42 CITY COUNCIL POLICY: FINANCIAL
MANAGEMENT AND BUDGETARY POLICY
AdoptedRevised: October 20, 2020January 3, 2023
1 Purpose.
Provide the framework and direction for financial planning and decision making by the City Council and City staff. These policies are designed to ensure the City’s financial integrity and provision of services that address the priorities of Lake Forest’s constituents.
This policy establishes financial parameters that will guide the budget development and deliberation process, safeguard financial assets, and maintain the City’s strong financial condition.
The desired policy outcome is that the long-term implications of financial decisions are fully understood and considered in the decision-making process.
The City Council will review this policy during each budget development process and consider any recommended revisions with the adoption of the budget. 2 Long-Range Financial Planning and Budget.
a) The budget is a resource allocation document and serves as the financial plan for the City. It will serve as the policy document of the City Council and will provide policy direction to the City Manger Manager in the areas of desired service levels and funding priorities.
b) The City Manager shall present a proposed budget to the City Council on a biennial basis to be adopted no later than June 30 in odd numbered years preceding the commencement of the two-year budget cycle. The budget will be prepared, presented, and administered by the City Manager and Director of Finance/City Treasurer.
c) The City will maintain a long-range fiscal perspective by preparing a two-year operating budget, seven-year Capital Improvement Plan, and seven-year Financial Forecast. The Budget will be developed and adopted with a sharp focus on long-term financial solvency and compliance with provisions of this policy.
d) The City Council values public input in the budgeting process and will provide opportunities for public input.
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e) The budget document will be prepared in a manner which facilitates public study and effectively communicates key economic issues and fiscal policies.
The budget will document and explain assumptions for underlying revenue sources and expenditure estimates.
f) The City Council may authorize the use of reserves and/or non-recurring revenues to balance the budget when unforeseen events occur that reduce the City’s recurring revenues, and to direct the City Manager to make budgetary recommendations that will re-balance the budget within a specified timeframe.
g) All budgetary procedures will conform to state regulations and Generally Accepted Accounting Principles (GAAP) for governmental agencies. h) The City’s budget will be presented by functionProgram Area of government with a logical breakdown of programs. The budget format will clearly outline the major service areas and associated expenditures. i) The budgeting process will include reports to the City Council and will include budgetary status and compliance. The City Manager will notify the City Council whenever changing operations or economic developments require corrective budgetary modifications. The City Manager shall also inform the City Council if operating revenues are projected to decrease by more than 10% from the adopted budget.
j) Non-personnel appropriations in the Operating Budget may be carried over from the first year to the second year of the two-year budget period with the approval of the City Manager with notification to the City Council Audit Committee.
j)k)Non-personnel appropriations in the Operating Budget may be carried over from on two-tear budget cycle to another when an agreement is in effect prior to the commencement of the new two-year budget with the approval of the City Manager with notification to the City Council Audit Committee. k)l)Departmental bBudget control shall be the responsibility of the Department Head. Department Heads shall, with the concurrence of the Director of Finance/City Treasurer, have the authority to move appropriations between programs line items within under their responsibility within the same Program Area.their departmental budgets. At the discretion of the City Manager, appropriations may be transferred from one department Program Area to another, or between funds within the Operating Budget with notification to the City Council Audit Committee.
l)m) At the City Manager’s discretion, appropriations may be moved from Item: 17
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one capital improvement project to another existing project within the adopted Capital Improvement Program with notification to the City Council Audit Committee.
m)n) During the budget cycle, special circumstances may require an adjustment in the appropriations established in the adopted budget and would require a budget amendment. These may include:
i. Changes to spending priorities
ii. Increase in operating or capital expenditures
iii. Decrease in operating revenues
n)o) City Council approval is required to increase the total sum of the appropriations made for the Operating Budget or the Capital Improvement Plan from the adopted Budget Resolution. City Council approval is also required to move appropriations between the Operating Budget and the Capital Improvement Program.
o)p) The goal of the City’s long-range financial planning is to pay for capital projects and large, one-time expenditures from existing sources (savings or reserve funds) and not be dependent on borrowing or new revenues. 3 Capital Planning.
a) The purpose of the Capital Improvement Program is to systematically plan, schedule and finance capital projects as approved and prioritized by the City Council. The Capital Improvement Program will be a seven-year plan and will include major rehabilitation costs to existing infrastructure and facilities, as well as the cost of new facilities or capital improvements. Staff will inventory and assess the condition of all major capital assets every two years and make recommendations to the City Council regarding any modification of the Capital improvement Program as part of the budget development process. b) Proposed capital projects will include projected changes in operating and maintenance costs, work force requirements, productivity, and risk management considerations.
c) A capital improvement project shall be established for all projects greater than $100,000 with an expected useful life of at least 3 years that also meet the definition of a public project per State Public Contracts Code Section 22002.These include projects involving construction, reconstruction, alteration, renovation, improvement, demolition or major repair work. This Item: 17
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excludes routine, recurring and usual work for the preservation, protection, or maintenance of publicly owned land, improvements and equipment. d) For purposes of this policy, the scope of a proposed capital improvement project may be defined as the work to be undertaken at a single location.
However, if work at a specific location would not otherwise meet the cost threshold for establishing a separate capital improvement project and similar work is to take place at another location(s) during the same fiscal year, then all such similar work shall be defined as one capital improvement project. e) A capital project may originate from a variety of input, including but not limited to public feedback, City Council and Commission ideas, the Biennial Residential and Business Satisfaction Study (i.e., survey), grant requirements or staff analysis. As part of the budget process, staff uses this input to submit Capital Improvement Program requests providing a detailed description of the proposed project or purchase. All requests will be reviewed by the City Manager using the formal evaluation process described below or some other alternative process identified by the City Manager. One evaluation consists of several ranking criteria, which are assigned relative weights as follows:
Criteria Weight
Project’s impact on health and safety 10
Project improves, upgrades, or rehabilitates an existing facility 9 Project’s impact on City operating budget 8
Project remedies a service deficiency 8
Percent of project costs to be funded by (non-City) resources and/or funding to be lost if project not done 7
Priority assigned by requesting Department 6
Other considerations, such as aesthetics, feasibility, special populations serviced, conformance to plans (including the General Plan), interjurisdictional effects and community economic effects 6 Once evaluation scores as assigned, project priorities will be determined and presented to the City Council for further review. After completing its review, the City Council will appropriate funding for the first two years of the Seven Year Capital Improvement Program as part of the two-year budget cycle. f) Unexpended project appropriations will be automatically carried forward as continuing appropriations to future fiscal years as required to complete the intent of the original budget with notification to the City Council Audit Committee.
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g) The City will actively pursue grant and other outside funding sources for all capital improvement projects. Staff will be cognizant that the grant amount should justify the staff time and other resources needed for its administration. 4 Risk Based Reserves.
This section is designed to develop standards for setting reserve levels for various significant City funds. Adequate reserve levels are a necessary component of the City’s overall financial management strategy and a key factor in external agencies’ measurement of the City’s financial strength. a) The City shall maintain reserves at a prudent level and shall use reserves appropriately with a focus on contributing to the reserves in good times and drawing on reserves in times of severe economic downturns, unforeseen major expenses, and/or sudden revenue losses to maintain a consistent level of service and quality operations.
b) The City shall establish certain financial reserves to protect the City against unexpected interruptions in revenues, vulnerability of State actions, adverse economic conditions, unpredictable one-time costs, and exposure to natural disasters and emergencies.
c) Established reserves will be based on an analysis of the risks that influence the needs for reserves as a hedge against uncertainty and loss. A risk is defined as probability and magnitude of a loss, disaster, or other undesirable event. The Risk Analysis will review the following risk factors and the City ‘s level of exposure to each risk factor impacting the City’s General Fund.
OPERATING RISK FACTORS
Revenue Source Stability
Vulnerability to Extreme Events
Expenditure Volatility
Leverage
Liquidity
Other Fund Dependency
Growth
CAPITAL RISK FACTORS
Capital ProjectsInfrastructure
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and Asset Replacement
Capital Asset Replacement
d) The Risk Analysis will identify the reserve level for each risk factor, the recommended Target General Fund Reserves based on all risk factors. e) The Risk Analysis will be performed biennially in coordination with the development of the operating budget.
f) The Total Minimum Reserve shall be established 5% below the Target General Fund Reserve Level.
g) The Target General Fund Reserves and Total Minimum Reserve will be established and updated by resolution based on each biennial analysis. h) Spending beyond the Total Minimum Reserve shall require a four-fifths vote of the City Council.
i) Gas Tax HUTA Fund – A minimum reserve level of $400,000 will be set aside as a reserve for street repair emergencies and other unanticipated traffic safety projects. The City Manager shall provide a plan including timeline to replenish the reserves within 180 days of City Council authorization to use the reserves. This reserve is intended to protect the City against unexpected interruptions in revenues, vulnerability of State actions, adverse economic conditions related to this revenue source.
j) Measure M Local Fair Share Fund – A minimum reserve level of $250,000 will be set aside as a reserve for street repair emergencies and other unanticipated traffic safety projects. The City Manager shall provide a plan including timeline to replenish the reserves within 180 days of City Council authorization to use the reserves. This reserve is intended to protect the City against unexpected interruptions in revenues, vulnerability of State actions, adverse economic conditions related to this revenue source. k) The City shall maintain a Pension Employer Contribution Stabilization Trust Fund to reduce volatility in the employer contribution rates set by CalPERS.
The City shall target a 95% funding status for the pension plan and a required pension liability payment of less than 10% of the annual pension contribution within the seven-year financial forecast. Funding status will be based on the most recent actuarial valuation of the pension plan. The operating budget presented by the City Manager will provide an update on the balance of the available resources and any recommendations for the budget period.
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l) The City Shall maintain an Other Post-Employment Benefits Trust (“OPEB”) Fund to fund the required health care costs to retirees. The City shall target a 100% funding status based on the most recent actuarial valuation of the OPEB Plan. The City shall make annual required contributions based on the most recent actuarial valuation of the OPEB Plan. The operating budget presented by the City Manager will provide an update on the balance of the available resources and any recommendations for the budget period.
5 Fund Balance Management.
a) The Fund Balance Policy establishes guidelines and procedures for allocating and reporting fund balance in the financial statements in accordance with Governmental Accounting Standard Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and as committed by City Council.
b) Fund balance is defined as the difference between the assets and liabilities reported in a governmental fund.
c) GASB Statement No. 54 defines five separate components of fund balance, each of which identifies the extent to which the City is bound to honor constraints on the specific purposes for which amounts can be spent. d) The following components defined by GASB Statement No. 54 shall constitute the City’s Fund Balance for financial reporting purposes:
i. Nonspendable Fund Balance (inherently nonspendable) – Assets that cannot be converted to cash(e.g., prepaid items and inventories of supplies) and assets that will not be converted to cash soon enough to affect the current period. ii. Restricted Fund Balance (externally enforceable limitations on use) – Limitations imposed by creditors, grantors, contributors, or laws and regulations of other governments and limitations imposed by law through constitutional provisions or enabling legislation.
iii. Committed Fund Balance (self-imposed limitations on use set in place prior to the end of the fiscal year) – Limitation Item: 17
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imposed at the highest level of decision making that requires formal action at the same level to remove (Ordinance).
iv. Assigned Fund Balance (limitation resulting from intended use) – Intended use established by highest level of decision making, by a body designated for that purpose, or by an official designated for that purpose, (delegated by the City Council to the City Manager).
v. Unassigned Fund Balance (residual net resources) – Excess of nonspendable, restricted, committed, and assigned total fund balance.
e) For the General Fund, unless the fund balances are non-spendable or restricted, fund balances are “spendable” and available for use at the discretion of the City Council.
f) For all other Special Revenue, Capital Projects and Debt Serve Funds, these resources are limited as to use by external enforceable limitations (e.g., enabling legislation) therefore fund balances in these funds will be categorized as restricted.
6 Revenues and Expenditures.
a) The City will maintain a level of expenditures which will provide for the health, safety and welfare of the residents of the community.
b) The City will endeavor to maintain a diversified and stable revenue base to minimize the effects of fluctuations in any single revenue source. Efforts will be directed to optimize existing revenue sources while periodically reviewing potential new revenue sources.
c) The City will estimate revenue using an objective, analytical process; in the case of assumption uncertainty, conservative projects will be utilized. d) The City will fund all current expenditures from current revenues, avoiding procedures that balance current budgets by postponing needed expenditures, accruing future revenues or rolling over short-term debt. e) Development processing costs and related administrative expenses shall be totally offset by development fees.
f) Gas tax revenues will be annually set aside to offset all costs in connection with the City’s street maintenance program. The City will strive to maintain this Item: 17
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program in such a manner that will not require the infusion of available General Fund revenuesresources.
7 User Fees.
a) The purpose of this User Fee Policy is to provide a consistent framework for the analysis and evaluation of user fees imposed by the City of Lake Forest.
Topics include: Services for which user fees are appropriately considered, basis for maximum fee amounts, amount of costs to be recovered from fees, and procedures for updating fees.
b) User fees are applied to recover all or a portion of the City’s costs for providing service of individual benefit or cause. “Providing service means activities at the option of the individual, such as requests for service, or City response to the decisions or action of the individual, such as regulation. The wide-ranging application of user fees for services of individual benefit or cause enables the general revenue sources of the City to be directed more fully to other services yielding broader community benefit. c) User fees are managed by nearly every operating function within the City.
Areas where user fees will be commonly applied include:
a. Regulatory activities, such as review and inspection of land development, construction/building, and improvements to infrastructure, and other areas of code review, compliance, and enforcement. b. Permitting, such as special events and use of public facilities, infrastructure, and services.
c. Facility rentals and use of public spaces, such as community centers, recreational sites, parks, and athletic field use.
d. Program participation.
e. Municipal operations providing service of individual benefit/request. f. Municipal operations responding to individual action. g. Licensing, billing, records management, and administration services. h. Direct-billing of City staff time.
d) Refer to the City’s Comprehensive Master Fee Schedule for a complete list of current services for which a user fee is imposed.
e) The City will identify basic tax-provided services and will establish user fees Item: 17
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and charges for services provided in excess of basis services and/or non- taxpaying users.
f) User fees are set at the discretion of the City Council, so long as the fess conform to the requirements of Article 13C of the California Constitution, which requires a “cost of services” basis for setting fee amounts. g) The City’s User fees will be set according to the estimates reasonable cost of service. Furthermore, user fees will bear a fair and reasonable relationship to the payer’s burdens on or benefits received from the activities and/or services provided by the City.
h) When evaluating user fees, the City will calculate the “full cost of service,” for each activity, which is the maximum fee amount allowed. The full cost of service will include components for:
i) The direct cost of service:
a. Labor associated with performance of service from all personnel involved in the activity.
b. Services, supplies, and/or materials required to complete the activity.
j) A reasonable share of the indirect costs of service:
a. The services, supplies, and materials which support the personnel involved in the activity.
b. The indirect management, administration, and support services associated with the City functions involved in the activity. c. The central services, City management and administration, and governmental oversight associated with the functions involved in the activity.
k) Once the full cost of service is established for each activity, the City will apply a consistent set of guidelines for determining the amount of cost to be recovered in the final fee amount. A cost recovery percentage will be applied to the full cost of service to calculate the fee.
l) Figure 1 below explains the City’s guidelines for setting a cost recovery threshold for each activity where user fees are applied. The cost recovery threshold assigned to each fee-related service will be identified in the periodic Item: 17
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analysis and documentation supporting the calculation of the City’s user fees. m) The City shall recalculate the full cost of activities supported by user fees to take into account inflation and other related matters. The following cost index will be used as the basis for calculating annual changes to the fee amounts:
Consumer Price Index (CPI) for the Los Angeles-Long Beach-Anaheim Metropolitan Statistical Area. The escalation amount will be the published annual percentage change calculation. The City’s Master Fee Schedule shall be approved and updated by resolution in connection with the adoption of the operating budget.
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n) The City will complete a thorough user fee study periodically, at least every five years, to determine the full cost of service of each activity included in the Comprehensive Master Fee Schedule. The user fee study will:
a. Analyze the direct and indirect costs associated of existing and new fee-related service provided City-wide.
b. Revisit cost recovery thresholds applied to fee related services. c. Determine updated fee amounts consistent with the cost of service basis and the City’s cost recovery at that time.
8 Accounting, Auditing, and Financial Reporting
a) The City’s accounting and financial reporting systems shall be maintained in accordance with generally accepted accounting principles (GAAP) and other standards promulgated by the GASB.
b) The City shall prepare an annual report, in a an Annual Comprehensive Annual Financial Report (CAFR ACFR) format, which shall conform to the reporting standards established by the Governmental Accounting, Auditing and Financial reporting (GAFR).
c) The annual financial report will be audited each year by an independent auditor. A new independent auditor shall be selected competitively, through a formal public request for proposal process, at least every six years pursuant to State law.
d) An Audit Committee shall be formed consisting of two City Council Members and the City Manager, or designee, to provide a direct line of communication between the auditor and the City Council. The City Attorney shall be available to advise the Audit Committee.
e) The City Manager will provide quarterly reports to the Audit Committee that compares year-to-date actuals with revenue and expenditure projections. f) The City Manager will notify the City Council whenever changing operations or economic developments require corrective budgetary measures. 9 Cash Management, Investments and Banking Relations.
a) Investments and cash management will be the responsibility of the Director of Finance/City Treasurer under the direction of the City Manager. The City may engage one or more external investments advisers that may be granted discretionary authority to purchase and sell investment securities in accordance with the City’s Statement of Investment Policy.
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a)
b) In accordance with Government Code Section 53646, the City Council will review and update annually a specific statement of investment and portfolio policy. The primary purpose of this policy is to set forth the City’s investment philosophy and objectives. The City’s investment objectivesoverriding objectives of the program are to preserve principal, provide sufficient liquidity, and manage investment risks, while seeking a market-rate of return. are safety, liquidity, and yield. The policy also specifically outlines authorized investments, the acceptable percentages and maximum maturities allowed for each investment instrument and the criteria used to determine qualified depositories/dealers.
c) In the selection of banking services, a competitive public request for proposal process will be used at least every five ten years.
Policy History
1. Adopted October 20, 2020
2. Revised March 2, 2021
3. Revised January 18, 2022
4. Revised January 3, 2023
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ATTACHMENT 2
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
INTRODUCTION
Prudent fiscal reserves are a mark of stability and a cornerstone of financial flexibility. The difficult question is: what constitutes a prudent fiscal reserve? The Government Finance Officers Association (“GFOA”) best practice recommends, at a minimum, that general-purpose governments, regardless of size, maintain an unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or operating expenditures.
This means the City should never have less than $10,545,967 in General Fund reserves based on GFOA-recommended best practices.
In June 2021, the City Council adopted a Risk Based Reserve Policy. Prior to this policy, the former Reserve Policy directed funding be set aside based on a percentage of General Fund revenues. The former policy did not consider certain specific risk factors (i.e., disasters, unfunded liabilities, emerging issues, liquidity, and growth) that could affect the City. The Risk Based Reserve Policy takes into consideration eight risk factors that could impact the City’s ability to deliver services and assigns a specific dollar amount to each factor. This approach represents a more dynamic, transparent, and effective budgeting tool to help the City Council and staff determine the appropriate level of funding needed in reserve. Staff is to conduct a General Fund Reserve Risk Analysis every two years in tandem with the formulation of the Operating Budget.
The discussion below defines “Reserves” and provides explains their importance to managing the finances of a city.
WHAT ARE RESERVES?
The terms “reserves” and “fund balance” are often used interchangeably. Fund balance is an accounting term to describe the difference between a fund’s assets and liabilities. In general, when municipal leaders are discussing the need for reserves, it is in the context of “reserving" funds for future expenses. Reserve expenses are costs associated with repairs or replacements to existing assets or expenses associated with special circumstances. Like savings for a “rainy day” in a personal budget, reserves can also be used for unplanned expenses related to litigation, economic downturns, and emergencies/natural disasters. Many cities utilize unrestricted reserves to fund capital improvements, avoid debt service costs, and increase the ability to cash flow fund a project during construction. It is Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
essential to clearly define the intended use for the City’s established reserve balance which is the purpose for the risk factors discussed later in this analysis.
WHY DOES T HE CITY HAVE RESERVES?
Ideally, a city can maintain a stable set of public services throughout an entire economic lifecycle. Maintaining healthy reserve balances protects the City from economic uncertainties and mitigates risks. Prudent reserves provide the City with options for responding to recessions and other issues and/or emergencies without impacting funds budgeted for day-to-day operations. It is vital that the City take advantage of good economic times by setting aside for those “rainy days” which are bound to occur in the future.
