s portfolio in a manner similar to other comparable portfolios in portfolio construction trading and in all other aspects. 5. Managers shall have full discretionary power to direct the investment, exchange, liquidation and reinvest the assets of the Plan, but must meet the provisions of the Board’s investment objectives and policies. The Board expects the manager to recommend changes to this document at any time when the manager views any part of it to be at variance with overall market and economic conditions. 6. Unless otherwise specified, portfolios are to be fully invested in allowable investment securities. Under no circumstance shall an investment manager attempt to “market time” investments in its portfolio(s). VI. PORTFOLIO REPORTING REQUIREMENTS Quarterly Reports: 1. The investment objectives of the portfolio will be clearly stated. Next a narrative description of the portfolio’s investment strategy will be provided with a discussion of the factors that proved to be favorable and those that were unfavorable. In addition, a concise statement of the firm’s investment decision-making process will be provided and any changes or modifications that were made to the process. 2. Portfolio performance before and after investment management fees: The manager shall report the quarterly total portfolio rate of return before and after investment management fees have been deducted, as well as cumulative and annual performance on both bases since account inception. Also included in these tables will be the manager's performance benchmarks. 3. Portfolio asset mix and asset growth: The portfolio's allocation to the major asset classes will be specified for the beginning and end of the quarter. Market values will be shown for the total account over the same period. Contra Costa County Investment Policies & Guidelines February 2011 7 4. Portfolio allocations according to characteristics and other classifications: Specific portfolio characteristics will be developed and contrasted to those of the portfolio's performance benchmark. 5. Portfolio reconciliation to the custodial bank: As of month end, the investment manager will reconcile their portfolio market value to that provided by the custodial bank. The custodial trustee accounts for investments on a trade date, full accrual basis. Explanation of any discrepancies shall be provided to the County. Monthly Reports: Portfolio summary report and detailed positions and transactions: A summary report consisting of a statement of changes in market value from the preceding month, a summarized portfolio composition using market values and portfolio performance for the latest month, and a portfolio reconciliation to the custodial market value of the account. The report should also include individual issues in the portfolio as of the most recent month-end along with a list of portfolio purchases and sales. VII. ASSET CATEGORIES For purposes of setting objectives and guidelines for the investment of the assets of the Plan, the assets shall be divided into four segments described as: Global Equity, Global Fixed Income, Real Estate, and the Incidental Cash position. The Domestic and International Equity allocations are considered part of the Global Equity segment. The Domestic Fixed Income allocation and the High Yield Fixed Income allocation are considered part of the Global Fixed Income portion of the Plan. Global Equity Portion shall consist of investments in common stock and other securities which are convertible into common stock. The Global Equity portion may be further divided into domestic, international, and global; large, mid and small capitalization; growth, value, and core. Global Fixed Income Portion shall consist of investments in fixed income securities including High-Yield bonds as well as securities including cash equivalents. Real Estate Portion shall consist of investments in real estate through the use of publicly traded real estate investment trusts (REITs) and through the use of commingled funds that invest in publically traded REITs. Incidental Cash Portion shall include short-term monies not invested in either the Real Estate, Global Fixed Income, or the Global Equity portion of the Plan. VIII. INVESTMENT OBJECTIVES The general investment objective of the Plan is to maximize total return, subject to the risk and quality constraints described in the Investment guidelines. The relative return objective is a total return on a market value basis which exceeds that of a custom index composed of appropriate asset class indexes weighted proportionally by corresponding asset class targets. The rate of return objective shall be the actuarial interest assumption, as determined from year to year. A. Total Fund Benchmarks The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth. The Plan’s targeted rate of return is 6.25%. The relative return objective is