EVALUATION OF PENSION SURPLUS FUND
OPTIONS, INCLUDING A SECTION 115 TRUST
January 27, 2026
City Council
OVERVIEW
2 • Background
• Statutory & Regulatory Framework
• Section 115 Pension Trusts: Overview and Key Considerations • Independent Subject-Matter Experts in Public Sector
Investment Strategies and Institutional Asset Management • Next Steps and Decision Points
BACKGROUND & PURPOSE OF THE STUDY SESSION
3 • Evaluate whether pension surplus funds above the CalPERS required contributions should be redirected into alternative investment options, such as a Section 115 Trust.
• Study session requested by Council Members Weber and
Weigand on 12/9/25 (A1 item).
PENSION FUNDING PROGRESS
4 • As of June 30, 2024, the City’s funded status was 75.9% with an unfunded accrued liability (UAL) of $313 million.
• The preliminary projection for June 30, 2025 reflects strong investment performance (12.1% return for FY 24/25), bringing the funded status to 82.4% and the liability down to $235 million.
• Each year, the UAL is adjusted based on whether CalPERS meets its expected rate of return (6.8%) and changes in actuarial assumptions, such as updates to mortality rates reflecting longer life expectancies.
June 30,
2025*
June 30,
2024
June 30,
2023
June 30,
2022
June 30,
2021
June 30,
2020
$235 million$313 million$341 million$348 million$223 million$333 millionUnfunded Liability
82.4%75.9%72.5%70.9%79.3 %69.2 %Funded
Percentage
12.1%9.5%6.1%-7.5%21.3 %4.7 %Investment
Return
* Projected
CALPERS INVESTMENT PROFILE:
ALLOCATION, RISK, AND RETURN
5 Asset Class Allocation
• CalPERS targets a 6.8 percent
assumed rate of return over the
long term.
• The portfolio employs leverage
(approximately 5 percent), a
strategy that increases return
exposure but also magnifies
market risk, volatility, and potential
losses.
• Environmental, Social and
Governance (ESG) considerations
are integrated into the investment
decision-making process and may
influence long-term performance
and risk characteristics.
CalPERS Portfolio Composition and Risk Management
PENSION PAYDOWN STRATEGY
6 •The City’s strategy is reviewed annually.
•The Finance Committee reviewed this strategy in November 2025 and recommended:
•Targeting a 95% funded status
•Continuing to commit $45 million per year toward UAL
reduction
•If the City continues to make $45 million in annual
contributions until reaching 95% funded in 2031, it will still need to pay the legally required amounts, which means the City is projected to reach 100% funded in 2033.
MINIMUM REQUIRED PAYMENTS
(STANDARD AMORTIZATION)
7 84.2%
85.2%
87.5%
89.8%
92.2%
94.4%
96.6%
98.0% 99.4%
100.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
$0
$5
$10
$15
$20
$25
$30
$35
$40
2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 2031-32 2032-33 2033-34 2034-35 Millions
Estimated Minimum Required UAL Payment Estimated Funded Status% 100%
90%
80%
Projected to Reach
100% Funded.
Final UAL
Payment of $6.7M.
84.2%
86.3%
89.0%
91.7%
94.3%
97.0% 98.9% 100.0% 100.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 2031-32 2032-33 2033-34 Millions
Estimated Minimum Required UAL Payment Additional Discretionary Payments (ADPs) Estimated Funded Status%
PROJECTED FUNDED STATUS
ASSUMING $45 MILLION PAID TO CALPERS ANNUALLY
8 Projected to Reach
100% Funded
100%
90%
80%
STATUTORY & REGULATORY FRAMEWORK
Marcus Wu, Partner
Pillsbury Winthrop Shaw Pittman LLP
9 STATUTORY INVESTMENT RESTRICTIONS ON CITY FUNDS
10 California Law Governing Public Agency Investments
• California Government Code §§ 53600–53609 applies to City treasury and general fund dollars, including funds set aside for pension contributions. • These rules apply regardless of funded status or cash surplus.
