DATE:
May 16, 2023
TO:
Mayor and City Council Members
Chair and Board Members, Hesperia Fire Protection District FROM:
Nils Bentsen, City Manager
BY:
Casey Brooksher, Director of Administrative Services
SUBJECT:
Approval of a Multiple Employer Other Post Employment Benefit (OPEB)/Pension 115 Trust with Shuster Advisory Group, LLC
RECOMMENDED ACTION
It is recommended that the City Council adopt Resolution No. 2023-31, authorizing the City Manager to execute agreements with Shuster Advisory Group LLC, Charles Schwab Trust Bank, and Alta Trust Company for the establishment and administration of a Multiple Employer OPEB and Pension 115 Trust; and the Board of Directors of the Hesperia Fire Protection District (HFPD) adopt Resolution HFPD No. 2023-03, approving the discontinuance of the HFPD’s participation in the Post-Employment Benefits Trust administered by the Public Agency Retirement Services (“PARS”), and approving agreements with Shuster Advisory Group LLC, Charles Schwab Trust Bank, and Alta Trust Company for the establishment and administration of a Multiple Employer OPEB/Pension 115 Trust.
BACKGROUND
The City provides full-time employees with a defined benefit pension through the California Public Employee’s Retirement System (CalPERS) and pays other post-employment benefits (OPEB) to certain retirees/group of retirees for health care costs. Most agencies are “pay-as-you-go,” meaning that annually, they estimate these costs (using actuarial firms) and budget for the expense. CalPERS has significantly changed the methodology for calculating the Annual Required Contributions (ARC) regarding the amortization of the Unfunded Actuarial Accrued Liability (UAAL). Until recently, the only option for reducing the UAAL was to commit additional funds to CalPERS, subject to the same CalPERS investment returns. Further, with a pay-as-you-go basis, there are no assets to offset liabilities that accumulate over the working lifetime of employees. A Section 115 Trust is a fiscally prudent approach to funding these future expenses and is considered a “best practice” by the Government Finance Officers Association (GFOA).
A Section 115 Trust is a vehicle authorized by the Internal Revenue Code, which allows an agency to segregate funds from general assets for the purpose of funding an essential government function (e.g. pension and post-employment obligations). Trust assets are irrevocably committed for the government function identified in the trust agreement and the City will retain control over the investment strategy of the funds. Some of the benefits that a Section 115 Trust program can provide for cities include utilizing the trust as a budget stabilization tool, improving the city’s overall credit rating, and an opportunity to earn higher investment returns. Additionally, given Governmental Accounting Standards Board (GASB) Statement, GASB No. 75, which requires that public agencies recognize OPEB liabilities on their balance sheet, establishing a trust will allow the City to recognize the assets set aside to reduce its unfunded accrued liability.
On August 7, 2018, the Board of Directors of the HFPD approved the establishment of a Section 115 Trust administered by PARS for payment of the HFPD CalPERS pension obligation, as required by LAFCO in the annexation fire operations by San Bernardino County Fire. However, the HFPD is not obligated to stay in the current trust arrangement with PARS, or any provider for that matter. To the extent that cost savings for administering the trust can be achieved, that is additional money that will stay in the trust and earn interest over time.
ISSUES/ANALYSIS
During the May 17, 2022 FY 2022-23 Budget Workshop, the City Council directed $4.0 million in General Fund reserves for the establishment of the City’s Section 115 Program, as reflected in the FY 2021-22 Revised Budget. In order to address both the City’s pension and OPEB obligations, allocating the $4.0 million between two City Section 115 Trusts is recommended with: 1) a $3.4 million pension stabilization trust, and 2) a $0.6 million OPEB trust.
Staff have analyzed the Shuster Advisory Group (Shuster) pricing model and related information in comparison to the PARS 115 program. The fee structure for the 115 Trust from Shuster is 57% lower in the annualized expenses of the program compared to the pricing structure of the PARS program. For the City’s $4.0 million in 115 Trust assets, the fee schedule from the PARS program would result in a 0.60% annualized fee, or $24,000, whereas the Shuster program would result in a current annualized fee of 0.26%, or $10,400. Future contributions by the City will only increase the comparative savings.
Shuster 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 $5 billion in assets under management focusing on serving the unique needs of governmental agencies and special districts serving over 60 cities, agencies and public entities. Shuster serves as fiduciary to plan investments and provides investment selection, monitoring, and management, with custody services provided by Charles Schwab Trust Bank for the safekeeping of plan assets, and trustee services provided by Alta Trust for Federal and State compliance monitoring.
Shuster is the same firm that took over fiduciary responsibilities of the employee’s 457(b) deferred compensation and 401(a) plans in August 2018. 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 54% reduction in total 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 analytical and responsive to the City’s needs.
Shuster has conducted the same analysis of the Section 115 Trust programs available to cities and agencies and again determined that the cities were being over-charged and underserved, which has a direct result on the savings that a city is putting aside for their future obligations. Shuster also 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 that provides cities with enhanced services for a fraction of the fees charged by other Section 115 Trust providers. With Shuster’s ongoing oversight and service model, Staff anticipates similar cost effective results with the 115 Trust, as has been experienced with the 457(b) and 401(a) plans.
As such, it is recommended that the City Council approve Resolution No. 2023-31 for the establishment and administration of a City Multiple Employer OPEB and a Pension 115 Trust with Shuster Advisory Group. Further, it is recommended that HFPD Board of Directors approve HFPD Resolution No. 2023-03 in order to terminate the HFPD’s current participation in the Post-Employment Benefits Trust administered by PARS and U.S. Bank, in favor of contracting with Shuster for the establishment and administration of a Multiple Employer Pension OPEB/Pension 115 Trust.
FISCAL IMPACT
The analysis of Shuster's pricing model and related information in comparison to the PARS 115 program reveal that the fee structure for the 115 Trust from Shuster is 57% lower in the annualized expenses of the program, compared to the pricing structure of the PARS program. For the City’s $4.0 million in 115 Trust assets, the fee schedule from the PARS program would result in a 0.60% annualized fee, or $24,000, whereas the Shuster program would result in a 0.26% current annualized fee, or $10,400. Future contributions by the City will only increase the comparative savings.
Lastly, Shuster will provide ten investment strategies that combine both active and passive (index) investment solutions, providing an optimum mix of investments from both an investment return and cost perspective. If desired by the City, Shuster will also provide a custom portfolio at no additional cost.
ALTERNATIVE(S)
Provide alternative direction to staff.
ATTACHMENT(S)
Resolution No. 2023-31
Resolution HFPD No. 2023-03
City of Hesperia STAFF REPORT City of Hesperia STAFF REPORT City of Hesperia
STAFF REPORT
City of Hesperia
STAFF REPORT
Staff Report to the City Council and Board Members of the Hesperia Fire Protection District Approval of a Multiple Employer Other Post Employment Benefit (OPEB)/Pension 115 Trust with Shuster Advisory Group, LLC May 16, 2023