Sebastopol City Council
October 17, 2023

Agenda Item Number:__7 __

CITY OF SEBASTOPOL

CITY COUNCIL

AGENDA ITEM
Meeting Date: October 17, 2023
To: Honorable Mayor and City Councilmembers
From: Ana Kwong, Administrative Services Director
Subject: Presentation and Discussion of Establishing and Administering a 115 Trust Program for Pension
Recommendation: It is recommended that the Council approve the adoption of the Section 115 Trust and Pension Funding Policy
Funding: Currently Budgeted:  Yes ☐ No ☐ Not Applicable

Account Code: 100-14-01-4210
Costs authorized in City Approved Budget:  Yes (Finance Initialed __AK___) ☐ No (Finance Exempt) INTRODUCTION/PURPOSE:

The item is to request Council adopt resolution approving the adoption of the Multiple Employer OPEB/Pension 115 Trust administered by Shuster Advisory Group, LLC and appointing the City Manager, or his/her successor or his/her designee, as the City’s Plan Administrator for the 115 Trust, and adopt the resolution approving the adoption of the City’s Pension Funding Policy and related budget adjustment.

BACKGROUND:

CalPERS Unfunded Accrued Liability:

The City of Sebastopol (the “City”), like most citiesin California, has an unfunded accrued liability (“UAL”) associated with its CalPERS pension plans. As of June 30, 2021, the City's UAL was $10.5 million; however, CalPERS reported investment returns of -7.5% for FY 2021-22, which increased the City's UAL to approximately $16.6 million, as of 6/30/2022 (seen in the most recent CalPERS actuarial valuation reports). CalPERS also recently reported preliminary investment returns of 5.8% for FY 2022-23, which is projected to increase the City’s UAL to $16.8 million. This projected increase will be reflected in the City’s next CalPERS actuarial valuation report that will be released in summer/fall of 2024. The 5.8% investment returns will increase the City’s annual UAL payment beginning in FY 2025-26. The City’s annual UAL payment has been, and will continue to be, a significant impact on its budget. Any investment underperformance by CalPERS in future years will further increase the City’s future UAL balance and annual UAL payment.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number:__7 __
Historical Efforts:

The City has previously taken steps to control pension costs, including setting aside fundsin an internal City pension reserve, which has a current balance of approximately $2.8 million. Over the past few years, the City has discussed moving these internal funds into a Section 115 Trust to capture the benefits of a trust. The topic of the Section 115 Trust for pension was brought back up to Council earlier this year at the May 16, 2023, City Council meeting when the City’s Municipal Advisor, NHA Advisors (“NHA”), delivered a fiscal sustainability presentation that touched on the City’s pension challenge and recommended the City consider a Section 115 Trust for pension. A copy of that report is attached for reference.

Benefits of a Section 115 Trust:

Assets in a Section 115 Trust are irrevocably committed to the government function specified 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 from the investment rulesfor the City’s pooled investments. Investment restrictionsthat apply to the 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. Therefore, setting aside funds in a Section 115 Trust should, over time, allow the City to earn more interest from its reserves than it otherwise would if those funds were left in the General Fund. Especially in today’s higher interest rate environment, even the more conservative/moderate Section 115 Trust investment options are generating a strong yield.

Other benefits include:
• Ability to “smooth out” higher UAL payments in the future by withdrawing funds from the Section 115 Trust to supplement payments from the General Fund (see chart below) • Investment diversification from CalPERS (CalPERS manages $37.2 million of the City’s pension assets, as of the 6/30/2022 CalPERS actuarial valuation)
• Increased budgetary flexibility (i.e., Trust assets can be accessed any time to fund the City’s pension obligations and pay reasonable expenses associated therewith) • Investments can be tailored to the City’s needs
• Oversight and control of investment selection, monitoring of performance, and ability to adjust investments based on performance
• Potential for positive rating agency and investor consideration $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
20182019202020212022202320242025202620272028202920302031203220332034203520362037203820392040204120422043204420452046 Millions
UAL Payments (6/30/2022
Actuarial Valuation)
New UAL Payments
from 5.8% FY 2022-23
Preliminary Returns
Historical UAL
Payments
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number:__7 __
DISCUSSION:

