CITY OF MENIFEE
SUBJECT: Consideration to Establish Section 115 Trust
MEETING DATE: September 9, 2025
TO: Finance Committee
PREPARED BY: Margarita Cornejo, Deputy Finance Director REVIEWED BY: Travis Hickey, Chief Financial Officer
APPROVED BY: Armando G. Villa, City Manager
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RECOMMENDED ACTION
1. Review and provide input on consideration of establishing a Section 115 Trust.
DISCUSSION
In its overall financial management, the City proactively assesses and strives for both short-term and long-term financial resilience and stability. For public agencies, unfunded pension and retiree medical (also known as Other Post-Employment Benefits (OPEB)) can often represent significant long-term financial liabilities. Governmental Accounting Standards Board (GASB) No. 68, Accounting and Financial Reporting for Pensions and GASB No. 75, Accounting and Financial Reporting for Post-Employment Benefits Other Than Pensions, require public agencies to recognize its net pension liability and OPEB liability as part of the Annual Comprehensive Financial Report (ACFR) to reflect the significance of these liabilities relative to an agency’s overall financial position.
To address and alleviate larger pension and OPEB liabilities, public agencies have the opportunity to set up a Section 115 Trust. A Section 115 Trust is a tax-exempt investment tool for cities to prefund essential government expenses (i.e., retirement plan benefits). Since these trust assets are designated for essential government expenses, they are exempt from state-mandated investment restrictions placed on the City’s internally managed portfolio. As a result, the City can earn a long-term rate of return greater than what it would attain through its investment pool.
Funds placed in a Section 115 Trust can remain in the Trust until the City chooses to draw down its assets to pay annual benefit obligations. To remain tax-exempt, assets held in a Section 115 Trust are designated as irrevocable, meaning they must be used to fund the City’s pension or OPEB obligations. Therefore, withdrawals from the trust may be made to reimburse the City for current and/or previous year’s payments or to pay pension or OPEB costs directly.
City of Menifee Staff Report
Consideration to Establish Section 115 Trust
September 9, 2025
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Unfunded Pension Liability
The City’s Unfunded Pension Liability is defined as the difference, or gap, between the total estimated current cost of future pension benefits owed to employees and the actual amount of money currently set aside in the City’s pension fund to pay for those benefits. Since incorporation, the City provides retirement benefits to employees as part of the California Public Employees’ Retirement Systems (CalPERS). The City does not participate in social security. As part of the personnel costs included within the adopted operating budget, the City includes the associated employer portion of retirement benefits. The overall CalPERS pension retirement program, which includes the City’s plan, is heavily impacted by factors like investment returns, increasing retirees, and fewer workers. Historically, the City has been able to pay off its unfunded pension liability in a year-to-year basis. However, as the City’s workforce expands and the annual pension contributions also increase, the City should strategize ways to mitigate sharp increases in its annual unfunded pension costs. Exploring a Section 115 Trust would provide an additional option.
Beginning with FY2024/25, the City established an Assigned Fund Balance for Unfunded Pension Liability. As each fiscal year closes out, the City reviews the opportunity to continue to contribute to this Assigned Fund Balance, as a measure to address any sudden increases on pension liability from year to year. In consideration of establishing a Section 115 Trust, staff would recommend moving a portion of the current Assigned Fund Balance Unfunded Pension Liability. This would formally and fully commit the funds into trust, which as previously indicated could be used to pay annual benefit obligations.
OPEB
The City of Menifee provides certain medical benefits to eligible retirees. To be eligible to receive the benefits, retirees must have retired directly from the City with a service or disability retirement.
State law requires a minimum employer contribution towards retiree medical for cities using CalPERS as their employee medical plan benefit provider, pursuant to the Public Employees’ Medical & Hospital Care Act (PEMHCA). The City of Menifee currently provides the state minimum contribution per employee of $117.75 in 2024.
At present, public agencies have two options for covering OPEB costs. One option is known as “pay-as-you-go,” where the employer makes the required insurance premium payments for its retirees as they are due using the current year’s operating budget. This is the City’s current method of payment. The other option is “pre-funding,” where funds are set aside in a dedicated trust account. Establishing and funding an OPEB trust ensures that an employer can meet its future obligations while leveraging higher yields to decrease the amount to be paid by the City’s General Fund.
GASB 75 requires agencies to account for and disclose their OPEB costs for all active and retired employees. As of the most recent valuation (June 2024) the City's Net OPEB Liability is $3,383,027 for benefits already earned. Without a plan to address the City's OPEB Liability, this amount will continue to grow. The California Policy Center publishes a Local Fiscal Health Dashboard. While the City scores a 90 out of 100 with an overall assessment of “Low Risk,” the one area where the City fell short was in the category of OPEB Funding where the City scored a grade of “F.” The City would quickly improve its overall score dramatically with the establishment and funding of a Section 115 Trust for OPEB.
City of Menifee Staff Report
Consideration to Establish Section 115 Trust
September 9, 2025
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Benefits of a Section 115 Trust:
Contributions placed in a Section 115 Trust Fund grow at the rate of interest of the trust fund investments which is generally much higher than a city’s general fund investments. This increased rate of return increases assets available to fund pension liabilities and retiree health care. The participation of Section 115 Trust funds has grown significantly, with public agencies of different sizes and structures seeking to manage these longer-term liabilities. Another benefit of a Section 115 Trust is that so long as the contributions and withdrawals are managed in compliance with IRS requirements, the capital gains in the OPEB trust fund are not taxed.
Recognizing the benefits of establishing a Section 115 Trust, staff recommends the City Council consider establishing its own Section 115 Trust and seeks input and feedback from the Finance Committee to move forward.
FISCAL IMPACT
There is no fiscal impact associated with the discussion of potentially forming a Section 115 Trust.
Ultimately, if the City elects to move forward with establishing a Section 115 Trust, an analysis and procurement process of options, including any associated costs would be completed and presented for City Council consideration.
ATTACHMENTS
None.