CITY COUNCIL STAFF REPORT
Meeting: May 19, 2026
Subject
Annual Review and Acceptance of Other Post-Employment Benefits (OPEB) and Pension Trust Investment Policies
Recommended Action
A. Adopt Resolution No. 26-XXX accepting the City Investment Policy for OPEB; and
B. Adopt Resolution No. 26-XXX accepting the City Investment Policy for the Pension Trust Investment Policies
Discussion
Background
In Fiscal Year (FY) 2009-10, the City established a Section 115 Trust to help fund its retiree health obligations, also known as OPEB. In FY 2017-18, the City also established a Section 115 Trust to pre-fund its pension obligation s and reduce the potential impact of pension cost volatility on the City's operating budget.
OPEB and Pension Trusts
Section 115 Trust Overview
A Section 115 Trust is a tax-exempt investment tool that allows local governments to pre- fund pension and retiree health costs. The benefits of a Section 115 Trust include the following:
• Local control over assets: The City controls the contributions, withdrawals, investment strategy, and risk level of assets in the Trust. • Potential for higher investment returns than General Fund: Investment requirements that apply to the City 's General Fund assets under Government Code 53601 are not applicable to Trust assets.
• Pension rate stabilization: Assets can be transferred to CalPERS at the City 's discretion to pay for Normal Cost or Unfunded Accrued Liability (UAL) contributions and can be used to reduce or eliminate large fluctuations in the City's pension costs.
2 • Diversification: Trust assets will be diversified from CalPERS investments.
OPEB Trust Overview
In FY 2009- 10, the City established a Section 115 Trust to help fund its retiree health obligations, also known as OPEB. Compared to a pay-as -you-go plan, the OPEB Trust allows the City to:
• Grow assets to pay future OPEB benefits.
• Earn higher returns than the General Fund.
• Reduce its total cost for providing post-employment benefits. • Reduce its Net OPEB Liability.
In July 2010, the City contributed $7.0 million in initial funding. With additional contributions of $12.3 million, total contributions to date are $19.3 million.
As of June 30, 2025, the City's OPEB Trust ha d a market value of $42.7 million and had earned an annualized investment return of 7.68% gross of fees since inception.
Time Period Annualized Investment Return
1 Year 12.80%
5 Year 8.93%
Since Inception 7.68%
1-Year investment returns were impacted by financial market volatility due to heightened geopolitical risk, supply chain bottlenecks and persistent inflation, and the Federal Reserve’s pivot to a less accommodative monetary policy.
As of the June 30, 2025, measurement date, using a 6.5% discount rate, the City’s OPEB plan had an accrued liability of $41.5 million and a market value of assets of $42.7 million, resulting in a net asset of $1.3 million and a funded ratio of 103.0%. Compared to June 30, 2024, the unfunded accrued liability became a net asset, primarily due to favorable market conditions.
June 30, 2023* June 30, 2024* June 30, 2025*
Accrued Liability 35,290,000 40,389,000 41,472,000
Market Value of Assets 34,708,000 38,013,000 42,734,000 Unfunded Accrued Liability 582,000 2,376,000 (1,262,000) Funded Ratio 98.4% 94.1% 103.0%
*Amounts provided from Actuarial Report, as opposed to PARS provided.
3 Pension Trust Overview
Since pension obligations are one of the City's largest financial obligations, the City has taken proactive steps to reduce the impacts of pension cost volatility. In March 2018, the City provided options to Council to address rising pension costs. In April 2018, the City presented a long-term pension funding strategy to the Fiscal Strategic Plan Committee. In May 2018, the City adopted a Section 115 Trust, also known as a Pension Rate Stabilization Program (PRSP), to reduce pension rate volatility on the City's budget. The Pension Trust helps the City to:
• Grow assets for future pension contributions.
• Invest assets over appropriate time horizons.
• Earn higher investment returns than the General Fund. • Reduce pension contribution volatility.
• Diversify funds from CalPERS investments.
As a fiscal sustainability measure, the City funds the Pension Trust using a more conservative discount rate of 6. 25%. The City 's pension funding goal is to accumulate sufficient funds in the Pension Trust to fund the difference between a 6.2 5% and a 7% discount rate and achieve a funded status of 80% by FY 2036- 37, 20 years from the adoption of the Pension Trust. The City's projections indicated that it would need to accumulate over $42 million in the Pension Trust within 20 years to achieve its pension funding goal.
As a result, the funding strategy proposed $8.0 million in initial funding, along with additional funding of $10.0 million over the first five years. To date, t he City has contributed $16.0 million, including:
• $8.0 million in FY 2018-19
• $4.0 million in FY 2019-20
• $2.0 million in FY 2020-21
• $2.0 million in FY 2021-22
As of June 30, 2025, the City's Pension Trust had a market value of $ 24.3 million, a year- over-year increase of $2.7 million, and had earned an annualized investment return of
8.03% gross of fees since inception.