Together with NHA, City staff evaluated multiple Section 115 Trust administrators based on experience, fees, investment options, investment performance, and other criteria. It was determined by City staff and NHA that Shuster Advisory Group, LLC (“Shuster”) would be the best Trust administrator for the City’s goals. Of the administrators considered, Shuster proved to have the lowest fees and best investment performance. Shuster offers fully customizable investment portfolios at no additional cost, which the City deemed to be an important factor in its decision. Shuster does not co-mingle client assets with the assets of other agencies, unlike many of the other providers managing portfolios, and Shuster will provide the City with real-time access to view account, transaction, holdings, and performance information. Shuster’s customer service and track record with other California agencies also stood out in the evaluation process.

The Resolution put before the City Council today is to adopt a Trust administered by Shuster, with an initial deposit of approximately $2.8 million (the balance of the City’s internal pension reserve) and related budget amendment to facilitate such transfer of funds to the 115 Trust.

About Shuster:

Shuster is an independent investment advisory firm and fiduciary. Shuster provides governmental and institutional retirement plan consulting services and private wealth management. Shuster is an 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 80 cities, agencies, and public entities. Shusterserves asfiduciary to plan investments and provides investment selection, monitoring, and management. Within the Shuster Section 115 Trust program, Shuster provides the trust administration, consultant, and investment advisor functions; Charles Schwab Trust Bank provides trust custodian services; and Alta Trust Company provides directed trustee services.

Documents to be Executed by the City:

To set up the Trust, the City will execute the following agreements:

1. Adoption Agreement for the Multiple Employer OPEB/Pension 115 Trust

2. Administrative Services Agreement

3. Investment Advisor Agreement
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
20242025202620272028202920302031203220332034203520362037203820392040204120422043204420452046 Millions
Projected UAL Payments*
Net Payments (Includes
Deposits and Withdrawals
from Trust)
Additional
Deposits
to Trust
*Assumes CalPERS investment returns of -7.5% in FY 2021-22, 5.8% in FY 2022-23, and 6.80% from FY 2023-24 onward Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number:__7 __
Next Steps for the Trust:

After City Council approval of the Trust, City staff will work with Shuster to finalize the documents and optimize an investment portfolio for the City’s Trust assets (based on the City’s risk tolerance and expected time horizon for withdrawalsfrom the Trust). Once thisstep is completed, the Trust account will be set up and the $2.8 million initial deposit can be made to the Trust. NHA will remain available to provide advice to City staff during these next steps.

Pension Funding Policy:

As part of a comprehensive pension cost management strategy, the City would also like to adopt a formal pension funding policy to ensure that there are guidelines and goals regarding its pension funding going forward.

The Pension Funding Policy lays out the following guidelines:

1. The City will pay at least the minimum required employer contribution to CalPERS each year

2. The City will prepay its annual UAL payment each July to achieve budgetary savings

3. The City will have a target funded ratio ranging from 85%-100% for its pension plans

4. The City will establish and maintain a Section 115 Trust dedicated to pensions

5. The City will consider Additional Discretionary Payments (ADPs) within the context of its annual evaluation of reserve levels, budgetary requirements, funded ratio, and other metrics

6. The City will evaluate a voluntary Fresh Start with CalPERS annually when the latest CalPERS actuarial valuation report is released

7. The City will only consider Pension Obligation Bonds (POBs) as a cost management strategy under very strict guidelines and after thorough due diligence and risk assessment

8. The City will review this policy periodically to determine if changes are necessary ENVIRONMENTAL REVIEW:

The proposed action is ☒ Not a project under CEQA ☐ Not exempt ☐ Exempt under Section ______ from the requirements of the California Environmental Quality Act (CEQA).

