Placentia Cit Council
AGENDA REPOR
TO: CITY COUNCIL
VIA: CITY ADMINISTRATOR
FROM: DIRECTOR OF FINANCE
DATE: SEPTEMBER 20, 2022
SUBJECT: RESOLUTION ADOPTING THE SECTION 115 TRUST POLICY FISCAL
IMPACT: NONE
SUMMARY:
On October 20, 2020, the City Council approved the establishment of a Section 115 Trust Fund for unfunded pension and Other Post -Employment Benefit (OPEB) obligations and a professional services agreement with Public Agency Retirement Services (PARS) for management of the trust and directed Staff to return to the City Council to present a funding policy.
RECOMMENDATION:
It is recommended that the City Council take the following action:
1. Adopt Resolution R-2022-61, a Resolution of the City Council of the City of Placentia adopting the Section 115 Trust Funding Policy; and
2. Approve the use of $2.45 million in bond proceeds currently held with US Bank for the initial funding payment to the Section 115 Trust with PARS.
STRATEGIC PLAN STATEMENT:
This item is consistent with the City Council approved 5 -Year Strategic Goal to Ensure Long -Term Fiscal Sustainability, under Objective #1.1 Review and Update Reserve Policy.
DISCUSSION:
As part of the City's pension liability funding strategy, the City issued lease revenue bonds in 2020 to address the City's pension unfunded actuarial liability (UAL) with CaIPERS. As a part of the bond issuance process, $2.45 million was set aside to be deposited into the Section 115 trust to fund the estimated increase in the UAL attributable to the 4.7% rate of return earned by CaIPERS as of June 30, 2020 (2.3% below discount rate). These funds have not yet been transferred to the PARS trust and have been held by the bond trustee, US Bank. The City recently received its most recent CaIPERS actuarial reports with a valuation date of June 30, 2021, which incorporated both
1.h.
Sept 20, 2022
City Council Agenda
September 20, 2022
the payment of the City's UAL from the bond proceeds, as well as CaIPERS' significant 21.3% rate of return as of June 30, 2021 (14.3% above discount rate).
The City's current funded status with CaIPERS is 109.8%-110.1%, with plan assets exceeding its liabilities. However, CaIPERS reduced its discount rate from 7.0% to 6.8% due to the high returns in FY2020-21, and ended June 20, 2022 with a loss of 6.1%. The combination of decreased discount rate and investment losses will decrease the City's funded status and increase its unfunded actuarial liability at the next valuation.
In addition to pension liabilities, for employees hired on or before November 21, 1995 the City provides retiree health, dental, vision and life insurance. For employees hired after November 21, 1995, the City contributes the minimum required medical insurance contribution established by CaIPERS for Tier II employees. These benefits have created an Other Post -Employment Benefit (OPEB) as defined by the Governmental Accounting Standards Board (GASB).
The City's most recent actuarial valuation of its Retiree Healthcare Plan, with a measurement date of June 30, 2020 determined a total OPEB liability of $31,325,829. The City is currently funding this expense on a pay-as-you-go basis costing approximately $1 million per year. This approach does not reduce the outstanding long-term liability and the City's plans are currently 0% funded.
To address both pension and OPEB liabilities, the City established a Section 115 Trust fund to be used as a rate stabilization fund to mitigate against future investment losses by CaIPERS and pre -fund OPEB expenses. Funds in the trust may only be used for:
■ Reimbursing the City for Other Post -Employment Benefits (OPEB) pay-as-you-go expenses
• Reimbursing the City for CaIPERS contributions
■ Paying OPEB expenses directly to retirees
■ Paying down specific CaIPERS liabilities
• Paying plan expenses (actuarial valuation or audit costs) Staff is recommending establishing a policy to fund the Section 115 trust for both future pension and OPEB costs, and the transfer of the $2.45 million in bond proceeds as an initial deposit. The City Administrator in coordination with the City Treasurer and Director of Finance will select the most appropriate investment option for each account (Pension and OPEB) in the Trust and any proposed withdrawals from the Trust for allowable expenses will be included in future proposed budgets.
Policy Highlights
It is the policy of the City to fulfill its obligation to its residents and employees to maintain fiscally responsible management practices and to ensure that promised retirement benefits are funded.
To that end, the City will utilize funds in the Section 115 Trust to meet its pension and OPEB funding obligations as follows:
City Council Agenda
September 20, 2022
• The City will contribute to CaIPERS the amount determined by CaIPERS actuaries to be the minimum required employer contribution each year.
• The City will prepay its annual obligation to CaIPERS by July 31st each year to achieve budgetary savings (3% discount compared to monthly payments). • The City will maintain a Section 115 Pension Trust. Assets in the Section 115 Pension Trust may be used only for pension and OPEB related costs and at the direction of the City Council. The City's funding objective is to accumulate sufficient assets to fully fund the retiree healthcare benefits that the City's retired employees receive throughout retirement and to support any increases in the City's UAL with Ca1PERS. In meeting this objective, the City will strive to meet the following funding goals:
o The City will strive to maintain assets in the OPEB trust equal to 90%-100% of the actuarial liability for OPEB through regular contributions to the Section 115 Trust. It is anticipated to take several years for the City to achieve full funding of the actuarial liability as the plan is currently 0% funded.
o The City will strive to make regular contributions to the OPEB trust to achieve this goal.
o The funds in the OPEB trust may be used to make the City's OPEB pay-as-you-go payments each year beginning with the FY 2023-24 budget. o The City will strive to contribute its Actuarially Determined Contribution (ADC) into the OPEB trust each year. For FY 2020-21 the ADC was $1,146,160. o The City will review the CaIPERS actuarial report annually as part of the budget process to assess the City's UAL sensitivity to changes in CaIPERS rate of return assumptions. The City Council may direct staff to allocate budgetary surplus, if any, at the close of the fiscal year to the Section 115 Trust for future increase in the UAL. • The City's goal is to achieve and maintain a funded status for each of its CaIPERS and OPEB plans of between 90% and 100%. A funded status of 100% signifies that the City's pension assets with CaIPERS match its accrued liabilities. • The City will review this policy at a minimum biennially, coincident with preparation of the OPEB actuarial valuations, to determine if changes to this policy are necessary to ensure adequate resources are being accumulated to fund OPEB benefits and to gauge progress towards the targeted funding level.
FISCAL IMPACT: There is no impact to the FY 2022/23 budget for this item. There is currently $2.45 million in assets held by the trustee from the sale of lease revenue bonds in 2020 set aside to establish the Section 115 Trust.
Prepared by: Reviewed and ap•roved:
Jennifer Lampman
Director of Finance City Administrator
Damien R. Arrula
City Council Agenda
September 20, 2022
Attachments:
1. Section 115 Trust Policy
2. Resolution R-2022-61