WHY NOT JUST RAISE TAXES OR FEES IF THE CITY NE EDS MORE MONEY? California voters have passed numerous measures that restrict the tax and fee raising authority of state and local governments. The most recent was Proposition 218, approved in 1996. Proposition 218 added restrictions to taxes, fees, and assessments, making it necessary to obtain voter approval to establish and/or raise many of them. Therefore, cities are best to plan to meet financial obligations utilizing the revenues available to it rather than depending upon voters to provide additional resources.
Table 1 below compares Lake Forest’s reserves to a subset of Orange County cities of similar size, operations, and demographics. Data for Table 1 was compiled from the Annual Comprehensive Financial Reports for Fiscal Year Ending June 30, 2022, for each city listed below.
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Table 1 - CITY COMPARISON
(IN MILLIONS)
CITY RESERVES
GENERAL
FUND
REVENUE
PERCENTAGE
OF RESERVES
TO REVENUE
Lake Forest $91.3 $60.0 152%
Rancho Santa
Margarita $27.4 $20.4 134%
Aliso Viejo $30.6 $24.3 126%
Yorba Linda $42.6 $41.6 102%
Laguna Niguel $46.7 $48.0 97%
SJC $35.1 $37.3 94%
Brea $38.7 $63.1 61%
Laguna Hills $13.8 $24.2 57%
Mission Viejo $39.3 $70.7 56%
Dana Point $21.1 $50.7 42%
San Clemente $30.3 $74.3 41%
Average $37.9 $46.8 88%
On June 15, 2021, the City Council adopted a Target Reserve Level of $52.3 million and a Minimum Reserve Level of $49.7 million (5% below the Target Reserve Level amount) based upon a risk analysis conducted by staff. Should the City Council vote to spend funds resulting in funding below the Minimum Reserve Level, staff would identify a plan to replace these funds over the next three to five fiscal years.
Table 2 below describes the City’s Discretionary Reserves as reflected in the Annual Comprehensive Financial Report for Fiscal Year Ended June 20, 2022 audited by CliftonLarsonAllen LLP. This table highlights $9.2 million of assigned General Fund Balance available as of the end of Fiscal Year 2021-2022 which is in addition to the funds identified as target reserve funds.
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Table 2 – Discretionary Reserves Summary
(IN MILLIONS)
Reserve Amount
per Policy
Available
Discretionary
Fund Balance
Percentage
of Policy
Percentage
of
General Fund
Revenues
Target Minimum
June 30, 2022 $52.3 $49.7 $91.3 174% 152%
RISK FACTORS IN DETERMINING PRUDENT RESERVES
GFOA best practices identify several risk factors that should be considered when calculating reserves. The size of reserves is determined primarily by the degree of risk associated with uncertainty, such as economic downturns, natural disasters, and other major events that could affect City finances. The risk factors used for this analysis are:
RISK FACTORS
OPERATING RISK FACTORS
1. Revenue Source Stability
2. Vulnerability to Extreme Events
3. Expenditure Volatility
4. Leverage
5. Liquidity
6. Other Fund Dependency
7. Growth
CAPITAL RISK FACTORS
8. Capital Projects – Infrastructure & Replacement
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
OPERATING RISK FACTORS
DETERMINING THE RESERVE
Revenue stability is important for the City’s consistency and growth. If the City’s expenditures outgrow revenue sources, the City would not continue to operate at the same level of service. Property tax, sales tax, and transient occupancy tax revenues are the primary source of revenue for the City. There is more spending discretion over these revenues in comparison to federal grants, user fees, or other funds that must be used for a specific program or purpose. As such, fluctuations in these revenue sources will affect the City’s ability to budget for public services.
RISK FACTOR #1 – REVENUE SOURCE STABILITY
How stable is the tax base in the face of adverse economic conditions? Relative to other revenues, property tax is considered a stable source of revenue. Sales and transient occupancy taxes (i.e., hotel taxes), however, are considered less stable. An excellent example of this is the 2008 recession. Lake Forest did not return to its pre-recession sales tax base until 2016, or eight years after the Great Recession. However, the City benefits from its ability to accommodate and retain profitable businesses in a diverse set of industries. As a result, sales tax revenue is more likely to remain stable due to the fact that the City does not rely heavily on a subset of industries.
PROPERTY TAX:
Property tax revenue steadily decreased from 2010 to 2012. Revenue received during 2011 and 2012 still exceeded pre-recession revenue in 2007 by $0.24 million. The property tax revenue base only declined $0.68 million in total during and immediately after the recession began. In 2013, only four years after the recession, property taxes reached a new high of $14 million and have continued to grow ever since. Property taxes continued to grow even with the onset of the 2020 pandemic.
The City’s property taxes continue to increase due to the new homes being constructed. New home building is projected to continue in Lake Forest for the next two years but expected to decrease due to the completion of the new Item: 17
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2023 General Fund Reserve Risk Analysis
June 2023
residential communities. The City’s property tax revenue increased by $1.4 million over the previous fiscal year (FY 20-21). This was primarily due to new residential housing development and historically low mortgage rates. Over the past 10 years, median price of single-family residential homes has increased 60%, demonstrating the strength and stability of the City’s property tax base.
SALES TAX:
Sales tax is considered a cyclical tax in that it is often impacted by unemployment and other economic conditions. The City’s sales tax revenues declined $1.57 million in 2009 and 2010 due to the Great Recession. However, sales tax revenue increased in 2011 and continued to rise. In 2020, sales tax revenue decreased to $15.75 million due to the COVID-19 pandemic, but quickly rebounded to $17.20 million the following year.
The City receives 1% of the sales tax from purchases at our local retail businesses, receiving one cent of every dollar of taxable sales occurring in Lake Forest. The City’s sales tax base is highly diversified, protecting the City from sudden revenue losses from a downturn in any one industry sector.
Due to the pandemic, the shift to online shopping which began several years ago has accelerated faster than the State can determine a “modern” methodology to allocate online sales tax. While sales taxes from online sales are remitted to a countywide pool, the City receives only a proportionate share based on a methodology that does not include point of delivery. The good news is the implementation of the Wayfair decision, which allows states to charge tax on purchases made from out-of-state sellers (even those without a physical presence in state), has resulted in an increase in sales taxes allocated to the countywide pool which, in turn, is allocated to the City.
TRANSIENT OCCUPANCY TAXES:
Transient occupancy taxes (“TOT”), also referred to as hotel taxes, have continued to grow as new hotels are built in Lake Forest. There is now a total of 14 hotels in the city. Between 2013 and 2019, TOT increased by 38% to $3.88 million. During 2020-2021, TOT revenue decreased by 28% due to the emergence of the coronavirus (COVID-19). In 2022, TOT increased by 86% to a new high of $5.2 million.
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Table 3 - 14-YEAR PROGRESSIVE REVENUE SOURCE TABLE
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Property Tax 13.20 12.87 12.52 12.52 14.01 14.56 14.98 15.56 16.65 17.65 19.75 20.70 22.30 23.70 Dollar Change 0.18 (0.33) (0.35) 0.00 1.49 0.55 0.42 0.58 1.09 1.00 2.10 0.95 1.60 1.40 Percentage
Change
1.38% -2.50% -2.72% 0.00% 11.90% 3.93% 2.88% 3.87% 7.01% 6.01% 11.90% 4.80% 7.73% 6.28%
Sales Tax 12.48 10.91 12.63 13.05 13.06 13.33 13.81 15.43 15.64 16.05 17.10 15.75 17.20 19.00 Dollar Change (2.73) (1.57) 1.72 0.42 0.01 0.27 0.48 1.62 0.21 0.41 1.05 (1.35) 1.45 1.80 Percentage
Change
-17.95% -12.58% 15.77% 3.33% 0.08% 2.07% 3.60% 11.73% 1.36% 2.62% 6.50% -7.90% 9.21% 10.47%
Transient
Occupancy
Tax
2.23 1.94 2.44 2.67 2.82 3.14 3.41 3.58 3.78 3.81 3.88 2.90 2.80 5.20 Dollar Change (0.58) (0.29) 0.50 0.23 0.15 0.32 0.27 0.17 0.20 0.03 0.06 (1.00) (0.10) 2.40 Percentage
Change
-20.64% -13.00% 25.77% 9.43% 5.62% 11.35% 8.60% 4.99% 5.59% 0.79% 1.71% -25.77% -3.45% 85.71%
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2023 General Fund Reserve Risk Analysis
June 2023
New hotels are drawn to Lake Forest to serve non-leisure travel. In other words, these hotels are serving the business community and tend to be booked on weekdays. Because these hotels are not related to tourism, this revenue is vulnerable to downturns in the economy along with the shift to virtual meetings.
TAX REVENUE DIVERSITY:
A secondary vulnerability to the City’s revenue sources is lack of revenue diversity. Lake Forest is heavily dependent upon three tax revenues: property taxes, sales taxes, and TOT. For example, cities with limited public parking, such as beach cities and cities with vibrant commercial districts, receive large amounts of revenue from parking meters, parking structures and parking citations. Utility users taxes and business license taxes are also common General Fund revenue resources. Lake Forest does not collect any of these taxes.
Cities with a less diversified base of General Fund revenue will require a greater amount in reserves to weather a downturn in just one revenue area. For FY 2022-23, the City is projected to receive $60.8 million in General Fund revenue.
Of this amount, $50.6 million is from taxes with the balance of $3 million from license and permits, user fees, fines and forfeitures and other miscellaneous sources. Of the $50.6 million tax revenue, $23.7 million is from property taxes, $18.75 million is from sales taxes, and $4.5 million is from transient occupancy taxes. The balance is generated by other taxes such as real property and franchise fees tax. As mentioned earlier, the City cannot increase taxes without voter approval because of Proposition 218. This limits the City’s ability to increase taxes should funding shortfalls occur. In short, the City has a narrow base of General Fund tax revenues.
Over the course of the Great Recession, the City lost $17.20 million of sales tax revenues, $0.97 million of property tax revenues, and $.29 million in TOT revenues. In total, the City lost almost $20.52 million in resources from the beginning of the recession through 2016.
Over the course the Covid-19 Pandemic the City lost $1.35 million of sales tax revenues, had growth of $0.95 million of property tax revenues, and a loss of $2.06 million in TOT revenues. In total, the City lost almost $2.46 million until a full recovery was seen.
Risk Factor #1 Revenue Source Stability Reserve
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Amount
How stable is the tax base in the face of adverse economic conditions?
$9,600,000
RISK FACTOR #2 – VULNERABILITY TO EXTREME EVENTS
As it pertains to this risk factor, extreme events are defined as extreme government funding take backs. In other words, the potential for funds that local jurisdictions receive from the state to be withheld.
2a: Is any City revenue source at risk due to State or Federal political action?
Cities have paid a heavy price over the years when the State faced on-going fiscal challenges. Tax shifts, borrowing and other taking of certain funds allocated to local governments began in the 1990’s with the Educational Revenue Augmentation Fund (“ERAF”) I and II shift, followed by a number of other actions. To this day, the original ERAF shifts remain in place.
Governor Brown initiated and carried out the dissolution of redevelopment, which redirected funds from local governments to school districts. In January 2019, Governor Newsom threatened to withhold Senate Bill 1 Gas Tax revenue to cities not seeking to increase affordable housing. While Senate Bill 1 funding does not flow through the General Fund, any taking of these funds will compromise the City’s ability to continue to maintain City streets in a “good” pavement condition.
In 2020, Governor Newsom tied the use of CARES Act funds, of which the City received $1,045,000, to compliance with California Department of Public Health guidance and Blueprint for a Safer Economy.
Risk Factor #2b Is the City susceptible to disaster? What is the level of insurance?
Risk Factor #2a Vulnerability To Extreme Events - Political Reserve Amount
Is any City revenue source at risk due to State or Federal political action?
$1,000,000
Item: 17
745
City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
The City’s Southern California location is susceptible to earthquakes and wildfires. Incorporated in 1991, the City has never suffered severely from a natural disaster. However, the City is not immune to such a circumstance and has previously experienced losses from winter storm damage. During the winter storms in 2019, the City incurred costs of approximately $500,000. Wildfires in past years have occurred along city borders. In 2020, the Orange County Sheriff issued mandatory evacuations in Lake Forest due to the Silverado fire and Bond fire. Fortunately, the City did not experience any injuries or property damage due to these fires. However, fire season starts sooner and lasts longer than in the past.
The City procures insurance through the California Joint Powers Insurance Authority (“CJPIA”). The City’s deductible is negligible for any non-earthquake or flood related loss at any City facility. The City also has earthquake and flood insurance on most City facilities. Earthquake claims have a minimum $100,000 deductible; however, the deductible could reach as high as 5% of the value of property, which could exceed $700,000 on some of the City’s facilities. Risk of damage from flood or earthquake is considered low and existing insurance coverage is considered robust; however, it would be prudent to set aside an amount approximately equal to the City’s deductible for one instance of damage to a City facility in the event of an earthquake.
Another type of disaster could be in the form of a cybersecurity incident. A cybersecurity attack can result in identity theft, extortion attempts, or loss of data.
The City services and operations rely heavily on the availability, functionality, and security of technology system and data. Successful cyber-attacks against City technologies and data would have a serious impact on the City’s ability to deliver services.
While the City takes cyber security seriously and utilizes a variety of robust tools to prevent cybersecurity incidents, a successful cybersecurity attack is possible.
It would be prudent to set aside an amount approximately equal to the City’s deductible for one instance of damage due to cyber criminal activity.
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #2b Vulnerability to Extreme Events - Disaster Reserve Amount
Is the City susceptible to natural disaster?
What is the level of insurance?
Wildfire Damage $500,000
Storm Damage 500,000
Earthquake 700,000
Cyber Security 250,000
$1,950,000
$1,950,000
Risk Factor #2c Are there current City services and/or emerging issues that are prone to legal challenges?
Cities spend millions annually responding to lawsuits involving injuries on public property, environmental issues, and a range of other legal challenges. It is difficult to predict when and if the City may be involved in litigation and the costs involved. The GFOA recommends that municipalities have a category in their reserves for cost spikes from legal challenges. Due to the unpredictability of litigation, it is prudent to set aside funds for this purpose.
Risk Factor #2c Vulnerability to Extreme Events - Legal Reserve Amount
Are there current City services and/or emerging issues that are prone to legal challenge?
$1,000,000
Risk Factor #2 Vulnerability To Extreme Events - Total Total Reserve
Amount
Are there events related to state or federal action, natural disaster, contract obligations, and issues prone to legal challenge?
$3,950,000
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
RISK FACTOR #3 – EXPENDITURE VOLATILITY
What future contractual obligations does the City have that dictate required expenditure levels?
This analysis excludes unfunded liabilities and debt service, which are considered under Risk Factor #4. This risk factor refers to potential spikes in expenditures, usually arising from a special, non-recurring circumstance. These expenses have generally been related to the City paying its proportionate share of a regional system. For example, the City paid $611,228 for its share of the new Orange County Animal Care Center in 2017. Another example is the City’s share of the 800 MHz II radio system in the amount of $569,821. Each time, the City used cash for its portion of the expense and avoided paying interest. There are no expenditures identified at this time that would be considered special and non-recurring. However, a reserve for unknown special and non-reoccurring expenses is prudent.
Other factors affecting expenditure volatility include sustaining the cost of maintaining the current service levels. In the last budget cycle, a trend of contracts increasing beyond typical CPI levels raised concerns about funding levels progressing at a pace more rapidly than current revenues. Prevailing wage laws can have a significant impact on contract costs. These laws require contractors and subcontractors to pay their workers a predetermined wage rate, typically based on the average wages in a particular region or industry. This, in turn, may result in higher contract prices for public projects, and maintenance as contractors’ factor in the higher wages they are required to pay. Consequently, prevailing wage laws can have a direct impact on the budget.
Risk Factor #3 Expenditure Volatility Reserve
Amount
What future contractual obligations does the City have that dictate required expenditure levels?
$4,000,000
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #4 – Leverage
Financial leverage is defined as the use of borrowed funds to purchase assets with the expectation that the return from the transaction will exceed the borrowing cost. A highly leveraged organization has less flexibility. Examples of leverage include long-term debt, pension, and other post-employment healthcare benefit obligations. Reserves are a critical source of financial flexibility, so higher leverage may call for higher reserves. The City has no structured debt obligations, so the City’s reserve strategy does not need to account for reduced financial flexibility from debt.
Risk Factor #4a Does the City have debt?
The City has no general fund bonded debt as compared to other Orange County cities shown in Table 4. This table illustrates two commonly used measures of indebtedness. The first, debt per capita, measures the burden placed on citizens by municipal indebtedness. The second measure is debt service (principal and interest payments) as a percent of city non-capital expenditures. This measures the pressure placed on the budget by debt payments. Like a household budget, flexibility in spending is limited by debt payments. Lake Forest proudly sits at zero debt, well below both the average of the debt per capita measure and percent of expenditures measure among the comparative agencies.
Table 4 – City Debt Comparison
(in Millions)
Lake
Forest
Laguna
Hills
San Juan
Capistrano
Brea
Mission
Viejo
with Mall
Bonds
Aliso
Viejo
Debt 0.0 1.3 24.8 42.9 45.4 12.02
Population 86,775 30,750 34,798 46,872 92,515 50,782
Debt per
Capita 0.0 $53 $474 $991 $490 $237
Debt Service
as % of
Expenditures
0.0 7.96% 5.14% 0.70% 4.52% 2.44%
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #4a Leverage - Debt Reserve
Amount
Does the City have debt? $0
Risk Factor #4b Does The City Have Any Pension Unfunded Accrued Liabilities (UAL)?
The City participates in the California Public Employees Retirement System (CalPERS). As of June 30, 2021, the pension plan funded status for classic CalPERS employees is 106.7% funded, while the pension plan funded status for PEPRA employees is 105.7% funded. New unfunded liabilities can emerge in future years due to assumption or method changes, changes in plan provisions, and actuarial experience different than assumed.
The unfunded liability
fluctuates based on the gains or losses of CalPERS investments and is anticipated to return to the funded status of prior years’ high ninety percentile.
Due to current assumptions, there are no unfunded liability payments in Fiscal Year 2023-24. Approximately 45% of Lake Forest employees are classic CalPERS members. Given the uncertainty around pension issues, it is difficult to say when increases would occur or how much they might be, especially when the pension board makes changes to pension assumptions that negatively impact the pensions funded status. Accordingly, it would be prudent to set aside reserves to help make a more gradual adjustment to any potential large increase in contribution rates. See Table 5 for a list of unfunded actuarial liabilities (“UAL”) in neighboring cities.
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Table 5 – Unfunded Pension Accrued Liabilities
Comparison to Neighboring Cities
City Normal Costs
(FY 22-23)
UAL Payment
(FY 22-23)
PERS Projected
Covered Payroll
(FY 22-23)
Total
Percentage
of Payroll
Unfunded
Liability Balance
(FY 22-23)
Average Balance
of Unfunded
UAAL
Outstanding
(End of FY 20/21)
Aliso Viejo 250,489 101,859 2,661,726 13% 347,790 -1% Brea 3,613,979 12,075,583 28,421,350 55% 107,518,973 22% Dana Point 596,978 577,579 6,135,478 19% 3,927,826 4% Laguna Niguel 604,845 823,686 6,711,612 21% 6,337,275 4% Laguna Hills 310,761 405,469 3,391,700 21% 2,706,650 4% Lake Forest 625,415 100,875 6,365,381 11% (2,966,596) -6% Mission Viejo 1,388,240 2,161,927 12,484,176 28% 11,377,815 12% Rancho Santa
Margarita 245,253 166,415 2,644,150 16% 1,073,815 3% San Clemente 1,619,269 2,773,043 16,998,513 26% 16,370,929 8% Yorba Linda 1,245,375 2,034,470 11,499,309 29% 15,046,865 19% Average Amounts 1,050,060 2,122,091 9,731,340 24% 16,174,134 7%
Risk Factor #4b Leverage – Pension Unfunded Liabilities Reserve Amount
Does the City have unfunded accrued liabilities (UAL)? $3,000,000
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #4c Does The City Have Any Additional Unfunded Accrued Liabilities?
The City also provides healthcare post-employment benefit. See Table 6 for a list of unfunded other post-employment benefits (“OPEB”) in neighboring cities.