GOALS:

This action supports the following City Council Goals and General Plan Actions:

Goal 1: Maintain the long term financial stability and sustainability of the City of Sebastopol and Operate City government in a fiscally responsible and responsive manner Goal EV7: Maintain a Stable and Self-Sustaining Fiscal Base in Order to Generate the Resources Necessary to Provide Desired City services and Support New Growth that is Consistent with the City’s values and Goals [Pg.9-8] PUBLIC COMMENT:

As of the writing of this staff report, the City has not received any public comment. However, staff anticipates receiving public comment from interested parties following the publication and distribution of this staff report.

Such comments will be provided to the City Council assupplemental materials before or at the meeting. In addition, public comments may be offered during the public comment portion of the agenda item.

PUBLIC NOTICE:

This item was noticed in accordance with the Ralph M. Brown Act and was available for public viewing and review at least 72 hours prior to schedule meeting date.

FISCAL IMPACT:

The cost for the consultant to guide and work with staff to support and implement the 115 Trust has been approved in the FY23-24 budget $15,000. The Trust is expected to be initially funded with a $2,800,000 deposit. At this asset level, the total annual fee is $7,960. A fee breakdown can be seen in the table below. Annual fees are paid from Trust assets.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number:__7 __
Service Provider Annual Fee (% of Assets) Annual Fee ($) Administration Shuster Advisory Group, LLC 0.05%1 $1,400 Custody Charles Schwab Trust Bank 0.01%2 $400
Trustee Alta Trust 0.02%3 $560
Investment Management Shuster Advisory Group, LLC 0.20% $5,600 Total Annual Fees 0.28% $7,960
1 Administration fee will convert to a flat dollar fee after the end of contract year-3 based on the highest year-end balance of the first 3 contract years
2 Custodial fee is 0.01% with an annual minimum of $400 3 Trustee fee is 0.02% with an annual minimum of $500 and annual maximum of $5,000 An appropriation of $2.8M to be transferred to the 115 Trust has not been appropriated in FY23-24 adopted budget.

Therefore, it is requested that the City Council approve a budget amendment in the Pension Reserve Fund as necessary to fund the Trust account that will be set up and the $2.8 million initial deposit can be made to the Trust.

RECOMMENDATION:

Staff recommends the Sebastopol City Council take the following actions:

1. Adopt Resolution approving the adoption of the Multiple Employer OPEB/Pension 115 Trust administered by Shuster Advisory Group, LLC and appointing the City Manager, or his/her successor or his/her designee, as the City’s Plan Administrator for the 115 Trust.

2. Authorize the City Manager, or his/hersuccessor or his/her designee, to enter into the Adoption Agreement for the Multiple Employer OPEB/Pension 115 Trust.

3. Authorize the City Manager, or his/her successor or his/her designee, to enter into the Administrative Services Agreement and Investment Advisor Agreement with Shuster Advisory Group, LLC.

4. Authorize the City Manager, or his/her successor or his/her designee, to transfer $2,800,000 to the City's 115 Trust upon completion of the Trust establishment documents.

5. Adopt Resolution approving the adoption of the City’s Pension Funding Policy.

6. Adopt Resolution approving a budget amendment of $2.8M to be transferred from Pension Reserve Fund as the initial deposit to the 115 Trust.

Attachments:

