Staff Report
City Council
Item No. {{section.number}}.F
Meeting Date: June 25, 2025
From: Kevin Biersack, Financial Services Director
Title: Section 115 Trust Plan for Other Post Employment Benefits RECOMMENDATION:
Staff recommends City Council adopt Resolution 2025-XX approving the Multiple Employer OPEB/Pension Section 115 Trust administered by Shuster Advisory Group and discontinue the City’s current participation in the CalPERS-administered CERBT.
BACKGROUND:
In August of 2021, the Administrative Services Director brought to Council the Prefunding Agreement and election to pre-fund Other Post-Employment Benefits (“OPEB”) through the California Employers’ Retiree Benefit Trust (“CERBT”) fund administered through the California Public Employees’ Retirement System (“CalPERS”). With Council’s guidance, city staff established the CERBT and moved $9.2 million dollars. Since then, City has contributed approximately $5 million and net earnings totaling $800,000+. As of March 31, 2025, the CERBT has a balance of $15,065,427.
The City is not obligated to stay in the current trust arrangement with CalPERS, or any provider for that matter. At the time the City entered into the non-binding agreement with CalPERS, there were few providers in the Section 115 Trust marketplace. Based on market analysis completed by Shuster Advisory Group, LLC (”Shuster”) identifying the lack of providers available and the services being offered, they developed a program that would enhance the service and investment models at a lower cost to City’s and public agencies. To the extent a more flexible and actively managed investment portfolio can be attained to improve the return on invested assets in the trust at a low cost, additional money can be earned in the trust and will achieve additional compounding over time.
DISCUSSION:
Assets in a Section 115 Trust are irrevocably committed for the government function specified in the applicable trust agreement. Additionally, monies held in such trusts can be invested in accordance with the rules governing those trusts, which are different than the investment rules for the City’s pooled investments as part of the City’s Investment Policy.
Investment restrictions that apply to the general fund of a City (CA Government Code (GC) 53601) do not apply to the assets held in an Irrevocable Section 115 Trust, thus allowing for more flexibility in the investment strategy. Setting aside funds in a Section 115 Trust can potentially earn a higher rate of return than funds invested within GC 53601 guidelines.
After reviewing the current investment portfolios and services, it was determined that improved investment flexibility, customization, transparency, and service could be achieved by transferring our plan administration and portfolio management to a different program provider. City staff, to include two members of the City Council (Mayor and Mayor Pro Tem) and the City Treasurer, met with the Shuster in January and March 2025, respectively. Staff’s valuation process concluded that the program offered by Shuster provides tremendous flexibility of investment options and the most competitive fees for the comprehensive services the City will receive, including but not limited to Investment Fiduciary services with a dedicated service team, consolidated full fee transparency, fully customizable investment options, individual accounts (providing daily valuation and account access), blend of active and passive investment options with optional private equity/debt, and compliance reporting for GASB 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. In addition, Shuster provided City staff with their Section 115 Trust & Defined Benefit (DB) Client List, which is attached to this staff report.
Analysis:
In 2023, the city was introduced to Shuster and later chose to engage Shuster as the retirement plan consultant and investment fiduciary for our 457(b) and 401(a) Plans. Shuster issued a Request for Information (RFI) to the current record-keeper administering the plans and completed a comprehensive review, identifying the fees for record-keeping and administration were high and not transparent, and the quality of the investment menu needed improvement. Based on the information obtained through the RFI, Shuster subsequently conducted a Request for Proposal (RFP) for administration and recordkeeping services for the Plans. The results of the RFP proved our administration and record-keeping fees could significantly be reduced and the city could implement an open architecture investment menu and a fee transparent platform benefiting participants. The incumbent, MissionSquare (formerly known as ICMA-RC), was selected by the city at a 62% reduction in plan fees [with a 95% reduction in 457(b) and 401(a) plan record keeping costs] while also providing an improved investment menu for plan participants. Shuster negotiated a custom stable value investment be added to the 457(b) and 401(a) plans that provided participants with an increase in crediting rate for those wanting safety of principal. The projected fee savings due to the fee reduction alone are estimated to be $3.6 million over a 10-year period, $9.0 million over 20 years, and $16.8 million over 30 years. These projected savings do not take into account any financial gains from improved investment options.