Table 6 – Unfunded Other Post-Employment Benefits Accrued Liabilities Comparison to Neighboring Cities
City Accrued
Liability Fund Assets
Plan Net
Unfunded
Liability
Percentage
of Total
Aliso Viejo 544,976 - 544,976 0%
Brea 29,180,581 (1,075,299) 30,255,880 -4%
Dana Point 1,397,265 (269,585) 1,666,850 -19%
Laguna Niguel 2,726,547 980,135 1,746,412 36%
Laguna Hills - - - 0%
Lake Forest 1,155,283 620,230 535,053 54%
Mission Viejo 10,527,599 12,664,140 (2,136,541) 120% Rancho Santa Margarita 856,773 (142,899) 999,672 -17% San Clemente 4,321,810 1,443,015 2,878,795 33%
Yorba Linda 17,030,082 1,633,785 15,396,297 10%
Average Amounts 6,774,092 1,585,352 5,188,739 21%
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #4c Leverage – Additional Unfunded Liabilities Reserve Amount
Does the City have additional unfunded accrued liabilities (UAL)?
$1,250,000
Risk Factor #4 Leverage Total
Reserve
Amount
Are there events related to state or federal action, natural disaster, contract obligations, and issues prone to legal challenge?
$4,250,000
Risk Factor #5 – Liquidity
What are the cash flow needs of the City?
Cities have consistent, year-round expenses, yet major revenues are received periodically. Some amount of fund balance reserves is needed to avoid cash flow problems caused by an uneven stream of revenue. As reported earlier, property tax revenue is the City’s largest revenue source. The majority of property tax revenue is received in December, January, April, and May each fiscal year. This means that cash outflow could exceed cash inflow for eight months out of the fiscal year. If there were insufficient reserves, the City would have to borrow funds to cover the cash needed for the first half of the fiscal year.
Halfway through the fiscal year, which is December 31
st, it would be expected
that 50% of expenditures and revenues have been spent and received.
However, typically 35% of revenues have been received, while 50% of expenditures have been spent.
Based on this analysis, by December 31st, the City generates an $8 million differential between revenues and expenditures before beginning to receive sufficient revenue resources to adequately offset monthly disbursements. Over the City’s history, the amount of negative cash flow has fluctuated annually.
Therefore, a conservative reserve is necessary to ensure the City’s “bills” are paid on a timely basis and avoids the need to engage in short-term borrowing for cash flow purposes.
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #5 Liquidity Reserve
Amount
What are the cash flow needs of the City? $8,000,000
Risk Factor #6 – Other Fund Dependency
What other funds have a significant dependence on the General Fund? Risk Factor #6a – Other Fund Short Term Borrowing
Two City funds that have dependency on the General Fund by way of annual subsidies for timing of cash flow purposes: Community Development Block Grant (“CDBG”) and Measure M2. These amounts can fluctuate from year to year.
The City is a regular recipient of grant and developer fee funding, specifically for capital improvement program (“CIP”) projects. A common characteristic of grant and developer fee funding is that most awarding agencies expect that project expenditures be incurred before requests for reimbursement are submitted to the granting agency. Essentially, most grants are on a reimbursement basis.
Provided grant regulations are followed, the City will be repaid for these expenditures. However, there is a timing difference in which the General Fund will advance funding for these projects.
Looking historically at the last five fiscal years, funds for CDBG projects, Measure M2, and other miscellaneous grants have “borrowed” General Fund resources for project expenditures.
A reserve for fund dependence will ensure the City does not lose an opportunity for grant funding due to the timing of a reimbursement.
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #6a Other Fund Dependency Short Term Borrowing Reserve Amount
What other funds have a significant dependence on the
General Fund?
$1,000,000
Risk Factor #6b – Other Fund Annual Subsidy
The City pays for the majority of contract street maintenance services with State Gas Tax HUTA resources. Contract street maintenance services include day-to- day street maintenance repair work and biennial citywide street striping. The cost of the current service level for bi-annual striping cannot be maintained by the Gas Tax HUTA resources at this time. Historically, contractual street maintenance services remained within budget despite recent declines in State Gas Tax HUTA revenue. However, historical trends show this is not viable in future years.
Statewide, Gas Tax HUTA funds are projected to be flat or decrease slightly in the near term due to the increased public reliance on electric vehicles and reduced gas consumption related to the telecommuting policies popularized during the COVID-19 pandemic. As a result, many local governments will likely need to adjust their traditional reliance on Gas Tax HUTA funds to cover the costs of road maintenance activities.
Over the next seven-year financial forecast range, if the City choses to maintain the current service level, a $4.3 million subsidy will be needed for funding as shown in Table 7. This graphic utilizes the last ten fiscal years of actuals and projected budget to form a trend of expected funding and expenditures.
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Table 7 – Anticipated Gas Tax Shortfall
Based on this analysis it would be prudent to reserve this level of funding for future uses in order to maintain service levels.
Risk Factor #6b Other Fund Dependency Annual Subsidy Reserve Amount
What other funds have a significant dependence on the
General Fund?
$4,300,000
Risk Factor #6 Other Fund Dependency Reserve
Amount
What other funds have a significant dependence on the
General Fund?
$5,300,000
0.00 0.50
1.00 1.50
2.00 2.50
3.00 3.50
4.00 4.50
Gas Tax Revenue/Expenditure Comparison
Revenue Expenditure
Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Risk Factor #7 – Growth
What new program areas will be required in the future and how will the City pay for these?
The City has a significant contract with the Orange County Sheriff’s Department (OCSD) that provides the City limited flexibility as to the scope and costs. In recent years, new OCSD programs, along with increasing pension costs, have resulted in sharp increases in contract costs. Program costs previously added to the City’s OCSD contract include the Lake Forest sub-station, the Field Training Bureau (“FTB”), and body-worn cameras. OCSD contract information for previous fiscal years are summarized in Table 8.
Table 8 – OCSD Contract by Fiscal Year
Fiscal Year Contract
Amount
Increase
from Prior
Year
Percentage
Increase
Percentage
of General
Fund
2014-15 $13,336,803 - - 35.08%
2015-16 14,210,900 874,097 6.55% 35.41%
2016-17 14,869,720 658,820 4.64% 34.70%
2017-18 16,134,298 1,264,578 8.50% 34.85%
2018-19 17,062,663 928,365 5.75% 36.00%
2019-20 17,659,961 597,238 3.5% 35.68%
2020-21 18,348,264 335,384 3.9% 39.46%
2021-22 19,003,498 655,234 3.6% 37.10%
2022-23 19,707,131 703,633 3.7% 37.44%
2023-24* 20,890,858 1,183,454 6.0% 35.00%
*As of preparation of analysis, the contract amount is proposed.
At the time of this analysis, the estimate from OCSD for the FY 2023-24 fiscal year is $20.9 million, a 6% increase over the 2022-23 contract. Contract costs are also influenced by the current collective bargaining agreement between the Orange County Board of Supervisors and Deputy Sheriffs.
The OCSD contract is a recurring annual contract and should not normally be addressed through reserves. However, it is prudent to set aside funds for use during an economic crisis because: (1) the City cannot significantly modify the Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
terms of the law enforcement contract; (2) the City cannot quickly raise additional revenues and, (3) the City cannot control mid-contract increases. This reserve should be able to fund two years of contract fluctuations in order to maintain a high level of service at an additional $1.0 million per year.
Risk Factor #7 Growth Reserve
Amount
What new program areas will be required in the future and how will the City pay for these?
$2,000,000
CAPITAL RISK FACTORS
Risk Factor #8 – Capital Projects – Infrastructure & Replacement Does the City have any infrastructure and capital asset replacement needs?
The term capital assets is used to describe assets that are used in operations and have initial useful lives extending beyond a single reporting period. Capital assets include facilities, infrastructure, equipment, and networks that enable the delivery of municipal services. The performance and continued use of these capital assets is essential to the health, safety, economic development, and quality of life of a community.
In some agencies, budgetary pressures can impede capital program expenditures or investments for maintenance and replacement. This is especially true for local governments that do not prepare a multi-year capital plan or properly consider the impact of capital projects on the operating budget. This lack of investment makes it increasingly difficult to sustain the asset in a condition necessary to provide expected service levels. Ultimately, deferring essential maintenance or asset replacement could reduce the organization’s ability to provide services and could threaten public health, safety, and overall quality of life. In addition, as the physical condition of the asset declines, deferring maintenance and/or replacement could increase long-term costs and liabilities.
A target reserve percentage for infrastructure replacement is 5%. There is the option to set up an annual noncash depreciation expense where actual cash is moved from the general fund account to an assigned reserve account for infrastructure replacement. Applying this option to the City would result in the Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
need to allocate $6.7 million annually, which is a funding level not currently feasible. Table 9 below is a summary of depreciating assets.
The City has $142.5 million in depreciable non-infrastructure capital assets. Of this amount, $100.4 are categorized as buildings and improvements, $37.5 improvements other than buildings, and $4.6 million categorized as machinery and equipment. The City’s capital assets now reflect the Lake Forest Civic Center which opened in December 2019.
Table 9 – SUMMARY OF COMBINED INFRASTRUCTURE ASSETS/CAPITAL
ASSET REPLACEMENT
The City’s 2023-2030 Capital Improvement Plan includes the use of $6.5 million of general fund resources. The planned capital spending can be met on a pay- as-you-go basis with the operating surplus’ anticipated during the seven-year financial forecast. As a result, no reserve for capital is necessary during the seven-year financial forecast period to meet the capital needs as currently Summary of Assets
Infrastructure
Building and
Improvements
Improvements
other than
Building
Machinery
and
Equipment Total
Capital Assets
Being
Depreciated
265,060,622 100,421,374
37,453,286
4,550,741
407,486,023
Accumulated
Depreciation
150,007,332 10,367,541
9,551,939
4,427,114
174,353,926
Net Book Value
115,053,290 90,053,833
27,901,347
123,627
233,132,097
Depreciation
Expense
6,728,993 3,937,228
1,350,367
96,080
12,112,668
Annual
Deprecation
percentage 2.54% 3.92% 3.61% 2.11% 2.97%
Target Reserve
Percentage 5% 10% 10% 10% -
Target Reserve $ 13,253,031 $ 10,042,137 $ 3,745,329 $ 455,074 $27,495,571 Item: 17
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
planned. In order to refine the amount identified to set aside for capital asset replacement, the City is in the process of developing an asset management plan.
The asset management plan will be a transformative and accurate tool the City can use to financially plan for the continued maintenance of all City assets. By considering the City’s maintenance and replacement needs in advance, it allows the City to determine an annual amount capital asset replacement.
During the current development of this plan, it is prudent to reserve funding for these future needs.
Risk Factor # 8 Capital Projects – Infrastructure &
Replacement
Reserve
Amount
Does the City have any infrastructure and capital asset replacement needs?
$27,500,000
SUMMARY OF RESERVE LEVELS PER RISK FACTOR
Eight risk factors have been analyzed to ascertain what constitutes a prudent reserve level for the City of Lake Forest. Table 10 demonstrates the results of each analysis. Risk factor 5 – Liquidity has not been used in calculating the target reserve level. For liquidity, the resources needed overlap with the other risk factors. As long as there is at least $8.0 million in reserves as a result of all the other factors combined, this same $8.0 million could be used to satisfy cash flow needs.
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City of Lake Forest
2023 General Fund Reserve Risk Analysis
June 2023
Table 10 – RESERVE LEVELS PER RISK FACTOR
1 Revenue Source Stability $9.60
2a Vulnerability to Extreme Events - Political 1.00
2b Vulnerability to Extreme Events - Disaster 1.95
2c Vulnerability to Extreme Events – Legal 1.00
3 Expenditure Volatility 4.00
4a Leverage-Debt Service 0.00
4b Leverage- Pension Unfunded Liabilities 3.00
4c Leverage – Other Unfunded Liabilities 1.25
6a Other Fund Dependency – Short Term 1.00
6b Other Fund Dependency – Annual 4.30
7 Growth 2.00
8 Capital Projects -Infrastructure &
Replacement
27.5 Total $56.6
% Based on Projected 2023-24 Revenue 89.4%
Optional Factors Not Used in Calculation
5 Liquidity 8.00
Therefore, the Target Reserve Level is set at $56.6 million with a Minimum Reserve Level set at $53.77 million (5% below the Target Reserve amount).
CONCLUSION
The City’s Risk Reserve Policy is a component of the City’s Financial Management and Budgetary Policy which establishes financial parameters to guide the development of the budget. The desired policy outcome is that the long-term implications of financial decisions are fully understood and considered in the decision-making process. Accordingly, the General Fund Risk Reserve Analysis provides a funding plan that analyzes the risks that influence the level of reserves the City needs to protect the organization against uncertainty and loss.
Lessons learned by municipalities after the Great Recession, coupled with California municipal revenue raising restrictions, emphasize the importance of establishing reserves. More recently, the COVID-19 pandemic demonstrated how reserves are used to reduce the budgetary impacts of economic downturns and continue the delivery of basic services during an unforeseen emergency.
Item: 17
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ATTACHMENT 3
Item: 17
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City of lake forest
PARS 115 Trust – OPEB Prefunding Program and Pension Rate Stabilization Program Plan & Alternate Retirement System (ARS) Client Review
May 24, 2023
Item: 17
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City Of lake forest ▎ 2
Contacts
Dennis Yu
Executive Vice President
(800) 540- 6369 x104
[email protected]
Alexandra Irving
Client Services Coordinator
(800) 540- 6369 x105
[email protected]
Keith Stribling, CFA
Senior Portfolio Manager
(949) 553- 2591
[email protected]
Item: 17
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City Of lake forest ▎ 3
Pars 115 Trust Team
Trust Administrator & Consultant
39 Years of Experience
(1984-2023)
2,000+
Plans under
Administration
1,000+
Public Agency
Clients
$6.4B
Assets under
Administration
500 K+
Plan Participants
Investment Manager
• Investment sub-advisor to trustee U.S. Bank
• Investment policy assistance
• Uses open architecture
• Active and passive platform options
• Customized portfolios (with minimum asset level)
104
Years of Experience
(1919-2023)
$17.7B
Assets under
Management &
Advisement
Trustee
• 5th largest commercial bank and one of the
nation’s largest trustees for Section 115 trusts
• Safeguard plan assets
• Oversight protection as plan fiduciary
• Custodian of assets
160
Years of Experience
(1863-2023)
$9.0T
Assets under Trust
Custody
500+
115 Trust Clients
• Serves as record-keeper, consultant,
and central point of contact
• Sub-trust accounting
• Coordinates all agency services
• Monitors plan compliance
(IRS/GASB/State Government Code)
• Processes contributions/disbursements
• Hands-on, dedicated support teams
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City Of lake forest ▎ 4
• Fielding Participant and Agency information requests
• Coordinating with PARS Trustee on benefit distributions and tax- reporting (1099s)
• Preparing monthly and annual Agency statements
• Coordinating annual audit of PARS Trust by independent CPA firm
• Preparing annual State Controller’s Report
• Assisting Agency with ongoing compliance and qualification issues
Pars administrative services
Item: 17
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City Of lake forest ▎ 5
PARS Section 115 Trust
for prefunding OPEB & Pension obligations
The
Item: 17
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City Of lake forest ▎ 6
• Section 115 Trusts are used by local governments to fund essential governmental functions (i.e., pension benefits and retiree health care) into an irrevocable trust
• The PARS Trust received an IRS Private Letter Ruling (PLR) in June 2015 to fund both OPEB and Pension Liabilities for a multiple-employer trust • Any income derived from a Section 115 Trust is tax exempt • Plan Investments governed by CA Govt Code Section 53216.6 and 53620 • Once contributions are placed into The PARS Trust, assets from the Trust can be used for specific benefit plan purposes including:
— Reimbursing the City for retirement system contributions — Transferring assets directly to the retirement system — Reimburse the City for OPEB Pay as you Go expenses
— Paying plan expenses (actuarial valuation or audit)
Section 115 Trust Background
Item: 17
768
City Of lake forest ▎ 7
Subaccounts
OPEB and pension assets are
individually sub-accounted,
and can be divided by dept.,
bargaining group, or cost center.
Assets in the PARS Section 115
Combination Trust can be used
to address unfunded liabilities.
Financial Stability
Allows separate investment
strategies for OPEB and
pension subaccounts.
Flexible Investing
OPEB and pension assets
aggregate and reach lower fees
on tiered schedule sooner –
saving money!
Economies-of-ScaleAnytime Access
Trust funds are available
anytime; OPEB for OPEB
and pension for pension.
No set-up costs, no minimum
annual contribution amounts,
and no fees until assets are added.
No Set Up Cost or Minimums
Retiree Medical Benefits
Prefund OPEB GASB 75
OPEB
Reimburse agency; or
Pay benefits provider
Pension Rate Stabilization Program
Prefund Pension (PRSP) GASB 68
Pension
Reimburse agency; or
Pay retirement system
Assets can be used to: Assets can be used to:
prefund
either or both
General Fund
PARS IRS -Approved Section 115 Trust
Item: 17
769
City Of lake forest ▎ 8
PARS OPEB TRUST Program
for prefunding Other Post -Employment Benefits
The
Item: 17
770
City Of lake forest ▎ 9
Why Prefund OPEB?
Reduced Costs
Diversification of trust assets can result in a greater rate of return, which can lower your eventual OPEB costs
1. Improve your Discount Rate
Continuing with Pay-as-you-Go strategy requires future valuations to use 20 year municipal treasury rate as discount rate. Pre-funding allows for increase discount rate
2. GASB 75
Effective 2017-18, GASB 75 will require OPEB liabilities to be placed directly on your balance sheet similar to pension liabilities under GASB 68. Assets in an OPEB Trust can address your OPEB liabilities
3. Improve Credit Ratings
Agencies that pre-fund their employee benefit liabilities can have a positive impact on their credit ratings, which may lower long term borrowing costs
4. Item: 17
771
City Of lake forest ▎ 10
• We have received the Annual Comprehensive Financial Report with a measurement date as of June 30, 2021. In the table below, we have summarized the results.
OPEB Actuarial Results
Demographic Study
Measurement Date
June 30, 2020
From the 2021 Annual
Comprehensive Financial Report
Measurement Date
June 30, 2021
From the 2022 Annual
Comprehensive Financial Report
Actives 61 57
Retirees 12 12
Total 73 69
Item: 17
772
City Of lake forest ▎ 11
OPEB Actuarial Results
Measurement Date
June 30, 2020
Discount Rate: 2.70%
From the 2021 Annual Comprehensive
Financial Report
Measurement Date
June 30, 2021
Discount Rate: 2.59%
From the 2022 Annual Comprehensive
Financial Report
Total OPEB Liability (TOL) $1,319,010 $1,155,283
Fiduciary Net Position $530,157 $620,230
Net OPEB Liability (NOL) $788,853 $535,053
Funded Ratio (%) 40.2% 53.7%
Service Cost plus Interest $127,255 $154,659
Annual Benefit Payments
(Pay-as-you-Go) $20,153 $22,632
Rule of thumb: For every one percent increase in the discount rate, the unfunded liability is lowered by 10-12%.
Item: 17
773
City Of lake forest ▎ 12
Plan Type: IRC Section 115 Irrevocable Exclusive Benefit Trust Trustee Approach: Discretionary
Plan Effective Date: June 19, 2012
Plan Administrator: Director of Finance
Current Investment Strategy: Moderate HighMark PLUS (Active) Strategy; Pooled Account Summary of Agency’s opeb Plan
AS OF APRIL 30, 2023:
Initial Contribution: June 2012: $200,000
Additional Contributions: $242,100
Total Contributions: $442,100
Disbursements: ($168,064)
Net Investment Earnings: $248,886
Account Balance: $522,922
Item: 17
774
City Of lake forest ▎ 13
Summary of Agency’s opeb Plan
*Plan Year Ending June 2012 is based on 1 month of activity. **Plan Year Ending June 2023 is based on 10 months of activity.
HISTORY OF CONTRIBUTIONS, DISBURSEMENTS, AND TOTAL ASSETS AS OF APRIL 30, 2023:
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Plan Year Ending
Contributions
Disbursements
Total Assets
Year Contributions Disbursements Total Assets
Jun-12* $200,000 $0 $200,000
Jun-13 $242,100 $4,799 $442,322
Jun-14 $0 $7,102 $469,437
Jun-15 $0 $9,295 $467,912
Jun-16 $0 $11,413 $473,006
Jun-17 $0 $12,271 $508,638
Jun-18 $0 $21,242 $519,728
Jun-19 $0 $19,518 $533,036
Jun-20 $0 $20,153 $530,157
Jun-21 $0 $22,632 $620,230
Jun-22 $0 $21,359 $518,099
Jun-23** $0 $18,281 $522,922
Item: 17
775
City Of lake forest ▎ 14
PARS Pension Rate
Stabilization Program
for prefunding pension obligations
The
Item: 17
776
City Of lake forest ▎ 15
Why Prefund Pension Obligations?