a total return on a market value basis which exceeds that of a custom index composed of appropriate asset class indexes weighted proportionally by corresponding asset class targets. The custom Contra Costa County Investment Policies & Guidelines February 2011 8 benchmark composition would include 18% Russell 1000 Index, 6% Russell Mid-Cap Index, 8% Russell 2000 Index, 8% MSCI-ACWI Index, 10% MSCI-EAFE Index, 45% Barclay’s Aggregate Index, 4% DJ Wilshire REIT Index and 1% Citigroup 3-Month T- Bill Index. B. Domestic Equity 1. For the Domestic Large Capitalization portion of the Plan, a rate of return in excess of the Russell 1000 Index, and a return in the upper half of the corresponding Morningstar large capitalization style universe. 2. For the Domestic Small Capitalization portion of the Plan, a rate of return in excess of the Russell 2000 Index, and a return in the upper half of the corresponding Morningstar small capitalization style universe. 3. For the Domestic Mid-cap portion of the Plan, a rate of return in excess of the Russell Mid- Cap Index, and a return in the upper half of the corresponding Morningstar mid-capitalization style universe. C. Global Equity 1. For the Global Equity portion of the Plan, a rate of return in excess of the MSCI-ACWI Index, and a return in the upper half of the corresponding Morningstar global large capitalization style universe. D. International Equity 1. The objective for the international equity portion of the Plan is a return in excess of the MSCI- EAFE Index, and a return in the upper half of the corresponding Morningstar International Equity style universe. E. Fixed Income 1. The objective for the fixed income portion of the Plan is a return in excess of the Barclays Aggregate Index, and a return in excess of the Morningstar Universe of intermediate-term fixed income universe. 2. The objective for the high-yield portion of the Plan is a return in excess of the Merrill Lynch BB/B Index, and a return in the upper half of the corresponding Morningstar High Yield universe. F. Real Estate 1. The objective for the real estate portion of the Plan is a return in excess of the Dow Jones U.S. REIT Index, and a return in excess of the Morningstar Universe of REIT funds. G. Incidental Cash 1. The objective of the cash portion is to achieve a return in excess of a comparable money market universe of funds. IX. ASSET ALLOCATION Targets The asset allocation targets and their associated ranges, which are a function of the returns and risks from various asset classes and the nature of the Plan’s liabilities, are set forth below in Table 1. The Board will review its asset allocation position as needed or a minimum of once every three to five years. The Board may make tactical adjustments to the targets and ranges, and may change the targets and ranges as appropriate. The Investment manager is responsible for maintaining the balance between fixed income and equity securities based on the asset allocation. The parameters shown in Table 1 shall be adhered to in managing the portfolio: Contra Costa County Investment Policies & Guidelines February 2011 9 Table 1 Allocation Ranges Target Mix Minimum Maximum Total Domestic Equity Large Cap 18% 15% 35% Mid Cap 6% 2% 10% Small Cap 8% 4% 12% Global Equity 8% 4% 12% International Equity (Developed) 10% 4% 16% International Equity (Emerging) 0% 0% 3% Fixed Income 45% 35% 55% High Yield 0% 0% 4% Real Estate 4% 0% 8% Cash (Money Market) 1% 0% 5% Rebalancing 1. From time to time, market conditions may cause the asset allocation to vary from the established target. To remain consistent with the asset allocation guidelines established by this document, the investment manager will at a minimum rebalance the portfolio on a quarterly basis. 2. The Board and Plan Administrator have the authority to issue instructions to the investment manager to liquidate securities for reallocation to other managers. 3. On an annual basis, the Board and Plan Administrator shall develop a cash flow plan for the subsequent year. This plan will take into consideration expected cash needs both for the payment of benefits as well as to fun under-allocated or new asset classes. X. INVESTMENT GUIDELINES The following guidelines apply to all Investment managers. Any further constraints, limitations or authorities to an individual manager, which are specific to that manager and have been agreed to by the manager and the Plan Administrator also apply. Global Equity 1. The maximum percentage of the Plan which may be invested in the securities of a single corporation shall be 10% of the value of the Plan. 2. The Plan shall not hold more than 5% of the equity securities of an issuer. Contra Costa County Investment Policies & Guidelines February 2011 10 Global Fixed Income The Fixed Income account securities will be restricted to the following: 1. Obligations of the U.S. Treasury 2. Obligations guaranteed by an agency of the United States 3. Government, agency, quasi-government and supranational bonds. 