1. Resolution (Section 115 Trust)

2. Adoption Agreement for the Multiple Employer OPEB/Pension 115 Trust

3. Administrative Services Agreement

4. Investment Advisor Agreement

5. Resolution (Pension Funding Policy)

6. City of Sebastopol Pension Funding Policy

7. Resolution (Budget Amendment)

8. NHA Report from May 2023

9. 115 Trust Presentation
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

RESOLUTION NO. XXXX-2023

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SEBASTOPOL APPROVING AND ADOPTING THE MULTIPLE EMPLOYER OPEB/PENSION 115 TRUST ADMINISTERED BY SHUSTER ADVISORY GROUP, LLC AND APPOINTING THE CITY MANAGER AS THE CITY’S PLAN ADMINSTRATOR FOR THE 115 TRUST
WHEREAS, the CITY OF SEBASTOPOL, a municipal corporation, hereinafter called CITY, provides pension benefits to eligible employees and retirees as a participant in the California Public Employees Retirement System (“CalPERS”); and
WHEREAS, the City, like most cities in California, has an unfunded accrued liability (“UAL”) associated with its CalPERS pension plans; and
WHEREAS, the annual UAL payment has been, and will continue to be, a significant impact on the City’s budget; and
WHEREAS, the City has discussed moving its internal pension reserves into a Section 115 Trust as a strategy to manage the City’s pension costs, by capturing the benefits of a trust, such as increased investment earnings and budgetary flexibility; and
WHEREAS, the City is eligible to participate in a tax-exempt trust performing an essential governmental function within the meaning of Section 115 of the Internal Revenue Code, as amended, and the Regulations issued thereunder, and the trust is a tax-exempt trust under the relevant statutory provisions of the State of California; and
WHEREAS, together with NHA, City staff evaluated multiple Section 115 Trust programs and determined the Multiple Employer OPEB/Pension 115 Trust (the “Trust”) administered by Shuster Advisory Group, LLC (“Shuster”) was the best program for the City’s goals; and WHEREAS, all qualified assets held in the Trust will be irrevocably dedicated to prefunding the City’s pension obligations.

NOW, THEREFORE, BE IT RESOLVED that the City of Sebastopol City Council hereby adopts a Resolution approving a Section 115 Trust to be administered by Shuster Advisory Group, LLC and appoints the City Manager, or his/her successor or his/her designee, as the City’s Plan Administrator for the Trust.

Let it be further resolved that the City of Sebastopol City Council authorizes the City Manager, or his/her successor or his/her designee, to take whatever additional actions are necessary to maintain the City’s participation in the Trust and to maintain compliance of any relevant regulation issued or as may be issued; therefore, authorizing him/her to take whatever additional actions are required to administer the Trust, by the following vote:

PASSED AND ADOPTED, by the CITY COUNCIL of THE CITY OF SEBASTOPOL, on this 17th day of October 2023.

VOTE:

Ayes:

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Noes:

Abstain:

Absent:

APPROVED: _______________________________________
Mayor Neysa Hinton
ATTEST: ______________________________________________________________________ Mary Gourley, Assistant City Manager/City Clerk, MMC
APPROVED AS TO FORM: __________________________________________________ Larry McLaughlin, City Attorney
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4820-7833-9064.v2

TRUST ADMINISTRATIVE SERVICES AGREEMENT
This agreement (“Agreement”) is made this 10th day of October, 2023, by and between CITY OF SEBASTOPOL (the “Employer”) and SHUSTER ADVISORY GROUP, LLC (the “Trust Administrator”).

WHEREAS, the Employer has adopted one or more plans, policies, or collective bargaining agreements (“Plans”) in order to provide other post-employment health and welfare benefits (other than pensions) (“OPEB”) or retirement benefits; and WHEREAS, the Trust Administrator and Alta Trust Company (the “Trustee”) have entered into an agreement (the “Trust Agreement”) establishing the Multiple Employer OPEB/Pension 115 Trust (the “Trust”); and
WHEREAS, the Employer has adopted the Trust by executing the adoption agreement to which this Agreement is attached (the “Adoption Agreement”“) in order to fund the OPEB and retirement benefits payable under the Plans; and
WHEREAS, the Employer wishes to retain the services of the Trust Administrator to administer the Employer’s account under the Trust (“Account”).

NOW THEREFORE, the Employer and the Trust Administrator hereby agree as follows:

Capitalized words not defined this document are defined in the Trust Agreement.