Time Period Annualized Investment Return
1 Year
5 Year
12.64%
8.86%
Since Inception 8.03%
Driven by favorable market performance, the Trust achieved a 12.64% return over the past year. Five -year and since -inception returns remain strong at 8.86% and 8.03%, respectively, underscoring the City’s long -term strategy to promote pension funding 4 stability.
OPEB and Pension Trust Investment Policies
The Audit Commi ttee is responsible for r eviewing the OPEB and Pe nsion Trust investment po licies annua lly, a ppointing investment managers, and monitoring investment performance. The City Council is responsible for annually adopting the OPEB and Pension Trust investment policies.
It is not expected that the OPEB and Pension Trust investment polic ies will change frequently. Short-term changes in the financial markets should not require adjustments to the policies.
The Audit Commi ttee last reviewed the policies on Oc tober 31, 2 024, with City C ouncil adopting the policies on December 3, 2024.
On January 26, 2026, the Audit Committee reviewed the proposed updates to the OPEB and Pension Trust Investment Policies and recommended forwarding one policy option to City Council that: (1) incorporates soft Environmental, Social, and Governance (ESG) language acknowledging consideration of ESG -related factors while emphasizing fiduciary responsibility to the trusts; (2)
further clarifies fiduciary responsibilities within
the policies; (3) retains Global Infrastructure as an asset class while adjusting its target allocation range to 0%, with future adjustments subject to Council consideration; and (4) returns to City Council for discussion rather than placement on the consent calendar. The proposed OPEB Trust Investment Policy a nd Pension Trust Investment Policy are included as Attachments A and C, respectively. Draft resolutions adopting the policies are included as Attachments E and F.
Public Agency Retirement Services (PARS) is the City’s Trust Administrator and PFM Asset Management is the City’s Investment Manager for the Pension and OPEB Trusts.
The Investment Manager manages the investments per the investment policies. Within the constraints imposed by these policies, Investment Managers are expected to comply with all applicable fiduciary and due diligence requirements under the “ prudent investor” rules.
OPEB and Pension Trust Investment Objectives
The OPEB Trust has a “Balanced” investment objective with a target rate of return of
6.50%, and the Pension Trust has a “Balanced” investment objective with a target rate of return of 6.25%. The “Balanced” 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.
5 As part of ongoing efforts to align with evolving industry best practices and enhance portfolio diversification, Global Infrastructure continues to be included as a permitted asset class due to its inflation-hedging characteristics, stable cash flows, and historically low correlation to traditional equities and fixed income assets. Consistent with Audit Committee direction, the strategic allocation range for Global Infrastructure has been updated to 0%, while retaining the asset class within the policy to preserve flexibility for future Council consideration.
The strategic asset allocation ranges and tactical targets for this objective are listed below:
Asset Class Range Target
Fixed Income 20-40% 30%
Equities 50-70% 64%
Real Estate 0-10% 5%
Global Infrastructure 0-10% 0%
Commodities 0-10% 0%
Cash 0-10% 1%
The target rates of return are based on the long-term expected rate of return for assets in the trusts and the City's time horizon for the investments.
With strong reserves and a fully funded OPEB plan, the City can maintain a long -term investment horizon with a “ balanced” investment objective. There may be periods of substantial decline in investment value, and the portfolio should expect periodic volatility. However, a 6.56% return on investment is expected over the long -term, based on the current investment objective. More conservative investment objectives such as “moderate” and “moderate-conservative” would expect less volatility and decline s in investment value; however, over the long term , they would also expect lower returns.
Many agencies anticipate needing to access the funds in their respective trusts sooner and invest with more emphasis on preserving capital in the near term.
The OPEB Trust has a higher discount rate than the Pension Trust because OPEB investments are expected to have a longer time horizon. OPEB obligations are generally longer in duration, and the City expects to withdraw Pension Trust funds earlier to fund CalPERS contributions. Given t hat changes to the CalPERS discount rate have larger effects on the City's operating budget and are farther out of the City's control, it is important that the City be able to use the Trust to pay CalPERS contributions as needed.
Sustainability Impact
There is no sustainability impact.
Fiscal Impact
There is no direct fiscal impact at this time.
6 City Work Program (CWP) Item/Description
None
Council Goal:
None
California Environmental Quality Act
No California Environmental Quality Act impact.
_____________________________________
Prepared by: Jonathan Orozco, Acting Director of Administrative Services and City Approved for Submission by: Tina Kapoor, City Manager
Attachments:
A – OPEB Trust Investment Policy (clean)
B – OPEB Trust Investment Policy (redline)
C – Pension Trust Investment Policy (clean)
D – Pension Trust Investment Policy (redline)
E – OPEB Trust Investment Policy Draft Resolution
F - Pension Trust Investment Policy Draft Resolution