Memorandum

City of Lawrence

Finance Department

TO:	David L. Corliss, City Manager
FROM:	Becky Jones, Assistant Finance Director
CC:	Cynthia Boecker, Assistant City Manager
Date:	September 21, 2007
RE:	Recommendation of PFM Asset Management, LLC for Investment Advisory Services

Background

On June 4, 2007, during the City Commission budget meeting, the Finance Director discussed the need to hire an investment advisory firm to assist with investing the large amount of bond proceeds the City will be receiving to fund it’s capital projects. The City has recently issued $19 million in revenue bonds and plans to issue an additional $160 million over the next five years. The City currently has $4 million in our debt service reserve account. The City Commission authorized advertisement of a Request for Proposals (RFP) for Investment Advisory Services on July 17, 2007.

The RFP for Investment Advisory Services included two major components. The first is the investment of revenue bond proceeds and the second is the investment of idle operating funds. Assistance in investing the revenue bond proceeds is requested due to the amount of bonds being issued, as well as the need to maximize our interest earnings while considering the safety and liquidity of the investments. An investment advisor has the expertise and staff available to select appropriate investments and to monitor them in terms of continued suitability and liquidity. Secondly, the recommended firm is also capable of taking an active role in the investment of the City’s operating funds. Their investment strategy will consider liquidity needs on a weekly basis by analyzing past expenditure trends and the investment of our core funds on a longer term basis to earn additional income.

The Finance Department received seven proposals in response to the RFP. A committee was formed to analyze the proposals and two firms were selected to make presentations, Springsted, Inc.  and Public Financial Management, Inc. (PFM).

Analysis

The following criteria were used as a basis for selection and the award recommendation:

• Understanding of the overall investment program and the investment objectives and its unique constraints
• Experience, resources, and qualifications of the firm and individuals assigned to this account
• Experience and reputation of the firm in managing state/local government portfolios. In evaluating the firm’s experience, past performance data will be evaluated in the context of portfolio objectives and constraints, as well as risks.
• Recommended approach to management of the portfolio
• Fees

PFM - calculated on the average daily balance of the asset		Springsted - calculated on an hourly basis
Bond Proceeds - avg balance	8 Basis Points	Bond Proceeds - per transaction	5 Basis Points
Operating Funds (negotiated fee)	9 Basis Points	Operating Funds
		Principal/Senior Officer	$150/hr
		Vice President	$130/hr
		Arbitrage Specialist/Financial Analyst	$130/hr
		Support Staff	$  40/hr

Recommendation

We would like to recommend PFM as the City’s Investment Advisory Firm for bond proceeds and the City’s operating funds.  PFM gave a complete response to the RFP. They have a large-experienced staff exclusively devoted to governmental investing, as well as a team that specializes in arbitrage calculations and compliance. Their approach is a more active role as portfolio managers. They will evaluate market risk and develop strategies that minimize the impact of market volatility on the portfolio. They provide thorough credit analysis of all securities purchased in the portfolio. They will conduct cash flow analysis and plan to invest our operating funds based upon past expenditure patterns and future liquidity needs.

The current interest rate environment is undergoing a significant change. As a result of the change, the City will see reduced interest earnings as short term rates decrease. If the Federal Reserve reduces its discount rates in the future, the rates we earn on our investments will be further reduced. In order for the City to maximize our interest earnings, it is recommended that our portfolio be professionally managed. This should include both our revenue bond proceeds and our idle operating funds.

Upon selection of an Investment Advisory Firm, the Government Finance Officers Association (GFOA)’s recommended practice encourages governments to enter into an Investment Advisory Agreement containing specific instructions concerning objectives and risk parameters, allowable investment instruments and strategies, and required reporting procedures. It is recommended that the City Manager be authorized to enter into the attached Investment Advisory Agreement with PFM.