TO: CITY COUNCIL
VIA: CITY ADMINISTRATOR
FROM: DIRECTOR OF FINANCE
DATE: JULY 25, 2023
Placentia Cit Council
AGENDA REPORT
SUBJECT: RESOLUTION APPROVING THE ADOPTION OF THE MULTIPLE EMPLOYER OPEB/PENSION 115 TRUST ADMINISTERED BY SHUSTER ADVISORY
GROUP, LLC
FISCAL
IMPACT: ESTIMATED SAVINGS OF $293,000 OVER 10 -YEARS, $1.1 MILLION OVER 20 - YEARS, AND $2.9 MILLION OVER 30 -YEARS
SUMMARY:
Assets in a 115 Trust are irrevocably committed for the government function specific in the applicable trust agreement. Additionally, monies held in such trusts can be invested in accordance with the rules governing those trusts, which are different than the investment rules for the City's pooled investments. Investment restrictions that apply to the general fund of a City (CA Government Code 53601) do not apply to the assets held in an Irrevocable Section 115 Trust, thus allowing for more flexibility in the investment strategy. Setting aside funds in a Section 115 Trust can potentially earn a higher rate of return than funds invested within 53601 guidelines.
Staff has analyzed Shuster Advisory Group, LLC's (Shuster) pricing model and the information provided in comparison to the current Public Agency Retirement Services (PARS) program. The 115 Trust arrangement from Shuster results in a 58% reduction in the annualized expenses of the program in comparison to the current PARS program. The fee schedule from the PARS program results in a 0.60% annualized fee currently, or $15,594, whereas the Shuster program would result in a 0.25% annualized fee currently, or $6,478. Assuming both programs earned an average 6% gross annual rate of return and annual contributions were made to both plans totaling $500,000 (80% to the OPEB and 20% to the Pension Stabilization), the reduction in fees alone will result in an estimated $293 thousand in savings over 10 -years, $1.1 million over 20 -years, and $2.9 million over 30 -years. These results assume there are no fee changes, no distributions, and assume $2.6 million of assets as of May 31, 2023 ($1.8 million of OPEB assets and $793 thousand of Pension Stabilization assets). Additional contributions by the city will only increase the comparative savings.
1.h.
July 25, 2023
City Council Agenda
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RECOMMENDATION:
It is recommended that the City Council take the following action:
1. Adopt Resolution 2023-67 approving the adoption of the Multiple Employer OPEB/Pension 115 Trust administered by Shuster Advisory Group, LLC and the discontinuance of the City's current participation in the PARS Post -Retirement Health Care Plan Trust administered by Public Agency Retirement Services ("PARS") and U.S Bank; and
2. Direct Staff to return to City Council with an update to Policy 431, "Section 115 Funding Policy", incorporating an OPEB and pension mitigation funding strategy.
STRATEGIC PLAN STATEMENT:
This item is consistent with the City Council approved 5 -Year Strategic Goal #1 to ensure long- term fiscal sustainability under Objective #1.5, which is to continue seeking ways to diversify the City's revenue sources to prevent over -reliance on any one source.
DISCUSSION:
City Council approved the establishment of a Section 115 trust with PARS on October 20, 2020, with subsequent approval of a Section 115 trust policy and initial funding of $2.4 million on September 20, 2022. The goal in establishing the Section 115 trust is to pre -fund OPEB and pension liabilities and mitigate the impact of CaIPERS investment losses on the City's finances.
The trust is irrevocable, with funds committed solely for the purpose of funding pension and OPEB costs such as reimbursing the City for annual CaIPERS pension expenses, making additional one-time payments directly to CaIPERS, payments for retiree medical expenses, and for other pension related expenses (i.e., plan audits or actuarial valuations).
The City is not obligated to stay in the current trust arrangement with PARS, or any provider for that matter. To the extent that cost savings for administering the trust can be achieved, that is additional money that will stay in the trust and earn interest over time.
Based on available options, significant savings in administration costs are available from Shuster.
Shuster is the same firm that took over fiduciary responsibilities of the employees' 457(b) deferred compensation and 401(a) plans in July 2022. Through that change, employees, participants, and retirees have realized significant savings on the fees of those accounts as well as access to an enhanced institutional investment menu.