Permitted Investments
• Cash, U.S. Treasury securities, and other high-quality fixed-income investments
Prohibited / Restricted Investments
• Equities, private investment managers, or alternative investment strategies Key Takeaway
Surplus pension dollars that remain in the City’s general fund are legally constrained to low-risk, fixed-income investments.
SECTION 115 TRUSTS –
DIFFERENT LEGAL & INVESTMENT FRAMEWORK
11 What is a Pension/OPEB Section 115 Trust?
• An irrevocable, tax-exempt trust under IRC Section 115 • Established solely to fund pension and/or OPEB liabilities • Assets are no longer considered City funds
Investment Authority
• California Government Code investment restrictions do not apply • Governed by CA Constitution, Article 16, Section 17
• Assets may be invested in any prudent, diversified strategy Governance & Fiduciary Safeguards
• Fiduciary duties of loyalty, prudence, and diversification apply • Best practices include:
• Formal investment policy
• Oversight committee to manage Trust investments
SECTION 115 PENSION TRUSTS:
OVERVIEW AND KEY CONSIDERATIONS
12 ADOPTION OF SECTION 115 PENSION TRUSTS BY
ORANGE COUNTY CITIES
13 OC Cities with a
Section 115 Pension Trust
Pension Trust Administrators
Used by OC Cities
PRIMARY BENEFITS OF A 115 PENSION TRUST
14 •Rate Stabilization: Helps smooth pension contribution volatility by allowing Section 115 Trust assets to offset unexpected increases driven by investment return volatility in CalPERS-managed assets.
•Diversification: Enables the City to diversify pension assets across a separate investment portfolio with a different asset mix than CalPERS.
•Local Control: Provides the City with direct control over contributions, disbursements, and investment decisions, including the ability to tailor risk and asset allocation to local priorities and market conditions.
INDEPENDENT SUBJECT-MATTER EXPERTS IN PUBLIC
SECTOR INVESTMENT STRATEGIES AND INSTITUTIONAL
ASSET MANAGEMENT:
PUBLIC AGENCY RETIREMENT SERVICES (PARS)
& PFM ASSET MANAGEMENT
15 PUBLIC AGENCY RETIREMENT SERVICES (PARS)
16 • PARS, headquartered in Newport Beach, was the first provider nationwide to receive an IRS Private Letter Ruling for Section 115 pension and OPEB trusts.
• PARS administers over 2,000 plans for over 1,100 public agencies, overseeing $8.3 billion in Section 115 trust assets. • PARS utilizes PFM for investment management services. • The City currently has a PARS-administered OPEB Trust with approximately $50 million dedicated to retiree medical benefits, which is fully funded.
• The OPEB Trust includes $5 million in excess funds that are available to be drawn down and could be used to fund a Pension Trust.
PARS INVESTMENT STRATEGY ALLOCATION OVERVIEW
17 • Five investment strategy options are available, each with defined ranges for equity, fixed income, and cash. The Balanced and Capital Appreciation strategies provide equity exposure similar to CalPERS. A customized strategy can also be created.
PARS-PFM PERFORMANCE COMPARED TO CALPERS
18 Annualized Returns, Net of Fees*
As of June 30, 2025
Long-Term Expected Returns,
Net of Fees*
* PARS and PFM have a tiered pricing structure that becomes more cost-effective as assets under management increase. The combined cost for trust management by PARS and investment management by PFM is 28 basis points when factoring in both the OPEB and Pension Trust assets.
NEXT STEPS & DECISION POINTS
19 CITY COUNCIL INPUT REQUESTED
20 • Does the City Council concur with the Finance Committee’s recommendation to target a 95% funded status, continuing to commit $45 million per year toward the pension liability? • Should an Internal Revenue Code Section 115 Pension Trust be established and funded from the $5 million surplus in the OPEB Trust?
• Does the City Council wish to make additional contributions to the Section 115 Pension Trust beyond the initial funding, or would the Council prefer to revisit this in one year?