CITY OF MENIFEE
SUBJECT: Establishment of Section 115 Trust
MEETING DATE: March 4, 2026
TO: Mayor and City Council
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. Approve a professional services agreement with Phase II dba Public Agency Retirement Services (PARS) for administrative services of the City’s Section 115 Trusts; and
2. Adopt a resolution approving the adoption of the City of Menifee’s Post Employment Benefit (OPEB) Trust and Pension Liability Trust, collectively Section 115 Trusts, for the purpose of prefunding pension and/or OPEB obligations, to administered by PARS and authorizing the City Manager, or designee, to act as the City’s Plan Administrator; and
3. Authorize the initial transfer of $2,616,761 from existing Assigned Fund Balance (Unfunded Pension Liability and OPEB Liability).
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 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
City of Menifee Staff Report
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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.
Unfunded Pension Liability (UAL)
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 Fiscal Year (FY) 2024/2025, 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 No. 75 requires agencies to account for and disclose their OPEB costs for all active and retired employees. As of the most recent valuation (June 2025) the City's Net OPEB Liability is $3,836,027 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 City of Menifee Staff Report
Establishment of Section 115 Trust
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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.
Purpose of Section 115 Trusts
The purpose of Section 115 Trusts is to help address and alleviate larger pension and OPEB liabilities, public agencies can 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 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.
Request for Proposals (“RFP”) for Section 115 Trust Services Following feedback received by the Finance Committee at the September meeting, staff issued RFP No. 2026-2 for Section 115 Pension Trust administration services (Establishment, Administration, and Investment Management) at the end of October 2025. A total of four proposal responses were received. An evaluation committee comprised of Finance staff evaluated the proposals and invited the top two proposals for finalist interviews. The finalists averaged weighted results of the evaluation completed are summarized in Table 1 and Table 2 below.
TABLE 1 – RFP PROPOSAL EVALUATION
Firm Average Score
(100 Possible Points)
Phase II Systems (dba PARS) 92.00
CalPERS 88.67
Keenan & Associates 84.33
Gaard Capital LLC 50.00
TABLE 2 – RFP INTERVIEW PORTION (TOP 2 FINALISTS)
Firm Average Score
(100 Possible Points)
Phase II Systems (dba PARS) 92.33
CalPERS 82.67
The result of the evaluation identified PARS as the most competitive proposer. In both the proposal and interview process, PARS demonstrated extensive experience with Section 115 Trusts, from set-up to on-going administration, and provided a clear and cohesive approach to move forward. Staff recommends a multiple-employer trust which allows the City to benefit from the cost and administrative efficiencies associated with joining other public entities. Although plan assets are combined between member agencies for economies of scale, there is no cost-sharing of earnings or liabilities in a multiple-employer trust.
City of Menifee Staff Report
Establishment of Section 115 Trust
March 4, 2026
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The RFP results and recommended trust administrator, PARS, was presented to the Finance Committee at the January 13, 2026 meeting. The Committee made a recommendation to bring forward the proposed professional services agreement with PARS for City Council consideration.
Initial Deposits & Revisions to the Fund Balance Policy for the General Fund (Policy No.
CC-07)
The City’s objective with the Trusts is to accumulate assets to fund its CalPERS pension costs and/or OPEB obligations, as well as mitigate the budget impact of costs associated with future associated costs.
It is recommended that the following amounts be deposited to the respective trusts to initiate the trusts be:
$698,747 for the UAL (Unfunded Pension Liability Trust) Section 115 Trust $1,918,014 OPEB Section 115 Trust
Another $1,918,014 related to the OPEB liability will be retained as an Assigned Fund Balance, and staff will assess as part of the FY2026/27 Mid-Cycle and FY2025/26 close out, any additional amount to transfer from the Assigned Fund Balance to the trusts.
Investment Portfolio Selection
City staff will work with its advisory team, including the Trust’s investment advisor, to select investment portfolios based on the City’s risk tolerance and projected withdrawal schedule from the Trust.
Additionally, staff will be updating Fund Balance Policy for the General Fund (Policy No. CC-07) outlining the City’s formal funding strategy with respect to the Section 115 trusts, and excess fund balance. The proposed revisions will be presented at the upcoming Finance Committee meeting for feedback, and then brought forth to City Council for consideration.
STRATEGIC PLAN OBJECTIVE
Thriving Economy
FISCAL IMPACT
The associated Section 115 Trust costs with PARS will be percentage based and relative to the City’s trust portfolio size. In summary, the City will be paying a combined 31.95 basis points (.3195%) represented by: 1) trust administration/consulting fees, estimated at 25 basis points (.25%) for a portfolio of under $10 million and 2) trust and investment advisory/management fees of 6.95 basis points (.0695%) (as of 9/30/2025) for the pooled combined assets of the PARS Option A: Target Index Strategy. While there are associated administration costs for such services, the potential to earn a long-term rate of return greater than what it would attain through its investment pool would offset some of these costs.
City of Menifee Staff Report
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ATTACHMENTS
1. Agreement
2. Resolution