Complete Local Control over Assets
Agency has complete control over assets, including contributions, disbursements and the timing, amount, and risk tolerance level of investments
1. Pension Rate Stabilization
Assets can be transferred to the retirement system at the Agency’s direction, potentially reducing/eliminating large fluctuations in employer contribution amounts
2. Rainy Day Fund
Emergency source of funds when employer revenues are strained in difficult budgetary or economic times
3. Diversification
Allows for investment flexibility and offers the potential for assets to earn greater returns than the general fund; spread the risk vs. sending additional money to CalPERS
4. Item: 17
777
City Of lake forest ▎ 16
Combined Miscellaneous Groups Valuation as of
June 30, 2020
Valuation as of
June 30, 2021 Change
Actuarial Liability $36.2 M $39.6 M 9.4% ↑
Assets $34.4 M $42.2 M 22.8% ↑
Unfunded Liability $1.8 M ($2.6 M) 243.9% ↓
Funded Ratio 95.0% 106.6% 12.3% ↑
Employer Contribution Amount $0.8 M
(FY 21-22)
$0.7 M
(FY 22-23) 3.9% ↓
Employer Contribution Amount – Projected* --- $0.8 M
(FY 28-29) 15.6% ↑
Pension Funding Status
As of June 30, 2021, City of Lake Forest’s CalPERS pension plan is funded as follows*:
* Data through 2028-29 from Agency’s latest CalPERS actuarial valuation.
Item: 17
778
City Of lake forest ▎ 17
Plan Type: IRC Section 115 Irrevocable Exclusive Benefit Trust Trustee Approach: Discretionary
Plan Effective Date: October 20, 2015
Plan Administrator: Director of Finance
Current Investment Strategy: Moderate HighMark PLUS (Active) Strategy; Pooled Account Summary of Agency’s Pension Plan
AS OF APRIL 30, 2023:
Initial Contribution: January 2016: $1,000,000
Additional Contributions: $1,000,000
Total Contributions: $1,000,000
Disbursements: $0
Net Investment Earnings: $484,155
Account Balance: $1,484,155
Item: 17
779
City Of lake forest ▎ 18
Summary of Agency’s pension Plan
*Plan Year Ending June 2016 is based on 6 months of activity. **Plan Year Ending June 2023 is based on 10 months of activity.
HISTORY OF CONTRIBUTIONS, DISBURSEMENTS, AND TOTAL ASSETS AS OF APRIL 30, 2023:
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Plan Year Ending
Contributions
Disbursements
Total Assets
Year Contributions Disbursements Total Assets
Jun-16* $1,000,000 $0 $1,043,297
Jun-17 $0 $0 $1,150,267
Jun-18 $0 $0 $1,224,083
Jun-19 $0 $0 $1,303,586
Jun-20 $0 $0 $1,347,100
Jun-21 $0 $0 $1,638,794
Jun-22 $0 $0 $1,419,295
Jun-23** $0 $0 $1,484,155
Item: 17
780
City Of lake forest ▎ 19
HighMark Capital Management
Investment Review
Item: 17
781
PARS: City of Lake Forest
May 24, 2023
Presented by
Keith Stribling, CFA
City Of lake forest ▎ 20
Item: 17
782
DISCUSSION HIGHLIGHTS – City of Lake Forest
Investment objective – Moderate HM Plus
Asset Allocation: PARS/HCM Moderate HM Plus (As of 4-30-2023) Allocation Target – 47.98% stocks (40-60% range), 48.05% bonds (40-60% range), 3.97% cash (0-20% range) Large cap 25.84%, Mid-cap 4.12%, Small cap 6.65%, International 9.78%, REIT 1.60% Performance: City of Lake Forest -OPEB
(as of 4-30-2023) gross of investment management fees, net of fund fees 4-month YTD: 5.15%
6-months: 6.93%
1-Year: 0.01%
3-Years: 5.75%
5-Years: 4.67%
Inception to date (7-01-2012) 5.57%
Asset Allocation: PARS/HCM Moderate HM Plus (As of 4-30-2023) Allocation Target – 47.98% stocks (40-60% range), 48.05% bonds (40-60% range), 3.97% cash (0-20% range) Large cap 25.84%, Mid-cap 4.12%, Small cap 6.65%, International 9.78%, REIT 1.60% Performance: City of Lake Forest-PENSION
(as of 4-30-2023) gross of investment management fees, net of fund fees 4-month YTD: 5.15%
6-months: 6.93%
1-Year: 0.01%
3-Years: 5.75%
5-Years: 4.67%
Inception to date 2-01-2016) 6.00%
Asset Allocation:
• Modestly underweight equities
• Favoring value style over growth
• Recently added to international
• Neutral duration fixed income
City Of lake forest ▎21
Item: 17
783
Economic Review
Aggressive fiscal policy
Monetary policy changing from inflationary to restrictive with rate hikes and a pullback on QE Rate hikes expected to curb inflation expectations but is the Fed done hiking Yield curve inverted implying a recession is in the offing Debt ceiling brinkmanship (US Govt default risk)
Regional banks under duress
Eventually global economies will improve
Risks: Inflation…Fed tapering & tightening creates recession; Russian aggression in Ukraine; China tensions with western countries
City Of lake forest ▎22
Item: 17
784
City Of lake forest ▎23
Item: 17
785
ASSET ALLOCATION- Moderate HM Plus
Ticker Investment Vehicle Weight
Equity 47.98%
Large Cap Core COFYX Columbia Contrarian Core Cl Y 4.72% VGIAX Vanguard Gro & Inc Admiral Shares 9.29%
Large Cap Value DODGX Dodge & Cox Stock Fund 4.40%
IVE iShares S&P 500 Value ETF 1.93%
Large Cap Growth HNACX Harbor CP Appre Rtrmt Cl 2.76%
IVW iShares S&P 500 Growth ETF 2.73%
Mid Cap Growth IWR iShares Rusell Mid Cap ETF 4.12%
Small Cap Value UBVFX Undiscovered Mgrs Behavrl R6 3.32% Small Cap Growth FGROX Emerald Growth Fund 3.33%
International Core DFALX DFA Large Cap International Port 3.58% International Value DODFX Dodge & Cox International Stock Fund 1.28% International Growth MGRDX MFS International Growth Fund 1.25% Emerging Markets HHHFX Hartford Schrodr Mkts Eq 3.67%
REIT VNQ Vngrd Index Tr Reit Viper Shs 1.60%
Fixed Income 48.05%
Short-Term VFSUX Vanguard Short-Term Corp Adm Fund 10.45% Intermediate-Term PTRQX Prudential Total Return BD 12.22% DBLFX Doubleline Core Fixed Inc Cl I 12.19%
DODIX Dodge & Cox Income 12.18%
High Yield PHIYX PIMCO High Yield 1.00%
Cash 3.97%
FGZXX First Amern Govt Oblig Fd CL Z 3.97%
TOTAL 100.00%
City Of lake forest ▎ 24
Item: 17
786
City of Lake Forest
City Of lake forest ▎ 25
Item: 17
787
City Of lake forest ▎26
• To a ssist our public agency clients with GASB compliance, PARS will be providing the following:
— An in dividual trust statement of each agency’s plan assets that shows a reconciliation of assets held at the beginning of the fiscal year through the end of the fiscal year, breaking out the appropriate plan contributions, benefit payments, expenses, and investment earnings
— Year-en d audited financial statements of the Trust as a whole including Schedule of Changes in Fiduciary Net Position by Employer completed by CliftonLarsonAllen (CLA) that is intended to be compliant with GASB 67/68 and GASB 74/75 requirements.
— Supporting S OC 1-Type 2 report on the controls over the calculation and allocation of additions and deductions to employer accounts within the Trust — Investment a llocation data and information on investment policies including target asset allocations and allowable asset class allocation ranges • PARS A uditors have determined that participating plans should be considered an agent multiple-employer defined benefit OPEB plan (agent OPEB plan) as defined under GASB
GASB compliance
Item: 17
788
PARS ALTERNATE
RETIREMENT system
CITY OF LAKE FOREST ▎27
for part -time employees in lieu of Social Security
The
Item: 17
789
City Of lake forest ▎ 28
• The PARS Alternate Retirement System (ARS) is an Alternative to Social Security p
lan for Part-Time, Seasonal, and Temporary (PST) Employees • Complies with O BRA ’90 (adopting federal legislation) and Internal Revenue Code S
ection 3121(b)(7)(F) requirements
• 457(b) deferred compensation plan
• Contribution may be split between the Employee and the Agency as designated b
y Employer (I.E. 6.2/1.3, 7.5/0.0; most popular option is 7.5% Employee, 0.0% Employer)
• Reduces cost to Agency due to lower total contribution rate (
7.5% minimum versus 12.4% with Social Security)
• Employee’s benefit is the accumulated account balance at distribution PARS Alternate Retirement System (ARS)
Item: 17
790
City Of lake forest ▎29
Summary of Agency’s Plan
Plan Effective Date: July 1, 2008
Type of Plan: 457(b) Deferred Compensation
Number of Participants: 217
• Active Contributing 75 (active participants who have been credited contributions within the last 180 days)
• Active Non-Contributing 14 (active participants who have not been credited contributions within the last 180 days)
• Inactive 128 (participants pending distribution)
Employer Contribution: 1.30%
Employee Contribution: 6.20%
Average Account Balance: $1,497.46
Investment Selection: Short to Intermediate Fixed Income Note: All Expenses paid by Plan Assets
Item: 17
791
City Of lake forest ▎30
Summary of Agency’s Plan
*Plan Year Ending June 2009 is based on 10 months of activity **Plan Year Ending June 2023 is based on 9 months of activity CONTRIBUTIONS, DISTRIBUTIONS, AND TOTAL ASSETS AS OF MARCH 31, 2023:
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
Plan Year Ending
Contributions
Distributions
Total Assets
Year Contributions Distributions Total Assets
Jun-09* $24,625 $0 $25,151
Jun-10 $25,246 $1,501 $49,757
Jun-11 $34,839 $3,175 $82,106
Jun-12 $34,502 $16,636 $100,477
Jun-13 $32,662 $18,683 $115,253
Jun-14 $34,818 $23,751 $126,916
Jun-15 $44,157 $21,399 $150,117
Jun-16 $50,575 $34,090 $168,001
Jun-17 $53,582 $26,442 $196,760
Jun-18 $47,146 $29,556 $216,383
Jun-19 $52,414 $7,118 $268,933
Jun-20 $59,132 $13,262 $322,645
Jun-21 $16,734 $13,013 $325,374
Jun-22 $50,899 $66,822 $293,214
Jun-23** $35,136 $6,666 $324,970
Item: 17
792
City Of lake forest ▎31
29 22
3 10
7 3 4
1 1
4 5
62 18
11 11 10
6 2 4
0 1 3
0 10
20 30
40 50
60 70
Less than 1 1 2 3 4 5 6 7 8 9 10+
Number of Participants
Years of Participation
Active Inactive
Participants by Number of Years in Plan
Less than 1 1 2 3 4 5 6 7 8 9 10+
Active 29 22 3 10 7 3 4 1 1 4 5
Inactive 62 18 11 11 10 6 2 4 0 1 3
NOTE:
Number of Years of Participation is
calculated based on Valuation Entry
Month (month in which contributions
are first posted to the plan) and Last Pay
Period End (payroll period of last
contribution). Some participants might
have had a break in service; therefore,
the Number of Years of Participation will
be based on the period of time after the
break of service.
Item: 17
793
City Of lake forest ▎32
$0-$999 $1,000-$1,999 $2,000-$2,999 $3,000-$3,999 $4,000-$4,999 $5,000-$5,999 $6,000-$6,999 $7,000-$7,999 $8,000-$8,999 $9,000-$9,999 $10,000+ Active 47 20 8 7 1 3 0 0 1 1 1
Inactive 72 25 10 7 8 1 2 1 0 2 0
Participants by Current Account Balance
47 20
8 7
1 3
0 0 1 1 1
72 25
10 7 8
1 2 1 0 2 0
0 10
20 30
40 50
60 70
80 $0-$999 $1,000-
$1,999
$2,000-
$2,999
$3,000-
$3,999
$4,000-
$4,999
$5,000-
$5,999
$6,000-
$6,999
$7,000-
$7,999
$8,000-
$8,999
$9,000-
$9,999
$10,000+
Number of Participants
Current Account Balance
Active Inactive
Item: 17
794
City Of lake forest ▎33
Asset Allocation
20.60%
65.35%
11.55% 1.15% 1.35%
ASSET BACKED SECURITIES CORPORATE BONDS
U.S. TREASURIES YANKEE BOND
MONEY MARKET
SHORT -TO -INTERMEDIATE TERM FIXED INCOME
As of March 31, 2023
Item: 17
795
City Of lake forest ▎34
AS OF PLAN YEAR ENDING JUNE 30, 2023:
Plan Annual Returns
*Plan Year Ending June 2009 is based on 10 months of activity **Plan Year Ending June 2023 is based on 9 months of activity -4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Jun-23
Plan Year Ending
Year Returns
Jun-09* 4.99%
Jun-10 2.84%
Jun-11 1.41%
Jun-12 0.91%
Jun-13 1.01%
Jun-14 0.73%
Jun-15 0.29%
Jun-16 1.18%
Jun-17 1.18%
Jun-18 1.37%
Jun-19 3.10%
Jun-20 2.75%
Jun-21 0.40%
Jun-22 -3.46%
Jun-23** 2.04%
Item: 17
796
City Of lake forest ▎ 35
• Portfolios managed by HighMark Capital Management, subadvisor to Trustee, U.S. Bank. • PARS can coordinate a meeting with a HighMark Portfolio Manager at any time. • The Agency has total Investment Flexibility and can utilize any investment deemed prudent b
y the Trustee for retirement plan purposes, including:
Flexible Investment Options
Money Market Fund
• U.S. Treasury Fund
• U.S. Government Fund
Fixed Income
• Morley Stable Value Fund
• Short-to-Intermediate Term
Fixed Income Portfolio –
Agency’s current strategy
Diversified Portfolios – Active or Passive Options
• Conservative Strategy
(Current policy: 15% equity, 80% fixed and 5% cash)
• Moderately Conservative Strategy
(Current policy: 30% equity, 65% fixed and 5% cash)
• Moderate Strategy
(Current policy: 50% equity, 45% fixed and 5% cash)
• Balanced Strategy
(Current policy: 60% equity, 35% fixed and 5% cash)
• Capital Appreciation Strategy
(Current policy: 75% equity, 20% fixed and 5% cash)
Item: 17
797
City Of lake forest ▎36
Strategy Equity (%) 1 Year 3 Years 5 Years 10 Years
Capital
Appreciation 65-85% -6.90% 11.99% 6.14% 7.45%
Balanced 50-70% -6.65% 9.70% 5.23% 6.22%
Moderate 40-60% -6.09% 7.93% 4.60% 5.44%
Moderately
Conservative 20-40% -5.33% 4.38% 3.17% 3.82%
Conservative 5-20% -4.69% 1.69% 2.18% 2.67%
Short-to-
Intermediate Term
Fixed Income
0% 1.36% 0.17% 1.13% 1.01%
HighMark Capital Management
ACTIVE PORTFOLIO RETURNS
* Past performance does not guarantee future results.
As of March 31, 2023
Item: 17
798
City Of lake forest ▎37
Last Year’s Savings: $33,254 Total Savings to Date: $389,692 Benefits to City
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Jun-23
Item: 17
799
City Of lake forest ▎ 38
EASE OF AGENCY ADMINISTRATION
“TURN - KEY” ADMINISTRATION
PARS provides ongoing “Turn-Key” administration to minimize burden to Agency staff:
• Handles all Agency/Participant inquiries
• Performs account valuations and produces statements and reports • Conducts all required state and federal reporting
SIMPLE ONGOING ADMINISTRATIVE ROLE
• Send contributions to the Trustee
• Send payroll contribution report to PARS
• Notify PARS of employees eligible for a distribution
Item: 17
800
City Of lake forest ▎39
1 Prompt Monthly Distributions
Processed within 60 days of PARS’ receipt of completed request form; completed requests are currently processed on an average of 23 days 2 Toll-free Number For Participants And Agency Personnel • Serviced by specialists knowledgeable of the Agency’s specific plan • 24-hour voicemail
• Toll Free Number: (800) 540-6369 | Email: [email protected] 3 Group Orientation Meetings
• Orientation meeting(s) can be held for Plan Participants and Agency Personnel a
s necessary
4 Participant Account Statements
• Annual statements sent directly to the Participant
• Available anytime upon request by the Participant
• Participant Portal Feature – Opted-In
Benefits to Employees
Item: 17
801
City Of lake forest ▎40
Public Agency Retirement Services (PARS) is pleased to announce the launch of our new participant portal for the PARS Alternate Retirement System (ARS).
Participants will now have access to the following features:
• Current account balance
• Transaction history
• Downloadable prior statements
• Quarterly investment information
• Summary of their plan
• Downloadable beneficiary form
Participant Portal Access – OPTED IN
myaccount.pars.org
Item: 17
802
City Of lake forest ▎41
Distribution Process
ARS Advantages
• 100% immediate vesting
(Ownership from day one)
• Pre-tax vs. After tax
• Portability (Cash out or rollover)
Lump-sum Distribution if:
• Retirement
• Termination
• Permanent Disability
• Death
In-service Distribution* if:
• Change of employment status to a position
c
overed by another retirement system (i.e.,
moving from a part-time position to a full-
time position) – IRS Regulation
Distribution Options
• Lump-sum cash payout
• IRA or other qualified plan rollovers
(any amount)
• Purchase of PERS service credit (i
f
e
ligible)
• Split Distribution
Distribution Eligibility
or
*A participant eligible
f
or an in-service distribution must
have a balance less than $5,000
and no prior distributions.
Item: 17
803
City Of lake forest ▎42
PLAN COMPLIANCE
• PARS provides ongoing plan compliance:
— Monitors state and federal law changes and pending legislations that im
pacts the Agency’s plans
— Updates Plan Documents as necessary
— Contracts with O’Melveny & Myers LLP and Pillsbury Winthrop Shaw P
ittman LLC for federal and state legal compliance
Item: 17
804
City Of lake forest ▎ 43
HighMark Performance Sheets
Item: 17
805
Morley Stable Value Fund
Class 25 - I
Principal Morley
FUND PROFILE
Assets $15,444,605,641
Crediting rate1 2.77%
Average credit quality2 AA
Average duration3 3.24 years
Market/book value ratio4 94.01%
CUSIP 852320423
Turnover ratio
(updated annually)5 1.92%
Inception date December 1993
FUND COMPOSITION
Cash 3.34%
GIC 3.75%
Separate account contracts 17.69%
Synthetic investment contracts 75.21%
TRUSTEE/ADVISER FEE 12
25 basis points
Investment objective
The objective of the Fund is to provide preservation of capital, relatively stable returns consistent with its comparatively low risk profile, and liquidity for benefit responsive plan or participant payments.
MARCH 31, 2023
Performance
Month 3 Mo YTD 1 Yr 3 Yr 5 Yr 10 Yr
Gross 0.23% 0.65% 0.65% 2.20% 1.96% 2.12% 1.84%
Net 0.21% 0.59% 0.59% 1.95% 1.71% 1.87% 1.59%
iMoneyNet All Taxable 0.35% 1.01% 1.01% 2.32% 0.79% 1.13% 0.66% 1-3 Year Govt 1.63% 1.59% 1.59% 0.23% -0.83% 1.09% 0.81% -1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Past performance is not a guarantee of future results. Performance returns assume the reinvestment of dividends and other earnings. Returns for periods less than one year are not annualized. Gross returns are presented net of Fund Level Expenses which includes Stable Value Investment Contract Fees, Sub-Adviser Fees, Acquired Fund Fees and Other Expenses. Net returns are presented net of 0.25% annualized Trustee/Adviser Fee and 0.00% annualized Service Provider Offset. Fees charged by varying share classes including the Service Provider Offset may differ and as a result, investors in other share classes may obtain higher or lower net returns if multiple share classes are available. Performance information for share class options available after the original Fund inception date are based on the performance of the Morley Stable Value Fund, adjusted to reflect estimated fees for the respective share class option. Please see total fund operating expenses on page 2.
Fund description
The Fund primarily consists of a diversified portfolio of Stable Value Investment Contracts (Investment Contracts) issued by life insurance companies, banks and other financial institutions, the performance of which may be predicated on underlying fixed income investments. The principal value of these assets is designed to remain stable regardless of stock and bond market fluctuations. The Fund is typically appropriate for investors who desire low volatility, stable principal value, and returns commensurate with a capital preservation objective for a component of their retirement savings. The Fund is designed for long-term retirement investing.