1. Trust Administrator Services
The Trust Administrator will provide the following services for the Employer’s Account:

1.1 Administrative Services
A. Instruct the custodian of the Account to make disbursements from the Employer’s Account at the direction of the Employer for the payment of OPEB or retirement benefits under the Employer’s Plans funded by the Account;
B. Verify custodian’s receipt of contributions made to the Account as informed by the Employer;
C. Provide the Employer after the end of each calendar quarter with an analysis of the performance of the investments of the Account and a statement of the changes in the investments made during such calendar quarter;
D. Provide annual statements of Trust accounts;
E. Instruct the custodian to disburse funds from the Account for the payment of the fees and expenses described in Section 2.1 and 3.2; and Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4820-7833-9064.v2
F. Coordinate such other actions with the Trustee and custodian of the Account as directed by the Plan Administrator that are within the scope of the Trust Administrator’s duties under the Trust Agreement.

1.2 Investment Management Services
A. Determine the asset allocation of investments in the Employer’s Account (“Investment Strategy”) based on information provided by the Employer or the Plan Administrator, including the anticipated amounts of cash required by the Plans for distributions and other expenses, and the appropriate risk tolerance for the Plans based on the Plans’ asset-liability characteristics and the Employer’s resources;
B. Prepare a recommended policy statement of the Account’s Investment Strategy acceptable to the Employer to the extent necessary to accomplish the Account’s Investment Strategy (“Investment Policy Statement”);
C. Execute the Account’s Investment Strategy by instructing the Trustee to buy and sell shares of investments permitted under the Trust in accordance with the Investment Policy Statement;
D. In consultation with the Employer, reassess and alter the Investment Strategy and Investment Policy Statement at least annually to the extent necessary to “rebalance” the Account investments; and
E. Perform reviews at least annually of the performance of the investments held in the Account, add or reduce allocations to each investment or add or delete investments in its judgment (to the extent permitted under the Investment Policy Statement and the Trust), and promptly advise the Employer of any additions or deletions of Account investments.

2. Compensation

2.1 Fees. For all services provided by the Trust Administrator under this Agreement and the Trustee under the Trust Agreement, the following fees will apply:

Trust Administration Fees (This Agreement)1: 0.05%
Trustee Fees (Trust Adoption Agreement)2: 0.02%
Custodial Asset Based Fee (Custodial Agreement)3: 0.01% Investment Advisory Fees (Investment Advisory Agmt.): 0.20% Fees will be collected quarterly other than the Investment Advisory Fee which will be collected monthly.
1 - Will convert to a flat dollar fee after the end of contract year-3 based on the highest year-end balance of the first 3 contract years.
2 - Annual minimum fee per plan of $500. Annual maximum fee per plan of $5,000. 3 - Annual minimum fee per plan of $400. Custodian may also charge fees related to non- standard assets, checks and wire fees outlined in the Custodial Agreement for the Plan.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4820-7833-9064.v2
The Trust Administrator will notify the Employer in writing of any change in the above fee amounts at least 60 days before the effective date of the change.

2.2 Fees for Additional Services. If and to the extent that the Employer requests the Trust Administrator to render services other than those described under this Agreement, such additional services will be compensated separately on terms to be agreed upon between the Trust Administrator and the Employer.

2.3 Pooled Investments. Assets invested by the Trust Administrator under the terms of this Agreement may from time to time be invested in individual securities, or in a proprietary money market mutual fund or local government investment pool (either, a “Pool”). Each Pool is a commingled fund managed by the Trust Administrator. Average daily net assets subject to the fees described in this section shall not take into account any funds invested in the Pool. Expenses of the Pool, including compensation for the Trust Administrator and the Pool custodian, are described in the relevant prospectus or information statement and are paid from the Pool.

3. Expenses

3.1 Furnishing of Administrative Services, Office Space, Equipment and Personnel. The Trust Administrator will furnish at its own expense all necessary administrative services, office space, equipment, clerical personnel, telephone and other communication facilities, investment advisory facilities, and executive and supervisory personnel required to perform the services under this Agreement, inclusive of reasonable costs required to attend meetings with the Employer.

