APPROVAL OF SECTION 115
TRUST AGREEMENTS AND
APPROPRIATION OF INITIAL
FUNDING
City Council Meeting
May 10, 2022
1 Alan Alton
Chief Financial Officer, Finance
CURRENT
• Staff made presentations to the Council on
strategies for addressing City pension costs,
specifically the City’s CalPERS unfunded
accrued liability (UAL).
• One strategy identified is to establish an
Internal Revenue Code Section 115 Trust to
prefund pension obligations.
• Staff contacted firms with experience
administering Section 115 Trusts, and selected
PFM Asset Management (PFMAM) to
administer the City’s Trust. 2
Section 115 Trust
• Section 115 of the Internal Revenue Code
allows for prefunding pension obligations with
a trust.
• The funds invested in the Trust are separate
from those in the City’s investment portfolio.
• Invested funds within the trust are not held to
the same investment restrictions that govern
general local government investing.
• Those funds may be invested more broadly
with a strategy for higher long-term returns.
3 PROPOSED
• The City would establish a Section 115 Trust with
two separate accounts
• City General Fund Pension
• Santa Rosa Water Pension
• The City will make initial deposits from reserves
• When existing Pension Obligation Bonds are retired
in 2024, redirect funds currently used to that debt
service to contribute to trust annually.
• Initial funding goal equal to approximately one year
UAL and Normal Cost payment
• Continue to build funds in Trust
• Achieve 100% funded status
• Serve as pension stabilization fund 4
BENEFITS AND RISKS
Benefits
• Local control over asset strategy and
timing of usage.
• Ability to earn higher return.
• Bond rating agencies will look favorably to
this type of action.
• Considered a best practice by GFOA.
Risks
• Market volatility could result in loss of
principal.
• Funds held in trust may own be used for
pension obligations.
5 FISCAL IMPACT
• Contributions to Trusts will have no additional budget impact to General Fund or SR Water
• Initial Deposits for General Fund and SR Water Trusts • $10M from Fiscal Stability Reserves
• $4.4M from SR Water
• Initial funding goal equal to approximately to the highest scheduled year of normal cost and UAL
• $34M for GF; $7.5M for SR Water
• Redirect POB debt service payments once paid off in
2024 for annual Trust contributions
• $2.6M from General Fund; $700K from SR Water
• Trust Administration Fees and Trustee Custodial Fees
paid from funds held in Trust
• .0023% approximate annual fee based on funds held in
aggregate, approximately $33,000 (based on $14.4M)
• Custodial fees estimated at $9,000
6 INVESTMENT STRATEGY
• Individual Investment Policy Statements for
City General Fund and SR Water Trusts
• Targeted rate of return of 5% to 6%
• Investments objectives based on long-term
investment horizon of over ten years
• Assets will be managed to minimize risk of loss
of principal over that horizon
• City investment committee will have City staff
including staff from Finance and Water
• Similar to existing Investment Committee for
the City’s general investment portfolio
7 RECOMMENDATION
It is recommended by the Finance Department that the Council, by resolution:
• 1) approve the execution of the Adoption Agreement for the Post- Employment Benefits Trust (Adoption Agreement) between the City and PFM Asset Management LLC (PFMAM) incorporating and
adopting the Trust Agreement as well as approving the Trust Administrative Services Agreement and Investment Policy Statements included as exhibits to the Adoption Agreement;
• 2) authorize the City Manager, Assistant City Manager and the Chief Financial Officer as officers with authority to execute necessary documents and agreements to carry out the trust services on behalf of the City including, but not limited to the Adoption Agreement and Trust Administrative Services Agreement;
• 3) approve an initial deposit of $10,000,000 from the General Fund reserves assigned for fiscal stability, and $4,400,000 from Santa Rosa Water enterprise fund reserves to the Section 115 Trust for the purpose of pre-funding pension obligations.
8 QUESTIONS?
9