ABS = Asset Backed Securities
MBS = Mortgage Backed Securities
CMBS = Commercial Mortgage Backed Securities
Sector allocation Credit quality
FUND STRUCTURE The Morley Stable Value Fund (the Fund) is a collective investment trust maintained by Principal Global Investors Trust Company, (the Trust Company). The Trust Company has retained Principal Morley, an investment team within Principal Global Investors, LLC, (the Adviser), to serve as investment manager with respect to the Fund, subject to the Trust Company’s supervision and review. The Adviser is an indirect wholly owned subsidiary of Principal Financial Group
® and is under common control with the Trust Company.
ABOUT THE INVESTMENT MANAGER Founded in 1982
and managing its first discretionary stable value account in February 1984, Morley has focused almost exclusively on managing stable value assets for our institutional client base since our inception.
CONTACT INFORMATION For additional information on
enrolling in the Fund, to obtain the Morley Stable Value Fund Disclosure document or to obtain additional information, please contact the Human Resources Department of the participating plan, or the participating plan’s recordkeeper.
INVESTMENT CONTRACT ISSUERS
Metropolitan Tower Life Ins Co 15.51%
Prudential Ins Co of America 14.68%
Massachusetts Mutual Life Ins Co 11.06%
Transamerica Life Ins Co 10.22%
State Street Bank 9.29%
RGA Reinsurance Co 9.19%
Pacific Life Insurance Company 9.18%
American General Life Ins Co 9.17%
New York Life Ins Co 7.63%
Metropolitan Life Ins Co 0.72%
U.S. Govt
19.16%
Credit
30.98%
MBS
21.42%
ABS
14.24%
CMBS
6.03%
GIC
3.99%
Cash
4.17%
AAA
64.73%
AA+
0.63%
AA
0.59% AA-
3.97%A+
3.72%
A
4.05%
A-
6.31%
BBB+
4.47%
BBB
7.10%
BBB-
4.34%
< BBB- / NR
0.09%
Item: 17
806
A word on risk6,7
While stable value is generally considered a conservative investment option, stable value assets do carry potential risks. The Fund may lose value and may be worth more or less than the original cost when redeemed, and there is no assurance that the Fund’s objective will be achieved. Risks include, but are not limited to, 1) Investment Contract risk which includes the risk of maintaining Book Value Accounting standards and the risk that Investment Contract issuers may default on their obligations under the contract; 2) interest rate risk which includes the potential that an increase in market interest rates may decrease the value of fixed income securities (bonds); 3) credit risk which reflects the potential that the issuer of fixed income securities will be unable to make the required payments of interest and/or principal when due. Principal Morley seeks to mitigate Investment Contract and credit risk by investing only in investment grade securities. Our credit research team continually analyzes the credit standing and outlook of investments in the Fund seeking to identify investment options with the best risk/return characteristics consistent with the Fund’s investment objective. Please review the Morley Stable Value Fund Disclosure document for additional information regarding Fund structure, investment objective and strategy, risks and expenses and carefully consider such factors before investing.
The Fund is not a mutual fund and is not registered with the Securities and Exchange Commission. The Trust Company is regulated by the State of Oregon. Units of the Fund are not deposits or obligations of, guaranteed by, or insured by the Trust Company or any affiliate, and are not insured by the FDIC or any other federal or state government agency. The value of the Fund may fluctuate so that when redeemed, units may be worth more or less than the original cost.
Fees and expenses
Fees and expenses associated with the Fund include Stable Value Investment Contract Fees, Sub-Adviser Fees, Acquired Fund Fees, and Other Expenses which are collectively referred to as Fund Level Expenses. The Fund also incurs a Trustee/Adviser Fee and may incur a Service Provider Offset if selected by the investing Plan/Trust. The combination of all of these fees represents the Total Fund Operating Expenses for the Fund.
Fund Level Expenses are variable and will fluctuate daily based on factors such as total Fund assets, assets associated with specific Stable Value Investment Contracts or sub-advisers, and the utilization and cost of applicable services. Fund Level Expenses have already been factored into the Fund’s gross performance. In contrast the Trustee/Adviser Fee and the Service Provider Offset are generally static and are only altered by direct action from the Trustee or an election by the investing Plan/Trust to amend the Service Provider Offset.
The Fund’s gross performance is reduced by the applicable Trustee/Adviser Fee and Service Provider Offset to produce the Fund’s net performance.
Expense information is updated monthly and may not match expenses provided by applicable recordkeeper.
Annualized fees as of March 31, 2023
Stable value investment contract fees (wrap fees)8 0.14% Sub-adviser fees9 0.03%
Acquired fund fees10 0.01%
Other expenses11 0.01%
Total fund level expenses 0.20%
Trustee/adviser fee12 0.25%
Service provider offset13 0.00%
Total fund operating expenses 0.45%
Fee information has been rounded to two decimal places. As a result of this rounding, individual fees may not sum to the total fee presented.
Additional information
Data provided is for general informational purposes only, is not intended to be used for auditing purposes and may not represent a complete accounting of all holdings within the portfolio.
The information should not be considered as investment, legal, accounting, or tax advice or a recommendation of any particular security, strategy, or investment product and it does not take into account the investment objectives, financial situation, or needs of any particular investor. Investors should consider whether the Fund is suitable for their particular circumstances and, if necessary, seek professional advice before investing.
Certain data including sector diversification, credit quality, and duration distribution, has been obtained from each investment manager and has been calculated based upon their internal calculation methodologies. The data is current as of the date listed, and is subject to change without notice. While generally deemed reliable, it has not been verified for accuracy or calculation methodologies and the accuracy of the data cannot be guaranteed.
Principal Morley calculates average portfolio credit quality statistics via the aggregated market value weighted average credit quality of securities within the portfolio including GICs, wrapped securities, and cash equivalents for the assets it directly manages. In the event of split ratings for any single investment (as provided by S&P Global, Moody’s Investment Services and Fitch Ratings), the following shall apply: (a) where only two rating agencies rate the investment, the lower of the two ratings shall apply, or (b) where three ratings agencies rate the investment, the median rating shall apply. Ratings are converted to equivalent S&P Global reporting styles.
Based upon the structure of various investment options (e.g. collective investment trusts, insurance company separate account contracts, or individually managed accounts), the client may or may not have direct fractional ownership of the underlying securities.
Market indices have been provided for comparison purposes only. They are unmanaged and do not reflect any fees or expenses. Individuals cannot invest directly in an index. The iMoneyNet All-Taxable Money Market Fund Index measures the equally weighted returns of the largest taxable money market funds. The Bloomberg 1-3 Year Govt Bond Index measures the returns of investment grade, dollar denominated bonds publicly issued by the U.S. Govt, with a maturity of over 1, and less than 3 years.
Direct investment in the Fund is limited to Participating Trusts (also known as investing Plan/Trust) that meet certain requirements described in the Declaration of Trust, that enter into a Participation Agreement with the Trustee. The Fund cannot accept investment directly from individuals and is subject to restrictions regarding transfer and withdrawal of assets including potential deferral of plan initiated withdrawal requests by up to 12 months, as defined in the applicable Declaration of Trust.
Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal Morley is an investment team within Principal Global Investors. Principal Global Investors is a member of the Principal Financial Group®, Des Moines, Iowa 50392.
Principal Global Investors, LLC (PGI) is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA), a commodity pool operator (CPO) and is a member of the National Futures Association (NFA). PGI advises qualified eligible persons (QEPs) under CFTC Regulation 4.7. © 2022 Principal Financial Services, Inc. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.
Morley Stable Value Fund Class 25 - I Definitions
1. Crediting rate – The rate of return credited to the book value of the Fund, expressed as an annual percentage rate and is calculated based on a book value dollar weighted basis gross of the Trustee/Adviser Fee and Service Provider Offset and Other Expenses but net of Wrap Fees, Sub-Adviser Fees, and Acquired Fund Fees. A crediting rate is determined per Investment Contract which may remain fixed for the term of the contract or may be reset at predetermined intervals based upon portfolio characteristics including yields, market value, book value and duration. The data is provided for general informational purposes and the return received may be higher or lower than the crediting rate provided.
2. Average credit quality – Represents an average of the market value dollar weighted credit quality of the underlying securities in the Fund as obtained by applicable credit rating agencies. The Fund itself has not been rated by these agencies. Average credit quality calculation methodologies may vary across the industry which may impact the validity of comparisons.
3. Average duration – Represents the average dollar weighted effective duration of the underlying securities in the Fund. Duration is a measure of the price sensitivity of a fixed- income security or portfolio to a change in interest rates and is commonly presented in years. The longer the duration the more sensitivity the Fund or security is expected to have to interest rate changes.
4. Market/book value ratio – Represents a measurement of the market value of the Fund’s underlying securities as compared to the Fund’s
book value; typically quoted as a percentage. Generally, participant transactions occur at book value even if the market value is above or below
the book value.
5. Turnover ratio – A measure of trading activity during the previous 12 months, expressed as a percentage of the average total assets of the Fund. The resulting percentage loosely represents the percentage of the portfolio’s holdings that have changed over the past 12 months. For the purposes of calculating turnover, investments in other pooled products including other collective investment trusts, or separate account contracts, are treated as a single transaction and do not account for the underlying trading activity within these products.
6. Book value accounting – An accounting methodology associated with Stable Value Funds which allows the Funds to amortize market value gains and losses over time through the Fund’s crediting rate thus providing capital preservation.
7. Stable value investment contracts – (also known as Investment Contracts or Wrap Contracts) Contracts issued by insurance companies, banks, and other financial institutions that provide book value accounting treatment for the Fund. These contracts are designed to provide capital preservation and permit benefit-responsive transactions at book value. Investment Contracts do not insure the value of the Fund and are not insurance against Fund losses but rather by applying Book Value Accounting standards permit the amortization of gains and losses over time through the crediting rate thus providing capital preservation. Typical examples of these contracts include Guaranteed Investment Contracts (GICs), Bank Investment Contracts (BICs), Synthetic Investment Contracts (SICs), Separate Account Contracts (SACs).
8. Stable value investment contract fees – Fees assessed by the financial institutions issuing the stable value investment contracts (wrap contracts) in which the Fund invests.
9. Sub-adviser fees – Fees assessed by sub-advisers which provide underlying fixed income management for certain portions of the Fund. Fees associated with services provided by Principal Morley are paid directly by the Trustee and are not Fund Level Expenses.
10. Acquired fund fees – The Fund invests in other funds which incur their own fees and expenses associated with fund operations. As a result a pro-rata share of the Other Expense of each underlying fund, as provided in its most recent audited financial report, is reported.
11. Other expenses – Fees and expenses associated with Fund operations including but not limited to, accounting and valuation services, custody services, legal and auditing services.
12. Trustee/adviser fee – Paid to the Trustee of the Fund for trustee and investment advisory services. Breakpoints associated with this fee reduce costs based upon total invested assets of the investing Plan/Trust.
13. Service provider offset – A fee option that may be selected by the Plan/Trust investing in the Fund. The fee is used by the investing Plan/Trust to pay for certain qualified expenses including but not limited to recordkeeping and administrative costs. 2264558-062023
Item: 17
807
1Q23* YTD* 1 YR 3 YR 5 YR 10 YR
PARS Short-to-Intermediate
Composite - Gross 1.46 1.46 1.36 0.24 1.13 1.01
PARS Short-to-Intermediate
Composite - Net 1.44 1.44 1.28 0.17 1.06 0.94
ICE BofA 1-3 Year
U.S. Treasury Index 1.56 1.56 0.20 -0.79 1.12 0.82
PARS DIVERSIFIED PORTFOLIOS
SHORT-TO-INTERMEDIATE FIXED INCOME
PHILOSOPHY
ANNUAL COMPOSITE RETURNS
(GROSS OF INVESTMENT MANAGEMENT FEES)
PROCESS
Fundamental Economic Analysis
Our Asset Allocation Committee, composed
of our most senior investment professionals,
conducts fundamental analysis of global
economic indicators and fiscal and monetary
policy. A strategic focus is placed on the leading
indicators that have historically provided insight
into the business cycle and potential changes
in Federal Reserve policy. Our goal is to ensure
that your portfolio is carefully positioned within a
macroeconomic framework.
Market and Credit Analysis
We identify the most attractive issues among
diverse asset classes and market sectors to
enhance portfolio diversification and yield. Yield
curve analysis identifies pricing opportunities
that give us the chance to reposition a portfolio
and take advantage of changes in the slope of the
yield curve. Sector analysis allows us to identify
areas that offer the most attractive yields on a
risk-adjusted basis. Our team evaluates historical
spread volatility and excess return trends, in
addition to expected relative performance of each
sector. Finally, our in-house research staff analyzes
the creditworthiness of new security candidates
and existing securities on an ongoing basis.
Portfolio Construction
In building a diversified and customized portfolio
tailored to clients stated objectives and liquidity
needs, our team seeks to diversify across multiple
industries and security types. Portfolios are
periodically repositioned to seek opportunities
arising from changes in interest rates, the yield
curve, and sector spreads.
Risk Management
Our overarching goal is to ensure risk is managed
and minimized through portfolio diversification, the
monitoring of portfolio holdings, and interest rate
sensitivity analysis. Comprehensive performance
measurement, compliance tools, and constant
adherence to investment guidelines allow us to
manage risk consistent with expectations.
WHY THE PARS DIVERSIFIED
SHORT-TO-INTERMEDIATE PORTFOLIO?
Q1 2023
* Returns less than one year are not annualized
We believe that safety, liquidity, and yield are the most important drivers of our short- to-intermediate strategy. We seek to maximize after-tax income while preserving principal and maintaining liquidity.
ANNUALIZED TOTAL RETURNS
(GROSS OF INVESTMENT MANAGEMENT FEES)
2008 1.06%
2009 5.39%
2010 1.69%
2011 0.83%
2012 1.72%
2013 0.73%
2014 0.52%
2015 0.47%
2016 1.31%
2017 1.50%
2018 1.94%
2019 3.30%
2020 1.82%
2021 -0.27%
2022 -2.32%
PORTFOLIO MATURITY
1. Fundamental
Economic
Analysis
2. Market
and Credit
Analysis
3. Portfolio
Construction
Risk Management
SECTOR WEIGHTINGS
Weight
0 – 1 Year 27.77%
1 – 2 Years 28.89%
2 – 3 Years 35.76%
3 – 4 Years 5.56%
4+ Years 2.02%
TOTAL 100.00%
Weight
Commercial Paper 0.00%
Corporate Bonds 65.35%
Asset Backed Securities 20.60%
U.S. Treasuries 11.55%
Yankee Bond 1.15%
Money Market 1.35%
TOTAL 100.00%
Item: 17
808
HIGHMARK CAPITAL MANAGEMENT
350 California Street
Suite 1600
San Francisco, CA 94104
800-582-4734
ABOUT THE ADVISER
HighMark® Capital Management, Inc. (HighMark) has
over 100 years (including predecessor organizations) of institutional money management experience with $8.6
billion in assets under management and $9.6 billion in
assets under advisement*. HighMark has a long term
disciplined approach to money management and
currently manages assets for a wide array of clients.
ABOUT THE PORTFOLIO MANAGEMENT TEAM
Greg Haendel, CFA
®
Head of Fixed Income
Investment Experience: since 1998
HighMark Tenure: since 2020
Education: BA, Economics, Amherst College;
MBA, Business, Finance and Accounting, UCLA
Anderson School of Business
Dorothy Cooney
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 1997
Education: BA, Political Science, University
of Colorado; MBA, Marketing Management,
University of San Francisco
Cori Farwell
Short Duration Fixed Income Strategies Manager
Investment Experience: since 1992
HighMark Tenure: since 2002
Education: BS, Business Administration,
California State University, San Francisco;
MBA, Finance, St. Mary’s College
Philip B. Levy, CFA
®, CPA
Intermediate Core Fixed Income Manager
Investment Experience: since 1991
HighMark Tenure: since 2008
Education: BA, Business Economics, University of
California, Santa Barbara
Curtis Wigginton
Portfolio Manager
Investment Experience: since 2018
HighMark Tenure: since 2018
Education: BS, Economics, Brigham Young University;
MBA, St. Mary’s College
The first quarter of 2023 saw significant volatility in the fixed income markets as a result of two regional bank failures, subsequent U.S. government actions to stem a potential liquidity crisis, and the forced Swiss government rescue of Credit Suisse Group by UBS. This was largely a result of a confidence crisis within parts of the U.S. and global banking system which ultimately manifested into a temporary liquidity crisis. The quarter also experienced some easing in hawkish rhetoric by the Federal Reserve and global central banks, modestly decelerating U.S. inflation measures, heightened concerns around slowing economic growth, and initial anxiety surrounding the looming government debt ceiling. U.S. treasury interest rates ultimately declined and investment grade credit spreads modestly widened during the quarter.
The Federal Reserve Open Market Committee (FOMC) downshifted their pace of rate hikes from the 75 bp and 50 bp hikes initiated during the fourth quarter of 2022 to 25 bp rate hikes at both their February and March meetings bringing the lower bound of the Fed Funds rate to 4.75%. In order to attempt to stop or slow the confidence induced regional bank liquidity crisis and deposit flight, The FOMC and US Treasury Department created a new temporary liquidity facility called the Bank Term Funding Program which allows all federally insured depository institutions to borrow money directly from the U.S. government collateralized on a dollar for dollar basis by the par value of pledged U.S.
Treasury and Agency securities for terms up to 1-year. The Fed also maintained their $95 bn per month quantitative tightening program aimed at gradually reducing their nearly $9 trillion balance sheet.
The Fed rate hiking cycle may be nearing an end as Fed Funds Futures priced in roughly one 25 bp rate hike prior to reaching a terminal rate of 5% on the lower bound, followed by roughly 75 bps of rate cuts by the end of 2023 as anticipated U.S. recessionary pressures develop.
U.S. Treasury interest rates ended the quarter broadly lower across the spectrum, primarily resulting from unprecedented banking stress during March and its effects on already weakening economic data and hence the likelihood that the Fed would be forced to slow or stop raising rates earlier than previously anticipated. The interest rate curve remained inverted across most maturities with the highest point being the 6-month T-bill at quarter end.
Short maturity yields were extremely volatile as 2-year treasury rates reached the highest levels since 2007 (5.07% intra-quarter) before reversing lower in a dramatic fashion to end the quarter at 4.03% (40 bps lower over the quarter), while 5-year rates declined to 3.58%. 10-year U.S. treasury rates declined 41 bps to 3.47% while the 30-year bond yield dropped 31 bps to 3.65%. During the quarter the 2-year to 10-year treasury curve reached the largest inversion since 1981 before rebounding as market sentiment pivoted from inflation to banking stress and economic growth concerns.
The Bloomberg 1-3 Year U.S. Government/Credit Index returned 1.51%, for a negative excess return of 8 bps, as short duration investment grade credit underperformed. The Bloomberg 1-3 year U.S. Corporate Index posted a return of 1.24%, underperforming comparable treasuries by 35 bps, while the Bloomberg 1-3 year U.S. Treasury Index gained 1.59% for the quarter as the front end of the rate curve rallied due to slower economic growth assumptions and the expectation that the Fed is nearing an end to the rate hiking cycle. Short duration investment grade corporate bond index credit spreads widened by 28 bps during the quarter to +101.
The Bloomberg high yield corporate bond index posted a gain of 3.57% during the quarter, outperforming duration equivalent Treasuries by 123 bps. High yield corporate bond index credit spreads narrowed -14 bps during the quarter to end at a credit spread of 455. However, the index reached a wide level 511 during the month of March as U.S. bank failures and global banking stress dominated the markets before the index credit spreads partially recovered by quarter end.
Agency mortgage-backed securities (MBS) posted an index gain of 2.53%, underperforming duration equivalent Treasuries by 50 bps. Mortgage-backed securities lagged in the quarter due to significant interest rate volatility and due to negative short-term technical factors related to the potential disposition of MBS portfolios held by the FDIC as a result of recent bank failures. The asset-backed securities index (ABS) gained 1.86%, underperforming duration equivalent Treasuries by 5 bps. The ABS index lagged slightly given a heightened focus on liquidity as well as given the relative value versus short maturity corporate bonds during the end of the quarter.
Outlook:
We expect the Fed’s rate hiking campaign to come to an end in the coming months as inflation continues to decelerate and as the Fed steps back to let the already contractionary policy work its way through the economy.
Given the long and variable lags of monetary policy, combined with the tightening effects of the recent banking turmoil, we expect economic growth to slow and the unemployment rate to increase as the year moves onward. As the effects of slowing economic growth work their way into projected corporate earnings and credit fundamentals, we expect credit spreads to modestly widen. As a result, we continue to believe 2023 will be characterized as passing the baton from interest rate risk to credit risk as interest rate pressures abate and credit fundamentals deteriorate.
