City Council
259 N. Wilma Avenue
Ripon, CA 95366
MEMO
To: Honorable City Council
From: Lisa Roos, City Clerk & Finance Director
Date: 05/10/2022
Subject: Pension Rate Stabilization Program-115 Trust
RECOMMENDED ACTION:
Direct staff to draft a resolution to participate in the Section 115 Retirement Trust and prepare an agreement with PARS to administer the City’s pension rate stabilization program, for the City Council approval.
BACKGROUND:
The City of Ripon is unique to other California cities where only the City’s sworn police officers receive a CalPERS defined benefit retirement plan1. A defined benefit plan provides a guaranteed income after retirement based on the employee’s salary and years of service. While the employee is working for the City, the City is required to pay CalPERS the “Normal Cost” to fund the future retirement payments of each employee. The Normal Cost is calculated based on a number of actuarial assumptions, including investment interest rate and mortality.
In addition to the Normal Cost, the City is charged an “Unfunded Actuarial Liability (UAL)”.
This represents the difference between what was paid through the Normal Cost to the current calculated amount needed to fund a retired employee’s retirement compensation. CalPERS has made certain changes to their actuarial assumptions that have significantly increased pension liabilities to cities – most notably, reducing the assumed interest earned on investments from 7.5 percent to 7.0 percent and shortening the amortization period from 30 years to 20 years.
1 Every other City employee receives a defined contribution retirement plan, similar to a private company’s 401k that does not have any unfunded liability associated with the financing of this type of retirement plan.
The following graph shows the City’s historical and projected Normal Cost and UAL until 2050:
As of June 30, 2020, the City’s current UAL is calculated to be $5,089,648 with future annual payments from $350,000 (2021-22) to $580,000. Even though the City’s unfunded pension liability is not as significant as other cities because only those employees working as sworn police officers are receiving a CalPERS defined benefit, staff has evaluated establishing a Section 115 Retirement Trust to mitigate this liability.
DISCUSSION
A Section 115 Retirement Trust is a tax-exempt investment vehicle authorized by the Internal Revenue Service (IRS) to prefund government expenses such as retirement plan benefits. Assets held within the trust are designated as irrevocable, meaning that the assets must be used to fund the City’s defined benefit retirement plan obligations. Monies placed within the trust may be invested according to rules governing the trust, which are different than the investment rules the City is required to follow for the City’s pooled investments such as LAIF and Bank of New York. Because of the rules associated with the trust, in theory, the funds placed within a trust can earn a higher rate of return than if the City invested the funds.
Funds placed within the trust can remain within the trust until such time that the City chooses to draw on its assets to pay an annual benefit obligation (e.g., reimburse Normal Cost or UAL payment to CalPERS). The City Council may consider adopting polices of when the trust is to be used to pay a CalPERS obligation.
Staff has requested information from three third-party firms to manage the Section 115 Retirement Trust for the City of Ripon, including the firms experience in serving local government clients in establishing Section 115 Retirement Trusts, investment performance, fees, and references. Below is a summary of the response from each of the firms for these criteria:
Table 1
Summary of Information Requested
Criteria PARS Keenan & Assoc. CalPERS
List of Clients 111 cities / 21 counties 15 cities & counties 151 cities / 12 counties Historical Rate of
Return (1)
7.49% 5.97% No data available (2)
Administrative Fees 0.6% 0.3% 0.25%
Notes:
(1) Based on moderate investment strategy over 10 years. (2) Only 1 year of data available.
Staff is recommending the City of Ripon move forward with Public Agency Retirement Services (PARS) to administer the Section 115 Retirement Trust because of their list of clients, many of which are local cities that have had a positive experience with PARS and have experienced the highest rate of return over the last 10 years. They do have the highest administrative fees, but if the City was to invest $1 million and experience a 10 percent return on that investment, the difference in fees between PARS and Keenan & Assoc. would be $3,000.
The following summarizes the next steps in establishing the City of Ripon 115 Trust:
1. June 2022 City Council Meeting: Approve resolution appointing a Plan Administrator (usually the City Administrator) and authorizing the mayor to execute the contract with PARS.
2. June 2022 – October 2022: PARS will assist staff in surveying the Council for their risk tolerance and the beginning investment amount.
3. October 2022 City Council Meeting: Adopt an Investment Policy for the Section 115 Trust, including risk tolerance, investment amount, and how the Section 115 Trust is to be used to fund CalPERS obligations.
4. November 2022: Establish the Section 115 Trust and deposit funds.
FISCAL IMPACT:
Fiscal impacts will vary based upon the amount invested in the Section 115 Retirement Trust and investment policy adopted by the City Council.