CITY COUNCIL STAFF REPORT
Meeting Date: April 18, 2022
TO: THE HONORABLE MAYOR AND CITY COUNCILMEMBERS
SUBJECT: ADOPT RESOLUTION NO. ___-22 APPROVING PARTICIPATION IN
THE PUBLIC AGENCIES POST-EMPLOYMENT BENEFITS TRUST
PROGRAM, ESTABLISHING THE CITY OF PLEASANT HILL
PENSION RATE STABILIZATION PROGRAM FUNDING AND
WITHDRAWAL POLICY, AND AUTHORIZING THE CITY MANAGER
TO EXECUTE AN AGREEMENT WITH PUBLIC AGENCY
RETIREMENT SERVICES (PARS) TO ESTABLISH AND ADMINISTER
A SECTION 115 TRUST
SYNOPSIS
The proposed resolution grants authorization for the City Manager to execute an agreement with Public Agency Retirement Services (PARS) to establish a Section 115 Trust. The Section 115 Trust would provide another tool to assist the City in prefunding pension costs while maintaining local control over these funds. This would also authorize an initial contribution of $1 million into the Section 115 Trust and establish the City of Pleasant Hill Pension Rate Stabilization Program Funding and Withdrawal Policy. The Budget Committee has reviewed the proposed actions and is forwarding a recommendation for approval.
DISCUSSION
Background
The City provides its permanent employees with a defined benefit pension through the California Public Employees’ Retirement System (CalPERS). A number of changes in recent years at CalPERS have increased the City’s required payments to the pension plan and decreased the plan’s funded status. Those changes that CalPERS has enacted are designed to increase the financial stability of its pension program, but result in higher City contributions. The City previously assessed options to help address the increased pension costs and their volatility with the assistance of an outside actuarial firm, Bartel Associates, in order to understand costs and options. At that time, the City’s options were to issue bonds to pay the unfunded liability or establish a trust with contributions from fund balance to help fund future costs. Bartel Associates performed an analysis and recommended the City proceed with establishing a trust.
Analysis
Public Agency Retirement Services (PARS) Section 115 Trusts Section 115 Irrevocable Trusts have been in existence for many years. In the past several years, they have been adopted as a mechanism for pre-funding public agencies’ Other Post-Employment Benefit (OPEB) liabilities (non-pension liabilities). Most recently, they have become a popular tool for pre-funding pension liabilities as a method to address unfunded liabilities and variances in annual pension contributions. In an effort to help public agencies address and manage their pension liability, PARS developed the PARS Post- Employment Benefits Trust Program. This program allows cities to pre-fund 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. PARS has partnered with U.S. Bank and its sub-adviser HighMark Capital Management Inc., as trustee to provide investment services for the program. To date, 259 California public agencies have adopted the Pension Rate Stabilization Program through PARS, including 125 cities and towns.
PARS provides full services to administer the City’s Section Trust Program with a dedicated Senior Consultant to ensure client satisfaction; a Client Services Coordinator to monitor contributions, process disbursements and coordinate annual reviews, and an Investment Management Team to assist with developing an Investment Policy Statement and conduct periodic onsite review of investment performance and market conditions.
In May 2021, Public Agency Retirement Services (PARS) presented the benefits of establishing a Section 115 irrevocable trust to assist in prefunding pension costs to the Budget Committee. The benefits for the City to prefund through a Section 115 Trust are the following:
a. Complete Local Control over Assets - City has complete control over assets, including contributions, disbursements and the timing, amount, and risk tolerance level of investments
b. Pension Rate Stabilization - Assets can be transferred to the retirement system at the City’s direction, potentially reducing fluctuations in employer contribution amounts c. Rainy Day Fund - Can be an emergency source of funds when employer revenues are strained in difficult budgetary or economic times since the trust can be used for ongoing pension costs
d. Diversification - Allows for flexibility and offers the potential for assets to earn greater returns than the General Fund; spread the risk vs. sending additional money to CalPERS The process was delayed due to the uncertainty of the financial impact of COVID-19. Last March, staff followed up with the Budget Committee to proceed with establishing a Section 115 Pension Trust with PARS. PARS and HighMark Capital provided an update, while staff provided some needed information to proceed to the next step. The Budget Committee provided the following direction:
a. Establish the Section 115 Pension Trust with PARS
b. Proceed with the moderate conservative investment strategy. The strategy can be changed and will be reviewed annually with the Budget Committee c. The City Treasurer and the Finance Manager will serve as the Plan Administrators d. The City of Pleasant Hill Pension Rate Stabilization Program Funding and Withdrawal Policy will include contributions based on the higher of $50K or 10% percentage of annual unassigned General Fund balance to be transferred to the Section 115 Trust e. Initial deposit of $1 million from the General Fund Reserve Policy On April 6th, staff updated the information based on the direction from the Budget Committee and included the PARS services trust agreements. The Budget Committee recommended proceeding to City Council with the Section 115 Trust, adopting the City of Pleasant Hill Pension Rate Stabilization Program Funding and Withdrawal Policy, and an initial deposit of $1 million from the General Fund Reserve. If City Council approves the Section 115 Trust, the process to implement the trust will take 30 to 60 days after receiving signed documents.
FISCAL IMPACT
Adoption of the proposed resolution and execution of the proposed agreement will result in a $1.0 million contribution to the PARS Section 115 Trust with a modification to the General Fund Reserve.
PUBLIC CONTACT
Public contact was made through posting of the City Council agenda on the City’s official notice bulletin board, at the Pleasant Hill Senior Center and at the Pleasant Hill Police Department. The agenda and staff report are posted on the City’s web page.
RECOMMENDED CITY COUNCIL ACTION
Adopt the proposed resolution authorization for the City Manager to execute an agreement with Public Agency Retirement Services (PARS) to establish a Section 115 Trust as recommended by the Budget Committee.
ALTERNATIVES TO RECOMMENDED ACTION
Do not adopt the proposed resolution and provide direction to staff.
ATTACHMENT(S):
Proposed Resolution
Exhibit 1 - PARS Services and Trust Agreement
Exhibit 2 - Pension Rate Stabilization Program Funding and Withdrawal Policy Prepared by: Erick Cheung, Finance Manager
Approved by: June Catalano, City Manager