With regards to U.S. treasury interest rates, we expect the inverted yield curve to remain inverted near term with the potential for the interest rate curve to steepen (become less inverted) as the Fed ends their rate hiking cycle and the market looks toward Fed policy easing. Despite continued interest rate volatility, we expect U.S. treasury interest rates to modestly decline during the second half of 2023 given anticipated decelerating inflation and weakening economic growth.
Given our interest rate outlook, we continue to hold a neutral duration position relative to the index. From an interest rate curve positioning standpoint, we exited the barbell maturity position and shifted to a neutral maturity position relative to the index during in the quarter as interest rate curves tend to re-steepen as we near the end to the Fed rate hike cycle.
Despite generally healthy corporate credit fundamentals, select industries and issuers are facing margin pressure and increased incentive to partake in M&A or share buybacks at the expense of debt holders. Further, slowing U.S. economic growth and relatively high corporate borrowing rates will likely weigh on earnings going forward. Corporate credit spread valuations worsened slightly during the most recent quarter and we anticipate moderately wider credit spreads over the remainder of 2023 as the probability of a recession increases. As a result, we continue to target a neutral position in corporate credit relative to the Bloomberg Aggregate Index on a nominal percentage basis and slight underweight position on a duration contribution basis with a focus on high quality non-cyclical short and intermediate term corporate bonds.
Valuations within asset-backed securities remain compelling, supported by generally strong credit fundamentals and robust structures, while relative value opportunities remain down the capital structure. There continues to be a deep and committed investor base for the asset-backed sector and it continues to provide an attractive and diversified alternative to other short duration asset classes. As such we remain overweight relative to the index.
Our outlook for agency mortgage-backed securities is favorable as valuations remain compelling while fundamentals HighMark® Capital Management Perspectives and Commentary *Assets under management (“AUM”) include assets for which HighMark provides continuous and regular supervisory and management services. Assets under advisement (“AUA”) include assets for which HighMark provides certain investment advisory services (including, but not limited to, investment research and strategies) for client assets of its parent company, MUFG Union Bank, N.A.
The performance records shown represent a size-weighted composite of tax exempt accounts that meet the following criteria: Accounts are managed by HighMark with full investment authority according to the PARS—Short-to-Intermediate Fixed Income objective.
Gross returns are presented before management and custodial fees but after all trading expenses and reflect the reinvestment of dividends and other income. A client's return will be reduced by the advisory fees and other expenses it may incur as a client.
The adviser to the PARS portfolios is U.S. Bank, and HighMark serves as sub-adviser to U.S. Bank to manage these portfolios. U.S. Bank charges clients a 0.12% annual management fee and pays HighMark 60% of the annual management fee for assets sub-advised by HighMark under its sub-advisory agreement with U.S. Bank. The 0.072% paid to HighMark, as well as other expenses that may be incurred in the management of the portfolio, will reduce the portfolio’s returns. Assuming an investment for five years, a 5% annual total retur n, and an annual sub-advisory fee rate of 0.072% deducted from the assets at market at the end of each year, a $10 million initial value would grow to $12.72 million after fees (Net -of-Fees) and $12.76 million before fees (Gross-of-Fees). Additional information regarding the firm’s policies and procedures for calculating and reporting performance results is available upon request. Performance results are calculated and presented in U.S. dollars and do not reflect the deduction of investment advisory fees, custody fees, or taxes but do reflect the deduction of trading expenses. Returns are calculated based on trade- date accounting.
Benchmark returns do not reflect the deduction of advisory fees, custody fees, transaction costs, or other expenses of investing. An investor cannot invest directly in the unmanaged index stated above. The ICE BofA 1-3 Year U.S. Treasury Index is an unmanaged index consisting of all public U.S. Treasury obligations having maturities from 1 year to 2.99 years. Total returns assume the reinvestment of dividends and other earnings. Results for periods greater than one year are annualized.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditi ons.
HighMark Capital Management, Inc. (HighMark), an SEC-registered investment adviser, is a wholly owned subsidiary of MUFG Union B ank, N.A. (MUFG Union Bank). HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, and public and private retirem ent plans. HighMark and MUFG Union Banks’s ultimate parent company is a wholly-owned subsidiary of U.S. Bancorp (“USB”). MUFG Union Bank provides certain services to HighMark and is compensated for these servic es. Past performance does not guarantee future results. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing HighMark strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by the Bank or any Bank affiliate, and MAY lose value, including possible loss of principal. are strong due to a lack of credit risk as well as given much of the mortgage universe is not economically refinanceable. We believe that the run-off of the Fed’s mortgage holdings as part of quantitative tightening, potential FDIC sales of agency mortgages out of failed banks, as well as the currently elevated interest rate volatility has been priced into current valuations. As a result, we remain modestly overweight agency mortgage-back securities relative to the index.
Despite an anticipated continued softening in credit spreads as economic growth slows, investment grade fixed income has become a much more attractive asset class as yields for most investment grade fixed income assets remain near their highest level since the Great Financial Crisis. As a result, we maintain a favorable view on high credit quality fixed income assets in a balanced portfolio with a bias toward higher credit quality sectors, industries and issuers, and are less concerned with the prospects for rising interest rates.
Item: 17
809
HighMark Plus (Active)
Composite Inception Date 07/2004
No of Holdings in Portfolio 20
HighMark Plus Composite (Active)
Gross Net
Current Quarter* 3.37% 3.28%
Blended Benchmark*,** 3.01%
Year To Date* 3.37% 3.28%
Blended Benchmark*,** 3.01%
1 Year -4.69% -5.03%
Blended Benchmark** -3.40%
3 Year 1.69% 1.32%
Blended Benchmark** 1.16%
5 Year 2.18% 1.81%
Blended Benchmark** 2.32%
10 Year 2.67% 2.30%
Blended Benchmark** 2.65%
PARS DIVERSIFIED PORTFOLIOS
CONSERVATIVE
INVESTMENT OBJECTIVE
ANNUAL RETURNS
ASSET ALLOCATION — CONSERVATIVE PORTFOLIO
Comprehensive Investment Solution
HighMark® Capital Management, Inc.’s (HighMark)
diversified investment portfolios are designed to
balance return expectations with risk tolerance.
Key features include: sophisticated asset allocation
and optimization techniques, four layers of
diversification (asset class, style, manager, and
security), access to rigorously screened, top tier
money managers, flexible investment options, and
experienced investment management.
Rigorous Manager Due Diligence
Our manager review committee utilizes a rigorous
screening process that searches for investment
managers and styles that have not only produced
above-average returns within acceptable risk
parameters, but have the resources and commitment
to continue to deliver these results. We have set high
standards for our investment managers and funds.
This is a highly specialized, time consuming
approach dedicated to one goal: competitive and
consistent performance.
Flexible Investment Options
In order to meet the unique needs of our clients,
we offer access to flexible implementation strategies:
HighMark Plus utilizes actively managed mutual
funds while Index Plus utilizes index-based
securities, including exchange-traded funds. Both
investment options leverage HighMark’s active asset
allocation approach.
Risk Management
The portfolio is constructed to control risk through
four layers of diversification – asset classes (cash,
fixed income, equity), investment styles (large cap,
small cap, international, value, growth), managers
and securities. Disciplined mutual fund selection and
monitoring process helps to drive return potential
while reducing portfolio risk.
WHY THE PARS DIVERSIFIED
CONSERVATIVE PORTFOLIO?
Q1 2023
* Returns less than one year are not annualized. **Breakdown for Blended Benchmark: From 10/1/2012 -Present: 7.5% S&P500,
1.5% Russell Mid Cap, 2.5% Russell 2000, 1% MSCI EM (net), 2% MSCI EAFE (net), 52.25% Bloomberg US Agg, 25.75% ICE BofA 1-3 Yr US Corp/Gov’t, 2% ICE BofA US High Yield Master II, 0.5% Wilshire REIT, and 5% FTSE 1 Mth US T-Bill. From 4/1/2007 – 9/30/2012, the blended benchmark was 12% S&P 500; 1% Russell 2000, 2% MSCI EAFE (net), 40% ICE BofA 1-3 Year Corp./Govt, 40% Bloomberg US Agg, 5% FTSE 1 Mth US T-Bill. Prior to April 2007: the blended benchmark was 15% S&P 500, 40% ICE BofA 1-3Yr Corp/Gov, 40% Bloomberg US Agg, and 5% FTSE 1 Mth US T-Bill.
To provide a consistent level of
inflation-protected income over
the long-term. The major portion
of the assets will be fixed income
related. Equity securities are
utilized to provide inflation
protection.
Conservative
Moderately Conservative
Moderate
Balanced
Capital Appreciation
Efficient Frontier
Risk (Standard Deviation)
Reward (Rate of Return)
Strategic Range Policy Tactical
Equity 5 – 20% 15% 14%
Fixed Income 60 – 95% 80% 82%
Cash 0 – 20% 5% 4%
ANNUALIZED TOTAL RETURNS
(Gross of Investment Management Fees, but Net of
Embedded Fund Fees)
Index Plus Composite (Passive)
Gross Net
Current Quarter* 3.26% 3.17%
Blended Benchmark*,** 3.01%
Year To Date* 3.26% 3.17%
Blended Benchmark*,** 3.01%
1 Year -4.04% -4.38%
Blended Benchmark** -3.40%
3 Year 0.77% 0.41%
Blended Benchmark** 1.16%
5 Year 2.12% 1.75%
Blended Benchmark** 2.32%
10 Year 2.48% 2.11%
Blended Benchmark** 2.65%
PORTFOLIO FACTS
Index Plus (Passive)
Composite Inception Date 07/2004
No of Holdings in Portfolio 13
(Gross of Investment Management Fees, but Net of Embedded Fund Fees)
HighMark Plus Composite (Active)
2008 -9.04%
2009 15.59%
2010 8.68%
2011 2.19%
2012 8.45%
2013 3.69%
2014 3.88%
2015 0.29%
2016 4.18%
2017 6.73%
2018 -1.35%
2019 11.05%
2020 9.03%
2021 2.20%
2022 -12.63%
Index Plus Composite (Passive)
2008 -6.70%
2009 10.49%
2010 7.67%
2011 3.70%
2012 6.22%
2013 3.40%
2014 4.32%
2015 0.06%
2016 3.75%
2017 5.52%
2018 -1.09%
2019 10.37%
2020 8.56%
2021 1.97%
2022 -12.06%
Item: 17
810
HIGHMARK CAPITAL MANAGEMENT
350 California Street
Suite 1600
San Francisco, CA 94104
800-582-4734
ABOUT THE ADVISER
HighMark® Capital Management, Inc. (HighMark) has
over 100 years (including predecessor organizations) of institutional money management experience with $8.6
billion in assets under management and $9.6 billion in
assets under advisement*. HighMark has a long term
disciplined approach to money management and
currently manages assets for a wide array of clients.
ABOUT THE PORTFOLIO MANAGEMENT TEAM
Andrew Brown, CFA
®
Senior Portfolio Manager
Investment Experience: since 1994
HighMark Tenure: since 1997
Education: MBA, University of Southern California;
BA, University of Southern California
Salvatore “Tory” Milazzo III, CFA
®
Senior Portfolio Manager
Investment Experience: since 2004
HighMark Tenure: since 2014
Education: BA, Colgate University
J. Keith Stribling, CFA
®
Senior Portfolio Manager
Investment Experience: since 1985
HighMark Tenure: since 1995
Education: BA, Stetson University
Christiane Tsuda
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2010
Education: BA, International Christian University, Tokyo Anne Wimmer, CFA
®
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2007
Education: BA, University of California, Santa Barbara
Asset Allocation Committee
Number of Members: 15
Average Years of Experience: 28
Average Tenure (Years): 16
Manager Review Group
Number of Members: 6
Average Years of Experience: 23
Average Tenure (Years): 12
*Assets under management (“AUM”) include assets for which HighMark provides continuous and regular supervisory and management services. Assets under advisement (“AUA”)
include assets for which HighMark provides certain investment advisory services (including, but not limited to, investment research and strategies) for client assets of its parent company, MUFG Union Bank, N.A.
The performance records shown represent size-weighted composites of tax exempt accounts that meet the following criteria:
Accounts are managed by HighMark with full investment authority according to the PARS Conservative active and passive objectives.
The adviser to the PARS portfolios is U.S. Bank, and HighMark serves as sub-adviser to U.S. Bank to manage these portfolios. U.S. Bank may charge clients as much as 0.60% annual management fee based on a sliding scale. U.S. Bank pays HighMark 60% of the annual management fee for assets sub-advised by HighMark under its sub-advisory agreement with U.S. Bank. The 0.36% paid to HighMark, as well as other expenses that may be incurred in the management of the portfolio, will reduce the portfolio’s returns. Assuming an investment for five years, a 5% annual total return, and an annual sub-advisory fee rate of 0.36% deducted from the assets at market at the end of each year, a $10 million initial value would grow to $12.53 million after fees (Net-of-Fees) and $12.76 million before fees (Gross-of-Fees). Gross returns are presented before management and custodial fees but after all trading expenses and reflect the reinvestment of dividends and other income. A client's return will be reduced by the advisory fees and other expenses it may incur as a client. Additional information regarding the firm’s policies and procedures for calculating and reporting performance results is available upon request. Performance results are calculated and presented in U.S. dollars and do not reflect the deduction of investment advisory fees, custody fees, or taxes but do reflect the deduction of trading expenses. Returns are calculated based on trade- date accounting.
Blended benchmarks represent HighMark’s strategic allocations between equity, fixed income, and cash and are rebalanced monthly. Benchmark returns do not reflect the deduction of advisory fees or other expenses of investing but assumes the reinvestment of dividends and other earnings. An investor cannot invest directly in an index. The unmanaged S&P 500 Index is representative of the performance of large companies in the U.S. stock market. The MSCI EAFE Index is a free float- adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Russell Midcap Index measures the performance of the mid- cap segment of the U.S. equity universe. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The ICE BofA U.S. High Yield Master II Index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Wilshire REIT Index measures U.S. publicly traded Real Estate Investment Trusts. The unmanaged Bloomberg U.S. Aggregate Bond Index is generally representative of the U.S. taxable bond market as a whole. The ICE BofA 1-3 Year U.S. Corporate & Government Index tracks the bond performance of the ICE BofA U.S. Corporate & Government Index, with a remaining term to final maturity less than 3 years.
The unmanaged FTSE 1-Month U.S. Treasury Bill Index tracks the yield of the 1-month U.S. Treasury Bill.
HighMark Capital Management, Inc. (HighMark), an SEC-registered investment adviser, is a wholly owned subsidiary of MUFG Union Bank, N.A. (MUFG Union Bank). HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, and public and private retirement plans. HighMark and MUFG Union Banks’s ultimate parent company is a wholly-owned subsidiary of U.S. Bancorp (“USB”). MUFG Union Bank provides certain services to HighMark and is compensated for these services. Past performance does not guarantee future results. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing HighMark strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by the Bank or any Bank affiliate, and MAY lose value, including possible loss of principal.
350 California Street
Suite 1600
San Francisco, CA 94104
800.582.4734
www.highmarkcapital.com
HOLDINGS
STYLE
Small Cap
2.2%
Interm-Term Bond
62.4%High Yield
1.1%
Short-Term Bond
18.0%
Large Cap Core
4.1%
Large Cap Growth
1.5%
Mid Cap
1.3%
Intl Stocks
3.0%
Cash
4.2%
Large Cap Value
1.8% Real Estate
0.4%
Holdings are subject to change at the
discretion of the investment manager.
HighMark Plus (Active) Index Plus (Passive)
Columbia Contrarian Core I3 iShares Core S&P 500 ETF
Vanguard Growth & Income Adm iShares S&P 500 Value ETF
Dodge & Cox Stock Fund iShares S&P 500 Growth ETF
iShares S&P 500 Value ETF iShares Russell Mid-Cap ETF
Harbor Capital Appreciation - Retirement Vanguard Real Estate ETF iShares S&P 500 Growth ETF iShares Russell 2000 Value ETF iShares Russell Mid-Cap ETF iShares Russell 2000 Growth ETF Vanguard Real Estate ETF iShares Core MSCI EAFE ETF
Undiscovered Managers Behavioral Value-R6 Vanguard FTSE Emerging Markets ETF Emerald Growth Fund-I Vanguard Short-Term Invest-Grade Adm DFA Large Cap International Portfolio iShares Core U.S. Aggregate Dodge & Cox International Stock Vanguard High-Yield Corp Adm MFS International Growth - R6 First American Government Obligations Z Hartford Schroders Emerging Markets Eq
Vanguard Short-Term Invest-Grade Adm
PIMCO High Yield Instl
Dodge & Cox Income-I
PGIM Total Return Bond - R6
DoubleLine Core Fixed Income - I
First American Government Obligations Z
Item: 17
811
HighMark Plus (Active)
Composite Inception Date 08/2004
No of Holdings in Portfolio 20
PARS DIVERSIFIED PORTFOLIOS
MODERATELY CONSERVATIVE
INVESTMENT OBJECTIVE
ANNUAL RETURNS
ASSET ALLOCATION — MODERATELY CONSERVATIVE PORTFOLIO
Comprehensive Investment Solution
HighMark® Capital Management, Inc.’s (HighMark)
diversified investment portfolios are designed to
balance return expectations with risk tolerance.
Key features include: sophisticated asset allocation
and optimization techniques, four layers of
diversification (asset class, style, manager, and
security), access to rigorously screened, top tier
money managers, flexible investment options, and
experienced investment management.
Rigorous Manager Due Diligence
Our manager review committee utilizes a rigorous
screening process that searches for investment
managers and styles that have not only produced
above-average returns within acceptable risk
parameters, but have the resources and commitment
to continue to deliver these results. We have set high
standards for our investment managers and funds.
This is a highly specialized, time consuming
approach dedicated to one goal: competitive and
consistent performance.
Flexible Investment Options
In order to meet the unique needs of our clients,
we offer access to flexible implementation strategies:
HighMark Plus utilizes actively managed mutual
funds while Index Plus utilizes index-based
securities, including exchange-traded funds. Both
investment options leverage HighMark’s active asset
allocation approach.
Risk Management
The portfolio is constructed to control risk through
four layers of diversification – asset classes (cash,
fixed income, equity), investment styles (large cap,
small cap, international, value, growth), managers
and securities. Disciplined mutual fund selection and
monitoring process helps to drive return potential
while reducing portfolio risk.
WHY THE PARS DIVERSIFIED
MODERATELY CONSERVATIVE PORTFOLIO?
Q1 2023
* Returns less than one year are not annualized. **Breakdown for Blended Benchmark: From 10/1/2012 -Present: 15.5% S&P500, 3% Russell Mid Cap, 4.5% Russell 2000, 2% MSCI EM (net), 4% MSCI EAFE (net), 49.25% Bloomberg US Agg, 14% ICE BofA 1- 3 Yr US Corp/Gov’t, 1.75% ICE BofA US High Yield Master II, 1% Wilshire REIT, and 5% FTSE 1 Mth US T-Bill. From 4/1/2007 - 9/30/2012: the blended benchmark was 25% S&P 500; 1.5% Russell 2000, 3.5% MSCI EAFE (net), 25% ICE BofA 1-3 Year Corp./Govt, 40% Bloomberg US Agg, 5% FTSE 1 Mth US T-Bill. Prior to April 2007, the blended benchmark was 30% S&P 500, 25% ICE BofA 1-3Yr Corp/Gov, 40% Bloomberg US Agg, and 5% FTSE 1 Mth US T-Bill.
To provide current income, with
capital appreciation as a
secondary objective. The major
portion of the assets is committed
to income-producing securities.
Market fluctuations should be
expected.
