CITY OF POMONA
COUNCIL REPORT
January 22, 2024
To: Honorable Mayor and Members of the City Council
From: Anita Gutierrez, Acting City Manager
Submitted By: Andrew Mowbray, Finance Director/City Treasurer SUBJECT: ESTABLISHMENT OF A SECTION 115 TRUST TO BUILD PENSION RESERVE RECOMMENDATION:
It is recommended that the City Council take the following actions:
Adopt the following Resolution:
RESOLUTION NO. 2024-07 – A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF POMONA, CALIFORNIA APPROVING THE ADOPTION OF THE PUBLIC AGENCIES POST EMPLOYMENT BENEFITS TRUST ADMINISTERED BY PUBLIC AGENCY RETIREMENT SERVICES (PARS); Authorize the Finance Director / City Treasurer or his designee as the City’s Plan Administrator for the Trust Program; and Authorize the Finance Director / City Treasurer to execute an Agreement for Administrative Services between PARS and the City of Pomona to administer the Trust.
EXECUTIVE SUMMARY:
In 2023, the City Council adopted the Updated Consolidated Fiscal Policies, which includes establishing a Section 115 Trust at $1.5M initially and $500k annually thereafter. As such, the Fiscal Year 2023-24 Operating Budget includes an appropriation of $1.5M towards a Section 115 Trust to address the City’s long-term pension obligation.
Public Agency Retirement Services (PARS) received the first IRS Private Letter Ruling (PLR) to fund pension liabilities for multiple-employer trusts. Staff recommends establishing a trust with PARS to address the City’s long-term pension obligation.
The establishment of a Section 115 Trust for the City’s PERS pension funding must be approved by resolution. This will give the City the ability to contribute and build its pension reserve while maintaining oversight of investment management and control over the risk tolerance of the portfolio in the trust. There is no cost to the City for establishing Section 115 Trust. There are no set-up costs, no minimum annual contribution amounts and no fees are charged until assets (funds) are added to the trust.
FISCAL IMPACT:
There is no cost to set up the Section 115 Trust, and there are no fees until assets (funds) are added.
PREVIOUS RELATED ACTION:
On December 19, 2022, the City Council received and filed the updated Ten-Year Financial Forecast and directed staff to pursue a Section 115 Trust that allows the City to build its pension reserve while maintaining oversight of investment management and control over the risk tolerance of the portfolio.
On February 6, 2023, the City Council approved a Resolution adopting the City’s Updated Consolidated Fiscal Policies and Administrative Procedures. The Fiscal Policies include establishing a Section 115 Trust at $1.5M initially and $500k annually thereafter.
On June 6, 2023, the City Council adopted the City’s Fiscal Year 2023-24 Operating Budget which includes appropriations to fund the Fiscal Policies.
DISCUSSION:
Section 2-993.2 of the City’s Municipal Code states that the City Manager or designee shall have the authority to approve specialty services related to fiscal and/or personnel matters. As such, staff recommends establishing a Section 115 Irrevocable Trust with Public Agency Retirement Services (PARS) to build its pension reserve while maintaining oversight of investment management and control over the risk tolerance of the portfolio. Establishing a Section 115 Trust must be done by a Resolution (Attachment 1). The City will also be required to enter into an Agreement for Administrative Services with PARS (Attachment 2). While trust funds must be dedicated toward pension obligations, they serve multiple purposes such as:
Act as a reserve fund to offset potential volatility in CalPERS Unfunded Annual Contributions (UAL).
Retain City oversight and local control of fund management selection and monitoring of performance.
Allow more control and flexibility in investment allocations.
Potential to realize higher investment returns than by maintaining monies within the City’s portfolio that is restricted by State and City regulations to very limited fixed income instruments.
Diversifies investments in pension trusts.
Act as a set-aside and available for use in reducing the City’s pension obligations.
Solidifies the City’s credit rating by demonstrating proactive action in meeting pension obligations.
The assets of the trust are legally protected from the creditors of the City.
PARS has been in existence since 1984 and currently manages over $8.7 billion in assets. To date, 405 California public agencies have adopted the Section 115 Trust through PARS, including 164 cities and towns. PARS is the trust administrator who serves as a record-keeper, consultant, central point of contact, monitors plan compliance (IRS/GASB/State Government Code), sub-trust accounting, processes contributions/disbursements and handles all agency inquiries. US Bank is the trustee who serves as the discretionary or directed trustee, custodian of assets, safeguard plan assets, oversight protection, plan fiduciary, and issues disbursements.
The Section 115 Trust offered by PARS has 10 portfolios to choose from to invest City funds. Each portfolio has different risk profiles with different amounts invested in equities and other instruments. As the amount of equities in the portfolios increases, volatility and risk increases. As the amount in equities decreases, volatility and risk likewise decrease. The portfolios range from “Capital Appreciation,” with 65 to 85 percent of funds invested in equities, to “Conservative”, with 5 to 20 percent of funds invested in equities. Staff recommends selecting the moderate investment strategy, which holds 40 to 60 percent in equities. As of September 30, 2023, returns under this portfolio are as follows: 1-Year Return: 9.22%, 3-Year Return: 2.11%, 5-Year Return: 3.84% and 10-Year Return: 5.06%.
The City’s Financial Advisor, Urban Futures Inc. (UFI) assisted with identifying firms providing an IRS-approved irrevocable funding vehicle to protect the city’s asset. In their analysis, it was determined to select PARS as the Section 115 Trust Administrator. PARS representatives along with UFI presented the recommendations to the City of Pomona Labor Subcommittee on December 11, 2023 and received feedback to move forward with this action. The City chooses to enter into an agreement with PARS under the fiscal specialty clause.
COUNCIL PRIORITIES & GOALS:
This item supports the 2019-20 City Council Priorities and Goals - Priority 1 (GOAL A): Continue to ensure that the City has sufficient financial reserves in accordance with the City Fund Balance Policy.
Prepared by:
Aleli Burgos
Deputy Finance Director
ATTACHMENT(S):
Attachment 1 – Resolution 2024-07
Attachment 2 – PARS Administrative Services Agreement
Attachment 3 – PARS Presentation
Resolution to Adopt the Public Agencies Post Employment Benefits Trust Administered by PARS