In March of 2022, the City was introduced to Shuster Advisory Group, LLC and chose to engage Shuster as the retirement plan consultant and investment fiduciary for our 457(b) and 401(a) plans beginning in July 2022. Shuster issued a Request for Information (RFI) to our incumbent record - keeper and completed a comprehensive review, identifying that the fees for record-keeping and administration were high and not transparent, and the quality of the investment menu needed improvement. Based on the information obtained through the RFI, Shuster subsequently
City Council Agenda
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conducted a Request for Proposal (RFP) for administration and recordkeeping services for the Plans. The results of the RFP proved that our administration and record-keeping fees could significantly be reduced, and the City could implement an open architecture investment menu and fee transparent platform, benefiting participants. The City decided to remain with the incumbent recordkeeper, MissionSquare (formerly known as ICMA-RC) at an 88% negotiated reduction in record keeping costs. Also, Shuster negotiated a higher crediting rate for the safety of principal investment option, is implementing an improved investment menu for plan participants and has implemented a comprehensive fiduciary oversight process.
Public Agency Retirement Services (PARS)
The PARS option for OPEB is the Public Agencies Post -Employment Benefits Trust, a multiple employer trust arrangement to which cities adopt the Trust to hold assets. It is important to note that although PARS provides services to public agencies, PARS is not a public agency or public retirement system. PARS provides trust administration for the PARS Post -Retirement Healthcare Plan. The advisor to the PARS investment portfolios is US Bank and HighMark Capital Management serves as the sub -advisor to US Bank, managing the portfolios. US Bank also serves as Trustee for the multiple employer trust. The fees for PARS administrative services and US Bank trust and investment advisory services are separate fees, both a tiered structure based on assets. The PARS program generally provides five HighMark active investment strategies and another five portfolios of the same strategies, but as passive (index) strategies.
Shuster Advisory Group, LLC
Shuster is an independent investment advisory firm and fiduciary. They provide governmental and institutional retirement plan consulting services as well as private wealth management. Shuster is a SEC -Registered Investment Advisor with over $5 billion in assets under management focusing on serving the unique needs of governmental agencies and special districts serving over 60 cities, agencies and public entities. Shuster serves as fiduciary to plan investments and provides investment selection, monitoring and management.
Shuster serves currently as the fiduciary investment advisor and plan consultant for the MissionSquare 457(b) Deferred Compensation and 401(a) Plan. The services provided by Shuster are unique with a low-cost transparent structure and white glove services. Shuster entered the public retirement plan sector after analyzing the sector and realizing that cities and agencies were being underserved and over -charged for their retirement plans, directly impacting the supplemental retirement savings of the public employees. Hiring Shuster for these services resulted in a 28% reduction in total plan costs for the 457(b) and 401(a) plans, in addition to a significant improvement in the quality of the investments available in the retirement plan. Shuster has proven to be responsive, analytical, and a true partner to the City.
Shuster has conducted the same analysis of the Section 115 Trust programs available to cities and agencies and again determined that the cities were being over -charged and underserved which has a direct result on the taxpayer -funded savings that a city is putting aside for their future obligations. Shuster also found that the programs available generally lacked investment flexibility, customization, transparency, and high-level customer service. As a result, Shuster created and offers a Section 115 Trust program that provides cities with enhanced services at a fraction of the
City Council Agenda
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cost currently being paid. With Shuster's ongoing oversight and exceptional service model, Staff expects similar results with the 115 Trust as experienced with the MissionSquare 457(b) and 401(a) plans.
Impact on OPEB Liability
Per the Fiscal Year 2021-22 Annual Comprehensive Financial Report (ACFR), the City has an OPEB liability of $24,910,487, a decrease of $6.4 million due to changes in actuarial assumptions including a decrease in assumptions for the discount rate, salary increases and inflation as well as a decrease in the number of retirees receiving benefits. Staff is working with our OPEB actuary to determine the impact on our OPEB liability the reduced fees and anticipated rate of return will have in the long term as well as a funding strategy to address the City's OPEB liability and any future pension liabilities incurred as a result of CaIPERS investment performance and will return to the City Council with a recommendation.
FISCAL IMPACT
Assuming both programs earned an average 6% gross annual rate of return and annual contributions were made to both plans totaling $500,000 (80% to the OPEB and 20% to the Pension Stabilization), the reduction in fees alone will result in an estimated $293 thousand in savings over 10 -years, $1.1 million over 20 -years, and $2.9 million over 30 -years. These results assume there are no fee changes, no distributions, and assume $2.6 million of assets as of May 31, 2023 ($1.8 million of OPEB assets and $793 thousand of Pension Stabilization assets).
Increased contributions by the City will only increase the comparative savings.
Lastly, Shuster will provide ten investment strategies that combine both active and passive (index) investment solutions to take advantage of the optimum mix of investments from both an investment return and cost perspective. If desired by the City, Shuster will also provide a custom portfolio at no additional cost.
Prepared by:
Jennifer Lampman
Director of Finance
Reviewed and approved:
./.40.ck
Damien R. Arrula
City Administrator
W
Attachment:
Resolution No. 2023-67