3.2 Expenses of Employer’s Account. Except as otherwise provided in this Agreement, Employer agrees to pay all expenses under the Trust incurred by (or allocable to) the Employer’s Account including, without limitation, taxes, expenses (including front- or back-end charges) of an investment fund, fees and expenses of the Account’s independent auditors and legal counsel, insurance premiums, expenses of the Trustee, the keeping of books and accounts, and the allocable costs of the annual Trust accounting described in Section 9.02 of the Trust Agreement. The Trust Administrator will calculate expenses allocable to the Account on a pro-rata basis, or in any other reasonable and equitable manner determined by the Trust Administrator.

4. Payment Terms. At the end of each calendar month, the Trust Administrator will prepare and submit fees and expenses under this Agreement as described in Sections

2.1 and 3.2. Except to the extent that the Employer has elected in the Adoption Agreement to pay such fees and expenses, the Employer authorizes the Trust Administrator to charge such fees and expenses to the Employer’s Account and authorizes and instructs the custodian to disburse funds from the Account for the payment of the fees and expenses. If the Employer has elected in the Adoption Agreement to pay such fees and expenses the Trust Administrator will prepare and submit monthly invoices to the Employer. If the Employer does not fully pay any invoice within 15 calendar days after the invoice’s postmark, then the Employer hereby authorizes the Trust Administrator to charge the unpaid amount to the Account and instructs the custodian to disburse such amount from the Account for the payment of the fees and expenses. If sufficient funds are not available or cannot for any reason Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4820-7833-9064.v2
otherwise be disbursed from the Account, the Trust Administrator will notify the Employer, and the Employer will pay the unpaid amount to the Trust Administrator from other sources within 10 calendar days after receiving the notice.

5. Registered Advisor; Duty of Care. The Trust Administrator hereby represents it is a registered investment advisor under the Investment Advisers Act of 1940. The Trust Administrator will immediately notify the Employer if at any time during the term of this Agreement it is not so registered or if its registration is suspended. The Trust Administrator agrees to perform its duties and responsibilities under this Agreement with reasonable care. The federal securities laws impose liabilities under certain circumstances on persons who are required to act in good faith. Nothing herein in any way constitutes a waiver or limitation of any rights which the Employer, the Trust, or the Trust Administrator may have under any federal securities laws. The Employer hereby authorizes the Trust Administrator to sign an Internal Revenue Service Form W-9 on behalf of the Employer and to deliver such form to broker-dealers or others from time to time as required in connection with securities transactions pursuant to this Agreement.

6. Trust Administrator’s Other Clients. The Employer understands that the Trust Administrator performs investment advisory services for various other clients which may include investment companies, commingled trust funds and/or individual portfolios. The Employer agrees that the Trust Administrator, in the exercise of its professional judgment, may give advice or take action with respect to any of its other clients which may differ from advice given or the timing or nature of action taken with respect to the Account. The Trust Administrator has no obligation to purchase, sell or exchange any security for the Employer solely by reason of the fact that the Trust Administrator, its principals, affiliates, or employees may purchase, sell or exchange such security for the account of any other client or for itself or its own accounts.

7. Risk Acknowledgment. The Trust Administrator does not guarantee the future performance of the Account or any specific level of performance, the success of any investment decision or strategy that the Trust Administrator may use, or the success of Trust Administrator’s overall management of the Account. The Employer understands that investment decisions made for the Employer’s Account by the Trust Administrator are subject to various markets, currencies, economic, political and business risks, and that those investment decisions will not always be profitable. The Employer understands that past performance does not necessarily predict future performance for the Account.