4. Certificates of deposit and banker’s acceptance of credit-worthy banks. 5. Individual Corporate bond investments shall be “Investment Grade” with a minimum quality rating of Baa2/BBB at the time of purchase. In the event that quality ratings differ among rating agencies, the higher rating will prevail. 6. Eligible instruments issued pursuant to SEC Rule 144(a) or Regulation S. 7. Commercial paper (including variable rate notes) of issuers rated P-1 by Moody’s Investor Services and A-1 by Standard & Poor’s. 8. Lower risk planned amortization class (PAC) collateralized mortgage obligations (“CMO”) and Sequential CMOs. CMOs other than PACs and Sequentials are limited to a maximum of 10% of the fixed income portfolio at cost. 9. Portfolio holdings in CMOs greater than 15 years or less than negative 15 years in duration (based on a 100 basis point move in rates) are limited to no more than a total of 2% of the fixed income portfolio at cost. 10. High yield securities may be held, but they will be held using a high-yield mutual fund Real Estate Investments in Real Estate will be made through individual REIT securities as well as commingled funds that invest in REITs. Separately held real estate investments are prohibited. Incidental Cash The incidental cash portion of the Plan shall be invested in readily marketable and diversified assets as are enumerated in the Fixed Income Portion Guidelines. Additionally money market funds and repurchase agreements are acceptable cash oriented investments. XI. PROHIBITED ASSETS The Plan wishes to avoid investments in the following investment categories: • Precious metals • Private Equity • Venture Capital • Short sales • Purchases of Letter Stock, Private Placements, or direct payments • Leveraged Transactions • Commodities Transactions Puts, calls, straddles, or other option strategies, • Purchases of real estate, with the exception of REITs • Derivatives, with exception of ETFs • Contra Costa County Issued Bonds XII. FUND SELECTION PROCESS Funds selected as investments in the Plan will be expected to have undergone a rigorous screening process that searches for managers and styles that will produce above average returns within acceptable risk parameters. The evaluation process will consider the following factors: Contra Costa County Investment Policies & Guidelines February 2011 11 • Performance track record • Fund assets • Manager tenure with fund • Expense ratios • Market capitalization • Style consistency • Number of holdings • Assets in top 10 • Portfolio turnover • Sector weighting allocations • Standard deviation • Sharpe ratio Performance evaluation of the Funds will take into consideration both performance relative to a benchmark index as well as performance relative to a universe of the fund’s peers. Evaluation metrics versus a representative benchmark will utilize a twelve-month rolling performance record compared to a representative benchmark over a three, five, seven and ten-year period (if/when available). A fund is expected to rank above the median in its appropriate peer group for the three, five and ten-year periods (if/when available). An additional requirement for all funds utilized in the Plan is that the fund families that sponsor the funds will have filled out and returned a request for proposal (RFP) submitted to them by the investment manager. This RFP will highlight significant areas such as organizational factors, composition of assets, portfolio characteristics, investment process, fee structure, internal compliance controls, and an overview of the investment personnel. Investment mutual funds may be removed from the investment portfolio from time to time. Factors that the investment manager will consider in regards to removing a fund include, but is not limited to: • Performance that is inconsistent with the manager’s style or our expectations • Performance that conflicts with peers and style universes • Security selection not in agreement with the manager’s investment philosophy/process • Purchases that lead to abnormal portfolio concentrations • Sector and industry exposures that are inconsistent with the manager’s guidelines • Unusual tracking error to the benchmarks • Inadequate transparency between the manager’s comments and portfolio holdings • Inconsistencies related to the manager’s remarks on style, sector, and market cap weightings • Instability at the manager’s investment management firm • Modifications to the investment process and/or risk controls that interfere with a firms strategy • Staffing adjustments that may result in poor performance • The fund selection process described above is not required for any passive investments, including index-based mutual funds or exchange-trade funds (ETFs).