Strategic Range Policy Tactical
Equity 20 - 40% 30% 29%
Fixed Income 50 - 80% 65% 67%
Cash 0 - 20% 5% 4%
ANNUALIZED TOTAL RETURNS
(Gross of Investment Management Fees, but Net of
Embedded Fund Fees)
HighMark Plus Composite (Active)
Gross Net
Current Quarter* 3.76% 3.67%
Blended Benchmark*,** 3.69%
Year To Date* 3.76% 3.67%
Blended Benchmark*,** 3.69%
1 Year -5.33% -5.67%
Blended Benchmark** -4.38%
3 Year 4.38% 4.01%
Blended Benchmark** 3.78%
5 Year 3.17% 2.80%
Blended Benchmark** 3.45%
10 Year 3.82% 3.45%
Blended Benchmark** 3.99%
Index Plus Composite (Passive)
Gross Net
Current Quarter* 3.72% 3.63%
Blended Benchmark*,** 3.69%
Year To Date* 3.72% 3.63%
Blended Benchmark*,** 3.69%
1 Year -4.66% -5.00%
Blended Benchmark** -4.38%
3 Year 3.36% 2.99%
Blended Benchmark** 3.78%
5 Year 3.19% 2.82%
Blended Benchmark** 3.45%
10 Year 3.72% 3.35%
Blended Benchmark** 3.99%
PORTFOLIO FACTS
Index Plus (Passive)
Composite Inception Date 05/2005
No of Holdings in Portfolio 13
Efficient Frontier
Risk (Standard Deviation)
Reward (Rate of Return)Conservative
Moderately Conservative
Moderate
Capital Appreciation
Balanced
(Gross of Investment Management Fees, but Net of Embedded Fund Fees)
HighMark Plus Composite (Active)
2008 -15.37%
2009 18.71%
2010 10.46%
2011 1.75%
2012 10.88%
2013 7.30%
2014 4.41%
2015 0.32%
2016 4.94%
2017 9.56%
2018 -2.60%
2019 13.73%
2020 10.76%
2021 5.15%
2022 -13.46%
Index Plus Composite (Passive)
2008 -12.40%
2009 11.92%
2010 9.72%
2011 3.24%
2012 8.24%
2013 6.78%
2014 5.40%
2015 -0.18%
2016 5.42%
2017 8.08%
2018 -2.33%
2019 13.53%
2020 9.74%
2021 5.33%
2022 -13.00%
Item: 17
812
HIGHMARK CAPITAL MANAGEMENT
350 California Street
Suite 1600
San Francisco, CA 94104
800-582-4734
ABOUT THE ADVISER
HighMark® Capital Management, Inc. (HighMark) has
over 100 years (including predecessor organizations) of institutional money management experience with $8.6
billion in assets under management and $9.6 billion in
assets under advisement*. HighMark has a long term
disciplined approach to money management and
currently manages assets for a wide array of clients.
ABOUT THE PORTFOLIO MANAGEMENT TEAM
Andrew Brown, CFA
®
Senior Portfolio Manager
Investment Experience: since 1994
HighMark Tenure: since 1997
Education: MBA, University of Southern California;
BA, University of Southern California
Salvatore “Tory” Milazzo III, CFA
®
Senior Portfolio Manager
Investment Experience: since 2004
HighMark Tenure: since 2014
Education: BA, Colgate University
J. Keith Stribling, CFA
®
Senior Portfolio Manager
Investment Experience: since 1985
HighMark Tenure: since 1995
Education: BA, Stetson University
Christiane Tsuda
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2010
Education: BA, International Christian University, Tokyo Anne Wimmer, CFA
®
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2007
Education: BA, University of California, Santa Barbara
Asset Allocation Committee
Number of Members: 15
Average Years of Experience: 28
Average Tenure (Years): 16
Manager Review Group
Number of Members: 6
Average Years of Experience: 23
Average Tenure (Years): 12
*Assets under management (“AUM”) include assets for which HighMark provides continuous and regular supervisory and management services. Assets under advisement (“AUA”)
include assets for which HighMark provides certain investment advisory services (including, but not limited to, investment research and strategies) for client assets of its parent company, MUFG Union Bank, N.A.
The performance records shown represent a size-weighted composite of tax exempt accounts that meet the following criteria: Accounts are managed by HighMark with full investment authority according to the PARS Moderately Conservative active and passive objectives.
The adviser to the PARS portfolios is U.S. Bank, and HighMark serves as sub-adviser to U.S. Bank to manage these portfolios. U.S. Bank may charge clients as much as 0.60% annual management fee based on a sliding scale. U.S. Bank pays HighMark 60% of the annual management fee for assets sub-advised by HighMark under its sub-advisory agreement with U.S. Bank. The 0.36% paid to HighMark, as well as other expenses that may be incurred in the management of the portfolio, will reduce the portfolio’s returns. Assuming an investment for five years, a 5% annual total return, and an annual sub-advisory fee rate of 0.36% deducted from the assets at market at the end of each year, a $10 million initial value would grow to $12.53 million after fees (Net -of-Fees) and $12.76 million before fees (Gross-of-Fees).
Gross returns are presented before management and custodial fees but after all trading expenses and reflect the reinvestment of dividends and other income. A client's return will be reduced by the advisory fees and other expenses it may incur as a client. Additional information regarding the firm’s policies and procedures for calculating and reporting performance results is available upon request. Performance results are calculated and presented in U.S. dollars and do not reflect the deduction of investment advisory fees, custody fees, or taxes but do reflect the deduction of trading expenses. Returns are calculated based on trade-date accounting.
Blended benchmarks represent HighMark’s strategic allocations between equity, fixed income, and cash and are rebalanced monthly. Benchmark returns do not reflect the deduction of advisory fees or other expenses of investing but assumes the reinvestment of dividends and other earnings. An investor cannot invest directly in an index. The unmanaged S&P 500 Index is representative of the performance of large companies in the U.S. stock market. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The ICE BofA U.S. High Yield Master II Index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Wilshire REIT index measures U.S. publicly traded Real Estate Investment Trusts. The unmanaged Bloomberg U.S. Aggregate Bond Index is generally representative of the U.S. taxable bond market as a whole. The ICE BofA 1-3 Year U.S. Corporate & Government Index tracks the bond performance of the ICE BofA U.S. Corporate & Government Index, with a remaining term to final maturity less than 3 years. The unmanaged FTSE 1-Month U.S.
Treasury Bill Index tracks the yield of the 1-month U.S. Treasury Bill.
HighMark Capital Management, Inc. (HighMark), an SEC-registered investment adviser, is a wholly owned subsidiary of MUFG Union Bank, N.A. (MUFG Union Bank). HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, and public and private retirement plans. HighMark and MUFG Union Banks’s ultimate parent company is a wholly-owned subsidiary of U.S. Bancorp (“USB”). MUFG Union Bank provides certain services to HighMark and is compensated for these services. Past performance does not guarantee future results. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing HighMark strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by the Bank or any Bank affiliate, and MAY lose value, including possible loss of principal.
350 California Street
Suite 1600
San Francisco, CA 94104
800.582.4734
www.highmarkcapital.com
HOLDINGS
STYLE
Small Cap 4.0%
Interm-Term Bond
52.5%
High Yield 1.0%
Short-Term Bond
13.5%
Large Cap Core
8.1%
Large Cap Growth
3.2%
Mid Cap 2.5%
Intl Stocks 6.2%
Cash 4.5%
Large Cap Value
3.6% Real Estate 0.9%
Holdings are subject to change at the
discretion of the investment manager.
HighMark Plus (Active) Index Plus (Passive)
Columbia Contrarian Core I3 iShares Core S&P 500 ETF
Vanguard Growth & Income Adm iShares S&P 500 Value ETF
Dodge & Cox Stock Fund iShares S&P 500 Growth ETF
iShares S&P 500 Value ETF iShares Russell Mid-Cap ETF
Harbor Capital Appreciation - Retirement Vanguard Real Estate ETF iShares S&P 500 Growth ETF iShares Russell 2000 Value ETF iShares Russell Mid-Cap ETF iShares Russell 2000 Growth ETF Vanguard Real Estate ETF iShares Core MSCI EAFE ETF
Undiscovered Managers Behavioral Value-R6 Vanguard FTSE Emerging Markets ETF Emerald Growth Fund-I Vanguard Short-Term Invest-Grade Adm DFA Large Cap International Portfolio iShares Core U.S. Aggregate Dodge & Cox International Stock Vanguard High-Yield Corp Adm MFS International Growth - R6 First American Government Obligations Z Hartford Schroders Emerging Markets Eq
Vanguard Short-Term Invest-Grade Adm
PIMCO High Yield Instl
Dodge & Cox Income-I
PGIM Total Return Bond - R6
DoubleLine Core Fixed Income - I
First American Government Obligations Z
Item: 17
813
PARS DIVERSIFIED PORTFOLIOS
MODERATE
INVESTMENT OBJECTIVE
ANNUAL RETURNS
ASSET ALLOCATION — MODERATE PORTFOLIO
Comprehensive Investment Solution
HighMark® Capital Management, Inc.’s (HighMark)
diversified investment portfolios are designed to
balance return expectations with risk tolerance.
Key features include: sophisticated asset allocation
and optimization techniques, four layers of
diversification (asset class, style, manager, and
security), access to rigorously screened, top tier
money managers, flexible investment options, and
experienced investment management.
Rigorous Manager Due Diligence
Our manager review committee utilizes a rigorous
screening process that searches for investment
managers and styles that have not only produced
above-average returns within acceptable risk
parameters, but have the resources and commitment
to continue to deliver these results. We have set high
standards for our investment managers and funds.
This is a highly specialized, time consuming
approach dedicated to one goal: competitive and
consistent performance.
Flexible Investment Options
In order to meet the unique needs of our clients,
we offer access to flexible implementation strategies:
HighMark Plus utilizes actively managed mutual
funds while Index Plus utilizes index-based
securities, including exchange-traded funds. Both
investment options leverage HighMark’s active asset
allocation approach.
Risk Management
The portfolio is constructed to control risk through
four layers of diversification – asset classes (cash,
fixed income, equity), investment styles (large cap,
small cap, international, value, growth), managers
and securities. Disciplined mutual fund selection and
monitoring process helps to drive return potential
while reducing portfolio risk.
WHY THE PARS DIVERSIFIED
MODERATE PORTFOLIO?
Q1 2023
* Returns less than one year are not annualized. **Breakdown for Blended Benchmark: From 10/1/2012 –Present: 26.5% S&P500, 5% Russell Mid Cap, 7.5% Russell 2000, 3.25% MSCI EM (net), 6% MSCI EAFE (net), 33.50% Bloomberg US Agg, 10% ICE BofA 1-3 Yr US Corp/Gov’t, 1.50% ICE BofA US High Yield Master II, 1.75% Wilshire REIT, and 5% FTSE 1 Mth US T-Bill. From 4/1/2007 – 9/30/2012: the blended benchmark was 43% S&P 500; 2% Russell 2000, 5% MSCI EAFE (net), 15% ICE BofA 1-3 Year Corp./Govt, 30% Bloomberg US Agg, 5% FTSE 1 Mth US T-Bill. Prior to April 2007: the blended benchmark was 50% S&P 500, 15% ICE BofA 1- 3Yr Corp/Gov, 30% Bloomberg US Agg, and 5% FTSE 1 Mth US T-Bill.
To provide current income and
moderate capital appreciation.
It is expected that dividend and
interest income will comprise a
significant portion of total return,
although growth through capital
appreciation is equally important.
Strategic Range Policy Tactical
Equity 40 - 60% 50% 47%
Fixed Income 40 - 60% 45% 48%
Cash 0 - 20% 5% 5%
ANNUALIZED TOTAL RETURNS
(Gross of Investment Management Fees, but Net of
Embedded Fund Fees)
Index Plus Composite (Passive)
Gross Net
Current Quarter* 4.29% 4.19%
Blended Benchmark*,** 4.39%
Year To Date* 4.29% 4.19%
Blended Benchmark*,** 4.39%
1 Year -5.45% -5.79%
Blended Benchmark** -5.25%
3 Year 7.08% 6.69%
Blended Benchmark** 7.65%
5 Year 4.55% 4.18%
Blended Benchmark** 4.97%
10 Year 5.31% 4.93%
Blended Benchmark** 5.74%
PORTFOLIO FACTS
HighMark Plus (Active)
Composite Inception Date 10/2004
No of Holdings in Portfolio 20
Index Plus (Passive)
Composite Inception Date 05/2006
No of Holdings in Portfolio 13
Efficient Frontier
Risk (Standard Deviation)
Reward (Rate of Return)Conservative
Moderately Conservative
Moderate
Capital Appreciation
Balanced
(Gross of Investment Management Fees, but Net of Embedded Fund Fees)
HighMark Plus Composite (Active)
2008 -22.88%
2009 21.47%
2010 12.42%
2011 0.55%
2012 12.25%
2013 13.06%
2014 4.84%
2015 0.14%
2016 6.45%
2017 13.19%
2018 -4.03%
2019 17.71%
2020 12.92%
2021 9.31%
2022 -14.63%
Index Plus Composite (Passive)
2008 -18.14%
2009 16.05%
2010 11.77%
2011 2.29%
2012 10.91%
2013 12.79%
2014 5.72%
2015 -0.52%
2016 7.23%
2017 11.59%
2018 -4.03%
2019 17.52%
2020 11.23%
2021 10.18%
2022 -14.21%
HighMark Plus Composite (Active)
Gross Net
Current Quarter* 4.42% 4.33%
Blended Benchmark*,** 4.39%
Year To Date* 4.42% 4.33%
Blended Benchmark*,** 4.39%
1 Year -6.09% -6.43%
Blended Benchmark** -5.25%
3 Year 7.93% 7.54%
Blended Benchmark** 7.65%
5 Year 4.60% 4.23%
Blended Benchmark** 4.97%
10 Year 5.44% 5.06%
Blended Benchmark** 5.74%
Item: 17
814
HIGHMARK CAPITAL MANAGEMENT
350 California Street
Suite 1600
San Francisco, CA 94104
800-582-4734
ABOUT THE ADVISER
HighMark® Capital Management, Inc. (HighMark) has
over 100 years (including predecessor organizations) of institutional money management experience with $8.6
billion in assets under management and $9.6 billion in
assets under advisement*. HighMark has a long term
disciplined approach to money management and
currently manages assets for a wide array of clients.
ABOUT THE PORTFOLIO MANAGEMENT TEAM
Andrew Brown, CFA
®
Senior Portfolio Manager
Investment Experience: since 1994
HighMark Tenure: since 1997
Education: MBA, University of Southern California;
BA, University of Southern California
Salvatore “Tory” Milazzo III, CFA
®
Senior Portfolio Manager
Investment Experience: since 2004
HighMark Tenure: since 2014
Education: BA, Colgate University
J. Keith Stribling, CFA
®
Senior Portfolio Manager
Investment Experience: since 1985
HighMark Tenure: since 1995
Education: BA, Stetson University
Christiane Tsuda
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2010
Education: BA, International Christian University, Tokyo Anne Wimmer, CFA
®
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2007
Education: BA, University of California, Santa Barbara
Asset Allocation Committee
Number of Members: 15
Average Years of Experience: 28
Average Tenure (Years): 16
Manager Review Group
Number of Members: 6
Average Years of Experience: 23
Average Tenure (Years): 12
*Assets under management (“AUM”) include assets for which HighMark provides continuous and regular supervisory and management services. Assets under advisement (“AUA”)
include assets for which HighMark provides certain investment advisory services (including, but not limited to, investment research and strategies) for client assets of its parent company, MUFG Union Bank, N.A.
The performance records shown represent size-weighted composites of tax exempt accounts that meet the following criteria: Accounts are managed by HighMark with full investment authority according to the PARS Moderate active and passive objectives.
The adviser to the PARS portfolios is U.S. Bank, and HighMark serves as sub-adviser to U.S. Bank to manage these portfolios. U.S. Bank may charge clients as much as 0.60% annual management fee based on a sliding scale. U.S. Bank pays HighMark 60% of the annual management fee for assets sub-advised by HighMark under its sub-advisory agreement with U.S. Bank. The 0.36% paid to HighMark, as well as other expenses that may be incurred in the management of the portfolio, will reduce the portfolio’s returns. Assuming an investment for five years, a 5% annual total return, and an annual sub-advisory fee rate of 0.36% deducted from the assets at market at the end of each year, a $10 million initial value would grow to $12.53 million after fees (Net-of-Fees) and $12.76 million before fees (Gross-of-Fees). Gross returns are presented before management and custodial fees but after all trading expenses and reflect the reinvestment of dividends and other income. A client's return will be reduced by the advisory fees and other expenses it may incur as a client. Additional information regarding the firm’s policies and procedures for calculating and reporting performance results is available upon request. Performance results are calculated and presented in U.S. dollars and do not reflect the deduction of investment advisory fees, custody fees, or taxes but do reflect the deduction of trading expenses. Returns are calculated based on trade-date accounting.
Blended benchmarks represent HighMark’s strategic allocations between equity, fixed income, and cash and are rebalanced monthly. Benchmark returns do not reflect the deduction of advisory fees or other expenses of investing but assumes the reinvestment of dividends and other earnings. An investor cannot invest directly in an index. The unmanaged S&P 500 Index is representative of the performance of large companies in the U.S. stock market. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The ICE BofA U.S. High Yield Master II Index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Wilshire REIT index measures U.S. publicly traded Real Estate Investment Trusts. The unmanaged Bloomberg U.S. Aggregate Bond Index is generally representative of the U.S. taxable bond market as a whole. The ICE BofA 1-3 Year U.S. Corporate & Government Index tracks the bond performance of the ICE BofA U.S. Corporate & Government Index, with a remaining term to final maturity less than 3 years. The unmanaged FTSE 1-Month U.S. Treasury Bill Index tracks the yield of the 1- month U.S. Treasury Bill.
HighMark Capital Management, Inc. (HighMark), an SEC-registered investment adviser, is a wholly owned subsidiary of MUFG Union Bank, N.A. (MUFG Union Bank). HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, and public and private retirement plans. HighMark and MUFG Union Banks’s ultimate parent company is a wholly-owned subsidiary of U.S. Bancorp (“USB”). MUFG Union Bank provides certain services to HighMark and is compensated for these services. Past performance does not guarantee future results. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing HighMark strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by the Bank or any Bank affiliate, and MAY lose value, including possible loss of principal.
350 California Street
Suite 1600
San Francisco, CA 94104
800.582.4734
www.highmarkcapital.com
HOLDINGS
STYLE
Small Cap
6.6%
Interm-Term Bond
36.3%
High Yield
1.0%
Short-Term Bond
10.7%
Large Cap Core
13.8%
Large Cap Growth
5.4%
Mid Cap
4.1%
Intl Stocks
9.8%
Cash
4.5%
Large Cap Value
6.2%
Real Estate
1.6%
Holdings are subject to change at the
discretion of the investment manager.
HighMark Plus (Active) Index Plus (Passive)
Columbia Contrarian Core I3 iShares Core S&P 500 ETF
Vanguard Growth & Income Adm iShares S&P 500 Value ETF
Dodge & Cox Stock Fund iShares S&P 500 Growth ETF
iShares S&P 500 Value ETF iShares Russell Mid-Cap ETF
Harbor Capital Appreciation - Retirement Vanguard Real Estate ETF iShares S&P 500 Growth ETF iShares Russell 2000 Value ETF iShares Russell Mid-Cap ETF iShares Russell 2000 Growth ETF Vanguard Real Estate ETF iShares Core MSCI EAFE ETF
Undiscovered Managers Behavioral Value-R6 Vanguard FTSE Emerging Markets ETF Emerald Growth Fund-I Vanguard Short-Term Invest-Grade Adm DFA Large Cap International Portfolio iShares Core U.S. Aggregate Dodge & Cox International Stock Vanguard High-Yield Corp Adm MFS International Growth - R6 First American Government Obligations Z Hartford Schroders Emerging Markets Eq
Vanguard Short-Term Invest-Grade Adm
PIMCO High Yield Instl
Dodge & Cox Income-I
PGIM Total Return Bond - R6
DoubleLine Core Fixed Income - I
First American Government Obligations Z
Item: 17
815
HighMark Plus (Active)
Composite Inception Date 10/2006
No of Holdings in Portfolio 20
PARS DIVERSIFIED PORTFOLIOS
BALANCED
INVESTMENT OBJECTIVE
ANNUAL RETURNS
ASSET ALLOCATION — BALANCED PORTFOLIO
Comprehensive Investment Solution
HighMark® Capital Management, Inc.’s (HighMark)
diversified investment portfolios are designed to
balance return expectations with risk tolerance.
Key features include: sophisticated asset allocation
and optimization techniques, four layers of
diversification (asset class, style, manager, and
security), access to rigorously screened, top tier
money managers, flexible investment options, and
experienced investment management.
Rigorous Manager Due Diligence
Our manager review committee utilizes a rigorous
screening process that searches for investment
managers and styles that have not only produced
above-average returns within acceptable risk
parameters, but have the resources and commitment
to continue to deliver these results. We have set high
standards for our investment managers and funds.
This is a highly specialized, time consuming
approach dedicated to one goal: competitive and
consistent performance.
Flexible Investment Options
In order to meet the unique needs of our clients,
we offer access to flexible implementation strategies:
HighMark Plus utilizes actively managed mutual
funds while Index Plus utilizes index-based
securities, including exchange-traded funds. Both
investment options leverage HighMark’s active asset
allocation approach.