The Trust Administrator will manage only the securities, cash and other investments held in Employer’s Account and in making investment decisions for the Account, the Trust Administrator will not consider any other securities, cash or other investments owned by the Employer or any of the Plans. Neither the Trust Administrator nor its officers, directors, agents, employees, and affiliate shall be liable for any losses in the Account, or any loss, cost, indebtedness, or liabilities arising from the Trust Administrator’s management of the investments in the Account (together, “Losses”) except for any Losses that result from an act or omission of the Trust Administrator constituting a violation of law or an act or omission of the Trust Administrator constituting gross negligence, willful misfeasance, bad faith or reckless disregard of its obligations under this Agreement or as otherwise may be provided by law. The Trust Administrator is not responsible for any loss incurred by reason of any act or omission of the Employer, the custodian of the Account, a third party manager, any broker-dealer, or any other third party.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4820-7833-9064.v2

8. Term of Agreement. This Agreement will remain in effect until terminated by either party at any time by giving 60 days’ written notice to the other party of its intent to terminate.

9. Force Majeure. The Trust Administrator has no liability for any losses arising out of the delays in performing or inability to perform the services which it renders under this Agreement which result from events beyond its control, including interruption of the business activities of the Trust Administrator or other financial institutions due to acts of God, acts of governmental authority, acts of war, terrorism, civil insurrection, riots, labor difficulties, or any action or inaction of any carrier or utility, or mechanical or other malfunction.

10. Disciplinary Actions. The Trust Administrator will promptly notify the Employer if the Trust Administrator is found to have violated any state or federal securities law or regulation in any criminal action or civil suit in any state or federal court or in any disciplinary proceeding before the Securities and Exchange Commission or any other regulatory agency or department of the United States, any registered securities exchange, the Financial Industry Regulatory Authority, or any regulatory authority of any State based upon the performance of services as an investment advisor.

11. Confidentiality. The Trust Administrator will not disclose any information relating to the Plans or the Account except to authorized officers of the Employer, the Plan Administrator the Trustee and third parties retained by the Trust Administrator to perform specific services within this Agreement without the Employer’s consent. The Employer will not disclose any information relating the Trust to individuals other than authorized officers of the Employer and the Plan Administrator, or their respective designees, without the Trust Administrator’s consent.

12. Independent Contractor. The Trust Administrator, its employees, officers and representatives, will not be deemed to be employees, agents (except as to the purchase or sale of securities described in Section 1), partners, servants, and/or joint ventures of the Employer or the Account by virtue of this Agreement or any actions or services rendered under this Agreement.

13. Records. The Trust Administrator will maintain appropriate records of all its activities hereunder. The Trust Administrator will use its best efforts to provide the Employer with a statement within 60 days following the end of each calendar quarter showing deposits, withdrawals, purchases and sales (or maturities) of investments, earnings received during the quarter, and the value of assets held on the last business day of the calendar quarter, all as provided for in the Trust Agreement, based on the information requested from and furnished to it by the Trustee.

14. Ownership of Reports and Documents. The Trust Administrator acknowledges that the originals of all correspondence, documents, reports and records produced in the course of providing the services pursuant to this Agreement are the property of the Employer. In the event this Agreement is terminated, the Trust Administrator agrees to provide such originals to the Employer. The Trust Administrator will not furnish copies of any such correspondence, documents reports and records to any party other than the Employer or the Plan Administrator, or their respective designees, or third parties retained by the Trust Administrator to perform services under this Agreement without the Employer’s consent. Notwithstanding the preceding provisions of this paragraph, the Trust Administrator is authorized to retain copies of any correspondence, documents, Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4820-7833-9064.v2
reports, and records to the extent needed to comply with applicable law, including but not limited to federal securities laws.

15. Trust Administrator’s Disclosure Statement. The Trust Administrator warrants that it has delivered to the Employer, at least 48 hours prior to the execution of this Agreement, the Trust Administrator’s current Securities and Exchange Commission Form ADV, Part II, including, without limitation, Schedule H thereto (disclosure statement). The Employer acknowledges receipt of such disclosure statement at least 48 hours prior to the execution of this Agreement.

16. Amendment. This Agreement shall not be changed, modified, terminated or discharged in whole or in part, except by an instrument in writing signed by both parties hereto, or their respective successors or assigns.

