City Council Agenda Report
TO: Mayor McCord and Members of the City Council
FROM: Ken Irwin, City Manager
BY: Saadiah Ryan, Finance Director
MEETING DATE: January 18, 2022
ITEM NO: 7.3
SUBJECT: Motion to Adopt Resolution No. 2022-01, authorizing the establishment of the PARS Post-Employment Benefits Trust Program which could be used to pre-fund pension and retiree health care obligations and Authorize the participation in the PARS Post-Employment Benefits Trust Program to be administered by Public Agency Retirement Services (PARS) and U.S.
Bank, appointing the City Manager as the City’s Plan Administrator, and authorizing the City Manager to execute the documents to implement the Program.
RECOMMENDATION
Motion to Adopt Resolution No. 2022-01, authorizing the establishment of the PARS PostEmployment Benefits Trust Program which could be used to pre-fund pension and retiree health care obligations and Authorize the participation in the PARS Post-Employment Benefits Trust Program to be administered by Public Agency Retirement Services (PARS) and U.S. Bank, appointing the City Manager as the City’s Plan Administrator, and authorizing the City Manager to execute the documents to implement the Program.
BACKGROUND
In 2012, the Government Accounting Standards Board (GASB) issued Statement No. 68, Accounting and Financial Reporting for Pensions. GASB 68 requires that governmental employers that sponsor Defined Benefit plans (i.e., CalPERS) must recognize a net pension liability (unfunded accrued liability) on their balance sheet. This is the difference between the City’s total pension liability (actuarial accrued liability) and actual plan assets. GASB 68 became effective for fiscal years starting after June 15, 2014.
To reduce the GASB 68 net pension liability figure, the City’s only prior option was to commit additional funds to CalPERS (in excess of its annual required contributions) to reduce its unfunded liability. However, a recent private letter ruling received by PARS from the IRS established that the City could create a separate trust to "pre-fund" its CalPERS unfunded liability. This would provide the City with an alternative to sending funds to CalPERS that will allow for greater local control over assets, investment by a professional fund management team selected and monitored by the City, with future excess contributions transferred to CalPERS at the City’s discretion.
To date, 242 public agencies have adopted the Pension Rate Stabilization Program (PRSP) through PARS including the City of Morgan Hill, City of Gilroy, County of San Benito, City of Santa Clara, and City of Cupertino.
Expected benefits offered by the PARS PRSP include:
· Contributions placed in an exclusive benefit trust could address the City’s Net Pension Liability
· Investment flexibility with Section 115 Trust compared to restrictions on general fund investments (Govt. Code 53216)
· Increased risk diversification of plan assets through different asset management · Investments can be tailored to the City’s unique demographics · Oversight and control of fund management selection, monitoring of performance and ability to replace fund management based on performance criteria · Increased flexibility on use of trust assets (i.e., trust assets can be accessed at anytime as long as the assets are used to fund the City’s pension obligations and defray reasonable expenses associated therewith)
· Lower investment management and administrative expenses compared to CalPERS · Potential for positive rating agency and investor consideration.
In an effort to help public agencies address and manage their GASB 68 liability, PARS has developed the PARS Post-Employment Benefits Trust Program. PARS has assembled leading professionals to provide the City with the necessary services required under one program to prefund pension and retiree health care liabilities through an IRS reviewed program. The program has been established as a multiple employer trust so that public agencies regardless of size can join the program to receive the necessary economies of scale to keep administrative fees low and avoid any setup costs. To properly offset liabilities, funds must be set aside in an exclusive benefit, irrevocable trust that cannot be accessed by creditors in order to be accounted for as assets to fund the liability on the City’s financial statements. The trust permits the City, under federal and state law, to invest in a more diversified array of investments to maximize investment returns long term and reduce the City’s liability.
PARS has partnered with US Bank to serve as trustee and its sub-adviser HighMark Capital Management, Inc., to provide investment management services for the program
RECOMMENDATION
It is recommended that the City Council approve the City’s establishment of the PARS PostEmployment Benefits Trust Program and adopt the resolution. It is also recommended that the City Council authorize the City Manager, subject to the review and approval of the City’s legal counsel, to sign all necessary documents.
FISCAL IMPACT
None.
ATTACHMENT
1. Exhibit A Agreement for Administrative Services.