California Public Employee’s Retirement System (CalPERS)
CalPERS options for OPEB and Pension Stabilization 115 trusts are referred to as the California Employers’ Retiree Benefit Trust (CERBT) for funding OPEB liabilities and the California Employers’ Pension Pre-funding Trust (CEPPT) for funding future pension liabilities. Both Trusts charge employers a single fee to cover all program costs. CERBT offers three diversified asset allocation strategies. CEPPT offers two diversified asset allocation strategies. While CERBT and CEPPT have lower fees than the Public Agency Retirement Services (PARS) or Shuster, they offer limited investment strategy options.
These investment strategies may perform better than the State (LAIF) or County investment pools; however, they both have lower reported rates of return than both PARS and Shuster.
Assets held within the CalPERS program are comingled with assets of other participating public agencies for investment purposes and are only valued monthly.
Shuster Advisory Group, LLC
Shuster Advisory Group, LLC is an independent investment advisory firm and fiduciary. They provide governmental and institutional retirement plan consulting services as well as private wealth management. Shuster is a SEC-Registered Investment Advisor with over $7 billion in assets under management focusing on serving the unique needs of governmental agencies and special districts. Shuster serves as an investment fiduciary to over 90 governmental agencies and special districts providing investment selection, monitoring and management, and provides plan consulting and participant services.
Shuster serves currently as the fiduciary investment advisor and plan consultant for our 457(b) and 401(a) plans. The services provided by Shuster are unique with a low-cost transparent structure and white glove approach. Shuster entered the public retirement plan sector after analyzing the sector and realizing that cities and agencies were being underserved and over-charged for their retirement plans, directly impacting the supplemental retirement savings of the public employees. Hiring Shuster for these services resulted in a 95% reduction in recordkeeping and administrative plan costs for the 457(b) and 401(a) plans, in addition to a significant improvement in the quality of the investments available in the retirement plan. Shuster has proven to be responsive, analytical, and a true partner to the city.
Shuster has conducted the same analysis of the Section 115 Trust programs available to cities and agencies and again determined that cities and other public agencies were being underserved and overcharged. Shuster found that the programs available generally lacked investment flexibility, customization, transparency, and high-level customer service. As a result, Shuster created and offers a Section 115 Trust program providing cities with enhanced services at a fraction of the cost of the Section 115 Trust marketplace. With Shuster’s ongoing oversight and exceptional service model, Staff expects similar results with the 115 Trust as experienced with the 457(b) and 401(a) plans.
Compared to available options other than CERBT, significant savings in administration costs are available from Shuster. As discussed above, Shuster is the same firm the City engaged to transfer and consolidate the investment fiduciary responsibilities of the City’s 457(b) and 401(a) plans. Through that change, employees, participants, and retirees have realized significant savings on the fees of those accounts as well as access to an enhanced institutional investment menu.
FISCAL IMPACT:
Staff has analyzed the proposal from Shuster and the information provided in comparison to the current CalPERS program. In the service provider Fee Comparison, see slide 20 in the attached 115 Trust Overview, the CalPERS CERBT administrative costs are .05% of the assets and Shuster’s administrative costs are .11% of the assets.
With the Shuster proposal, there is more potential for enhanced financial performance due to customizable portfolios, flexibility to adapt to changing risk models, and fund company diversity (Fidelity, Vanguard, American Funds, BlackRock, PIMCO, etc.). Shuster provides ten different investment strategies combining both active and passive (index) investment solutions to take advantage of the optimum mix of investments from both an investment return and cost perspective. In coordination with the Financial Services Director and the City Treasury, Shuster provides a custom portfolio at no additional cost.
Staff’s valuation process concluded that the transfer of the CalPERS program to the program offered by Shuster provides the greatest flexibility of investment options and the most competitive fees for the comprehensive services the City will receive, including:
Investment Fiduciary services
Consolidated full fee transparency
Customizable investment options
Individual accounts
Daily valuation and account access
Blend of active and passive investment options
Private equity/debt (optional)
GASB compliant reporting
Local dedicated service team
Direct access to Portfolio Management Team
The costs associated with providers such as PARS are higher in cost than the solutions offered by Shuster.
FIVE-YEAR STRATEGIC PLAN:
GOAL C – Fiscal Stability and Sustainability
ATTACHMENTS:
1. Cathedral City CERBT Resolution
2. 115 Trust & DB Client List
3. Cathedral City 115 Trust Presentation 09.30.2024