Risk Management
The portfolio is constructed to control risk through
four layers of diversification – asset classes (cash,
fixed income, equity), investment styles (large cap,
small cap, international, value, growth), managers
and securities. Disciplined mutual fund selection and
monitoring process helps to drive return potential
while reducing portfolio risk.
WHY THE PARS DIVERSIFIED
BALANCED PORTFOLIO?
Q1 2023
* Returns less than one year are not annualized. **Breakdown for Blended Benchmark: From 10/1/2012 –Present: 32% S&P500, 6% Russell Mid Cap, 9% Russell 2000, 4% MSCI EM (net), 7% MSCI EAFE (net), 27% Bloomberg US Agg, 6.75% ICE BofA 1-3 Yr US Corp/Gov’t, 1.25% ICE BofA US High Yield Master II, 2% Wilshire REIT, and 5% FTSE 1 MthUS T-Bill. From 4/1/2007 – 9/30/2012:
the blended benchmark was 51% S&P 500; 3% Russell 2000, 6% MSCI EAFE (net), 5% ICE BofA 1-3 Year Corp./Govt, 30% Bloomberg US Agg, 5% FTSE 1 Mth US T-Bill. Prior to April 2007: the blended benchmark was 60% S&P 500, 5% ICE BofA 1-3Yr Corp/Gov, 30% Bloomberg US Agg, and 5% FTSE 1 Mth US T-Bill.
To provide growth of principal and
income. While dividend and
interest income are an important
component of the objective’s
total return, it is expected that
capital appreciation will comprise
a larger portion of the total return.
Strategic Range Policy Tactical
Equity 50 – 70% 60% 57%
Fixed Income 30 – 50% 35% 38%
Cash 0 – 20% 5% 5%
ANNUALIZED TOTAL RETURNS
(Gross of Investment Management Fees, but Net of
Embedded Fund Fees)
HighMark Plus Composite (Active)
Gross Net
Current Quarter* 4.64% 4.55%
Blended Benchmark*,** 4.76%
Year To Date* 4.64% 4.55%
Blended Benchmark*,** 4.76%
1 Year -6.65% -6.99%
Blended Benchmark** -5.78%
3 Year 9.70% 9.31%
Blended Benchmark** 9.56%
5 Year 5.23% 4.85%
Blended Benchmark** 5.67%
10 Year 6.22% 5.84%
Blended Benchmark** 6.59%
Index Plus Composite (Passive)
Gross Net
Current Quarter* 4.58% 4.49%
Blended Benchmark*,** 4.76%
Year To Date* 4.58% 4.49%
Blended Benchmark*,** 4.76%
1 Year -6.02% -6.36%
Blended Benchmark** -5.78%
3 Year 8.91% 8.52%
Blended Benchmark** 9.56%
5 Year 5.19% 4.81%
Blended Benchmark** 5.67%
10 Year 6.08% 5.70%
Blended Benchmark** 6.59%
PORTFOLIO FACTS
Index Plus (Passive)
Composite Inception Date 10/2007
No of Holdings in Portfolio 13
Efficient Frontier
Risk (Standard Deviation)
Reward (Rate of Return)Conservative
Moderately Conservative
Moderate
Capital Appreciation
Balanced
(Gross of Investment Management Fees, but Net of Embedded Fund Fees)
HighMark Plus Composite (Active)
2008 -25.72%
2009 21.36%
2010 14.11%
2011 -0.46%
2012 13.25%
2013 16.61%
2014 4.70%
2015 0.04%
2016 6.81%
2017 15.46%
2018 -4.88%
2019 19.85%
2020 13.85%
2021 11.44%
2022 -15.28%
Index Plus Composite (Passive)
2008 -23.22%
2009 17.62%
2010 12.76%
2011 1.60%
2012 11.93%
2013 15.63%
2014 6.08%
2015 -0.81%
2016 8.26%
2017 13.39%
2018 -5.05%
2019 19.59%
2020 12.07%
2021 12.63%
2022 -14.97%
Item: 17
816
HIGHMARK CAPITAL MANAGEMENT
350 California Street
Suite 1600
San Francisco, CA 94104
800-582-4734
ABOUT THE ADVISER
HighMark® Capital Management, Inc. (HighMark) has
over 100 years (including predecessor organizations) of institutional money management experience with $8.6
billion in assets under management and $9.6 billion in
assets under advisement*. HighMark has a long term
disciplined approach to money management and
currently manages assets for a wide array of clients.
ABOUT THE PORTFOLIO MANAGEMENT TEAM
Andrew Brown, CFA
®
Senior Portfolio Manager
Investment Experience: since 1994
HighMark Tenure: since 1997
Education: MBA, University of Southern California;
BA, University of Southern California
Salvatore “Tory” Milazzo III, CFA
®
Senior Portfolio Manager
Investment Experience: since 2004
HighMark Tenure: since 2014
Education: BA, Colgate University
J. Keith Stribling, CFA
®
Senior Portfolio Manager
Investment Experience: since 1985
HighMark Tenure: since 1995
Education: BA, Stetson University
Christiane Tsuda
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2010
Education: BA, International Christian University, Tokyo Anne Wimmer, CFA
®
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2007
Education: BA, University of California, Santa Barbara
Asset Allocation Committee
Number of Members: 15
Average Years of Experience: 28
Average Tenure (Years): 16
Manager Review Group
Number of Members: 6
Average Years of Experience: 23
Average Tenure (Years): 12
*Assets under management (“AUM”) include assets for which HighMark provides continuous and regular supervisory and management services. Assets under advisement (“AUA”)
include assets for which HighMark provides certain investment advisory services (including, but not limited to, investment research and strategies) for client assets of its parent company, MUFG Union Bank, N.A.
The performance records shown represent size-weighted composites of tax exempt accounts that meet the following criteria:
Accounts are managed by HighMark with full investment authority according to the PARS Balanced active and passive objectives.
The composite name has been changed from PARS Balanced/Moderately Aggressive to PARS Balanced on 5/1/2013. The adviser to the PARS portfolios is U.S. Bank, and HighMark serves as sub-adviser to U.S. Bank to manage these portfolios.
U.S. Bank may charge clients as much as 0.60% annual management fee based on a sliding scale. U.S. Bank pays HighMark 60% of the annual management fee for assets sub-advised by HighMark under its sub-advisory agreement with U.S. Bank. The 0.36% paid to HighMark, as well as other expenses that may be incurred in the management of the portfolio, will reduce the portfolio’s returns. Assuming an investment for five years, a 5% annual total return, and an annual sub- advisory fee rate of 0.36% deducted from the assets at market at the end of each year, a $10 million initial value would grow to $12.53 million after fees (Net-of-Fees) and $12.76 million before fees (Gross-of-Fees). Gross returns are presented before management and custodial fees but after all trading expenses and reflect the reinvestment of dividends and other income. A client's return will be reduced by the advisory fees and other expenses it may incur as a client. Additional information regarding the firm’s policies and procedures for calculating and reporting performance results is available upon request.
Performance results are calculated and presented in U.S. dollars and do not reflect the deduction of investment advisory fees, custody fees, or taxes but do reflect the deduction of trading expenses. Returns are calculated based on trade- date accounting.
Blended benchmarks represent HighMark’s strategic allocations between equity, fixed income, and cash and are rebalanced monthly. Benchmark returns do not reflect the deduction of advisory fees or other expenses of investing but assumes the reinvestment of dividends and other earnings. An investor cannot invest directly in an index. The unmanaged S&P 500 Index is representative of the performance of large companies in the U.S. stock market. The MSCI EAFE Index is a free float- adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Russell Midcap Index measures the performance of the mid- cap segment of the U.S. equity universe. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The ICE BofA U.S. High Yield Master II Index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Wilshire REIT index measures U.S. publicly traded Real Estate Investment Trusts. The unmanaged Bloomberg U.S. Aggregate Bond Index is generally representative of the U.S. taxable bond market as a whole. The ICE BofA 1-3 Year U.S. Corporate & Government Index tracks the bond performance of the ICE BofA U.S. Corporate & Government Index, with a remaining term to final maturity less than 3 years.
The unmanaged FTSE 1-Month U.S. Treasury Bill Index tracks the yield of the 1-month U.S. Treasury Bill.
HighMark Capital Management, Inc. (HighMark), an SEC-registered investment adviser, is a wholly owned subsidiary of MUFG Union Bank, N.A. (MUFG Union Bank). HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, and public and private retirement plans. HighMark and MUFG Union Banks’s ultimate parent company is a wholly-owned subsidiary of U.S. Bancorp (“USB”). MUFG Union Bank provides certain services to HighMark and is compensated for these services. Past performance does not guarantee future results. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing HighMark strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by the Bank or any Bank affiliate, and MAY lose value, including possible loss of principal.
350 California Street
Suite 1600
San Francisco, CA 94104
800.582.4734
www.highmarkcapital.com
HOLDINGS
STYLE
Small Cap
7.9%
Interm-Term Bond
29.6%
High Yield
0.9%
Short-Term Bond
7.5%Large Cap Core
16.8%
Large Cap Growth
6.5%
Mid Cap
5.0%
Intl Stocks
11.6%
Cash
5.0%
Large Cap Value
7.5%
Real Estate
1.7%
Holdings are subject to change at the
discretion of the investment manager.
HighMark Plus (Active) Index Plus (Passive)
Columbia Contrarian Core I3 iShares Core S&P 500 ETF
Vanguard Growth & Income Adm iShares S&P 500 Value ETF
Dodge & Cox Stock Fund iShares S&P 500 Growth ETF
iShares S&P 500 Value ETF iShares Russell Mid-Cap ETF
Harbor Capital Appreciation - Retirement Vanguard Real Estate ETF iShares S&P 500 Growth ETF iShares Russell 2000 Value ETF iShares Russell Mid-Cap ETF iShares Russell 2000 Growth ETF Vanguard Real Estate ETF iShares Core MSCI EAFE ETF
Undiscovered Managers Behavioral Value-R6 Vanguard FTSE Emerging Markets ETF Emerald Growth Fund-I Vanguard Short-Term Invest-Grade Adm DFA Large Cap International Portfolio iShares Core U.S. Aggregate Dodge & Cox International Stock Vanguard High-Yield Corp Adm MFS International Growth - R6 First American Government Obligations Z Hartford Schroders Emerging Markets Eq
Vanguard Short-Term Invest-Grade Adm
PIMCO High Yield Instl
Dodge & Cox Income-I
PGIM Total Return Bond - R6
DoubleLine Core Fixed Income - I
First American Government Obligations Z
Item: 17
817
PARS DIVERSIFIED PORTFOLIOS
CAPITAL APPRECIATION
INVESTMENT OBJECTIVE
ANNUAL RETURNS
ASSET ALLOCATION — CAPITAL APPRECIATION PORTFOLIO
Comprehensive Investment Solution
HighMark® Capital Management, Inc.’s (HighMark)
diversified investment portfolios are designed to
balance return expectations with risk tolerance.
Key features include: sophisticated asset allocation
and optimization techniques, four layers of
diversification (asset class, style, manager, and
security), access to rigorously screened, top tier
money managers, flexible investment options, and
experienced investment management.
Rigorous Manager Due Diligence
Our manager review committee utilizes a rigorous
screening process that searches for investment
managers and styles that have not only produced
above-average returns within acceptable risk
parameters, but have the resources and commitment
to continue to deliver these results. We have set high
standards for our investment managers and funds.
This is a highly specialized, time consuming
approach dedicated to one goal: competitive and
consistent performance.
Flexible Investment Options
In order to meet the unique needs of our clients,
we offer access to flexible implementation strategies:
HighMark Plus utilizes actively managed mutual
funds while Index Plus utilizes index-based
securities, including exchange-traded funds. Both
investment options leverage HighMark’s active asset
allocation approach.
Risk Management
The portfolio is constructed to control risk through
four layers of diversification – asset classes (cash,
fixed income, equity), investment styles (large cap,
small cap, international, value, growth), managers
and securities. Disciplined mutual fund selection and
monitoring process helps to drive return potential
while reducing portfolio risk.
WHY THE PARS DIVERSIFIED
CAPITAL APPRECIATION PORTFOLIO?
Q1 2023
* Returns less than one year are not annualized. **Breakdown for Blended Benchmark: 39.5% S&P500, 7.5% Russell Mid Cap,
10.5% Russell 2000, 5.25% MSCI EM (net), 10.25% MSCI EAFE (net), 16% Bloomberg US Agg, 3% ICE BofA 1-3 Yr US Corp/Gov’t, 1% ICE BofA US High Yield Master II, 2% Wilshire REIT, and 5% FTSE 1 MthUS T-Bill.
To provide growth of principal.
The major portion of the assets
are invested in equity securities
and market fluctuations are
expected.
Strategic Range Policy Tactical
Equity 65 - 85% 75% 71%
Fixed Income 10 - 30% 20% 23%
Cash 0 - 20% 5% 6%
ANNUALIZED TOTAL RETURNS
(Gross of Investment Management Fees, but Net of
Embedded Fund Fees)
Consolidated Composite
Gross Net
Current Quarter* 5.18% 5.09%
Blended Benchmark*,** 5.36%
Year To Date* 5.18% 5.09%
Blended Benchmark*,** 5.36%
1 Year -6.90% -7.23%
Blended Benchmark** -6.36%
3 Year 11.99% 11.59%
Blended Benchmark** 12.37%
5 Year 6.14% 5.76%
Blended Benchmark** 6.59%
10 Year 7.45% 7.06%
Blended Benchmark** 7.74%
PORTFOLIO FACTS
Consolidated Composite
Composite Inception Date 01/2009
No of Holdings in Portfolio 20
Efficient Frontier
Risk (Standard Deviation)
Reward (Rate of Return)Conservative
Moderately Conservative
Moderate
Capital Appreciation
Balanced
(Gross of Investment Management Fees, but Net of Embedded Fund Fees)
Consolidated Composite
2008 N/A
2009 23.77%
2010 12.95%
2011 -1.35%
2012 13.87%
2013 20.33%
2014 6.05%
2015 -0.26%
2016 8.79%
2017 16.72%
2018 -5.82%
2019 22.62%
2020 14.50%
2021 14.96%
2022 -16.08%
Item: 17
818
HIGHMARK CAPITAL MANAGEMENT
350 California Street
Suite 1600
San Francisco, CA 94104
800-582-4734
ABOUT THE ADVISER
HighMark® Capital Management, Inc. (HighMark) has
over 100 years (including predecessor organizations) of institutional money management experience with $8.6
billion in assets under management and $9.6 billion in
assets under advisement*. HighMark has a long term
disciplined approach to money management and
currently manages assets for a wide array of clients.
ABOUT THE PORTFOLIO MANAGEMENT TEAM
Andrew Brown, CFA
®
Senior Portfolio Manager
Investment Experience: since 1994
HighMark Tenure: since 1997
Education: MBA, University of Southern California;
BA, University of Southern California
Salvatore “Tory” Milazzo III, CFA
®
Senior Portfolio Manager
Investment Experience: since 2004
HighMark Tenure: since 2014
Education: BA, Colgate University
J. Keith Stribling, CFA
®
Senior Portfolio Manager
Investment Experience: since 1985
HighMark Tenure: since 1995
Education: BA, Stetson University
Christiane Tsuda
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2010
Education: BA, International Christian University, Tokyo Anne Wimmer, CFA
®
Senior Portfolio Manager
Investment Experience: since 1987
HighMark Tenure: since 2007
Education: BA, University of California, Santa Barbara
Asset Allocation Committee
Number of Members: 15
Average Years of Experience: 28
Average Tenure (Years): 16
Manager Review Group
Number of Members: 6
Average Years of Experience: 23
Average Tenure (Years): 12
*Assets under management (“AUM”) include assets for which HighMark provides continuous and regular supervisory and management services. Assets under advisement (“AUA”)
include assets for which HighMark provides certain investment advisory services (including, but not limited to, investment research and strategies) for client assets of its parent company, MUFG Union Bank, N.A.
The performance records shown represent a size-weighted composite of tax exempt accounts that meet the following criteria: Accounts are managed by HighMark with full investment authority according to the PARS Capital Appreciation active and passive objectives.
The adviser to the PARS portfolios is U.S. Bank, and HighMark serves as sub-adviser to U.S. Bank to manage these portfolios. U.S. Bank may charge clients as much as 0.60% annual management fee based on a sliding scale. U.S. Bank pays HighMark 60% of the annual management fee for assets sub-advised by HighMark under its sub-advisory agreement with U.S. Bank. The 0.36% paid to HighMark, as well as other expenses that may be incurred in the management of the portfolio, will reduce the portfolio’s returns. Assuming an investment for five years, a 5% annual total return, and an annual sub-advisory fee rate of 0.36% deducted from the assets at market at the end of each year, a $10 million initial value would grow to $12.53 million after fees (Net-of-Fees) and $12.76 million before fees (Gross-of-Fees). Gross returns are presented before management and custodial fees but after all trading expenses and reflect the reinvestment of dividends and other income. A client's return will be reduced by the advisory fees and other expenses it may incur as a client. Additional information regarding the firm’s policies and procedures for calculating and reporting performance results is available upon request. Performance results are calculated and presented in U.S. dollars and do not reflect the deduction of investment advisory fees, custody fees, or taxes but do reflect the deduction of trading expenses. Returns are calculated based on trade-date accounting.
Blended benchmarks represent HighMark’s strategic allocations between equity, fixed income, and cash and are rebalanced monthly. Benchmark returns do not reflect the deduction of advisory fees or other expenses of investing but assumes the reinvestment of dividends and other earnings. An investor cannot invest directly in an index. The unmanaged S&P 500 Index is representative of the performance of large companies in the U.S. stock market. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The ICE BofA U.S. High Yield Master II Index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Wilshire REIT index measures U.S. publicly traded Real Estate Investment Trusts. The unmanaged Bloomberg U.S. Aggregate Bond Index is generally representative of the U.S. taxable bond market as a whole. The ICE BofA 1-3 Year U.S. Corporate & Government Index tracks the bond performance of the ICE BofA U.S. Corporate & Government Index, with a remaining term to final maturity less than 3 years. The unmanaged FTSE 1-Month U.S. Treasury Bill Index tracks the yield of the 1-month U.S. Treasury Bill.
HighMark Capital Management, Inc. (HighMark), an SEC-registered investment adviser, is a wholly owned subsidiary of MUFG Union Bank, N.A. (MUFG Union Bank). HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, and public and private retirement plans. HighMark and MUFG Union Banks’s ultimate parent company is a wholly-owned subsidiary of U.S. Bancorp (“USB”). MUFG Union Bank provides certain services to HighMark and is compensated for these services. Past performance does not guarantee future results.
Individual account management and construction will vary depending on each client's investment needs and objectives.
Investments employing HighMark strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by the Bank or any Bank affiliate, and MAY lose value, including possible loss of principal.
350 California Street
Suite 1600
San Francisco, CA 94104
800.582.4734
www.highmarkcapital.com
HOLDINGS
STYLE
Small Cap
9.1%
Interm-Term Bond
18.6%
High Yield
0.8%
Short-Term Bond
3.3%
Large Cap Core
21.2%
Large Cap Growth
7.9%
Mid Cap
6.3%
Intl Stocks
16.0%
Cash
6.0%
Large Cap Value
9.1%
Real Estate
1.7%
Holdings are subject to change at the
discretion of the investment manager.
HighMark Plus (Active) Index Plus (Passive)
Columbia Contrarian Core I3 iShares Core S&P 500 ETF
Vanguard Growth & Income Adm iShares S&P 500 Value ETF
Dodge & Cox Stock Fund iShares S&P 500 Growth ETF
iShares S&P 500 Value ETF iShares Russell Mid-Cap ETF
Harbor Capital Appreciation - Retirement Vanguard Real Estate ETF iShares S&P 500 Growth ETF iShares Russell 2000 Value ETF iShares Russell Mid-Cap ETF iShares Russell 2000 Growth ETF Vanguard Real Estate ETF iShares Core MSCI EAFE ETF
Undiscovered Managers Behavioral Value-R6 Vanguard FTSE Emerging Markets ETF Emerald Growth Fund-I Vanguard Short-Term Invest-Grade Adm DFA Large Cap International Portfolio iShares Core U.S. Aggregate Dodge & Cox International Stock Vanguard High-Yield Corp Adm MFS International Growth - R6 First American Government Obligations Z Hartford Schroders Emerging Markets Eq
Vanguard Short-Term Invest-Grade Adm
PIMCO High Yield Instl
Dodge & Cox Income-I
PGIM Total Return Bond - R6
DoubleLine Core Fixed Income - I
First American Government Obligations Z
Item: 17
819