17. Successors and Assigns. The provisions of this Agreement are binding on the Trust Administrator and its respective successors and assigns, provided, however, that the rights and obligations of the Trust Administrator may not be assigned without the Employer’s consent.

18. Designees. In accordance with Section 1.18 of the Trust Agreement, the Employer will certify to the Trust Administrator in writing the persons or entity with the plenary authority pursuant to applicable state law over the investment and management of the Employer’s Plans or its designee (“Plan Administrator”). The Plan Administrator has the authority to act on behalf of, and to exercise any of the rights of, the Employer under this Agreement.

In accordance with Section 6.1(l) of the Trust Agreement, the Trust Administrator may designate and engage the services of such agents, representatives, advisors, counsel, accountants and other third parties, including affiliates of the Trust Administrator, and delegate its authority to perform specified services under this Agreement to such third parties. Any such designee shall have the authority to perform the services delegated to it by the Trust Administrator. Any officer of the Trust Administrator has the authority to exercise any of the rights of the Trust Administrator under this Agreement.

19. Notice. Written notices required under this Agreement will be sent by regular mail, certified mail, overnight delivery or courier, and will be deemed given when received at the parties’ respective addresses shown below. Either party must notify the other party in writing of a change in address.

Employer’s Address:

City of Sebastopol
7120 Bodega Avenue
Sebastopol, CA 95473
Attn: City Manager
Trust Administrator’s Address:

Shuster Advisory Group, LLC
155 N. Lake Ave, #500
Pasadena, CA 91101
Attn: Mark Shuster, Managing Member
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4820-7833-9064.v2

20. Arbitration. The Employer understands and agrees that, to the extent permitted by law, all claims and disputes arising out of transactions or activities in connection with the Account, or construction, performance, or breach of this Agreement, will be determined by arbitrators sitting in Los Angeles, California, in accordance with the current rules then in effect of the American Arbitration Association. The arbitrators may allocate attorneys’ fees and arbitration costs between parties. In this regard, the Employer understands that: (1) Arbitration is final and binding on the parties; (2) the parties are waiving their right to seek a judicial determination in court, including the right to jury trial; (3) prearbitration discovery is generally more limited than and different from court proceedings; (4) the arbitrators’ award is not required to include factual findings or legal reasoning and any party’s right to appeal or seek modification of rulings by the arbitrators is strictly limited; (5) the panel of arbitrators will typically include a minority of arbitrators who are in the securities industry; and (6) arbitration will be conducted according to the securities arbitration rules then in effect of the American Arbitration Association.

21. Applicable Law. This Agreement will be construed, enforced and administered according to the laws of the state of California, without regard to its conflicts of law principles. In the event that either party institutes legal proceedings against the other, venue will lie in any court of competent jurisdiction in the state of California.

22. Entire Agreement. This Agreement, including exhibits and any other documents referenced herein, constitutes the entire agreement of the parties with respect to the subject matter of this Agreement, and supersedes all prior negotiations, agreements, and understandings, whether written or oral, with respect thereto.

23. Severability. If any provision of this Agreement is held by any court of competent jurisdiction to be invalid or unenforceable, the remaining provisions of the Agreement will continue in full force and effect.

24. Counterparts. This Agreement may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed will be deemed to be a complete original and all of which together will constitute one and the same Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their authorized officers on the date set forth in the first paragraph of this Agreement.

TRUST ADMINISTRATOR EMPLOYER
Shuster Advisory Group, LLC City of Sebastopol
By: By: _____
Its: Its: _____
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

INVESTMENT ADVISOR AGREEMENT
MULTIPLE EMPLOYER OPEB/PENSION 115 TRUST

This agreement (“Agreement”) is entered into between Shuster Advisory Group, LLC (“SHUSTER”), a California limited liability company, and City of Sebastopol (“EMPLOYER”) as further identified on Appendix A., as the responsible plan fiduciary for the Plan(s) further identified in Appendix A, desires to engage SHUSTER to provide the services described in this Agreement according to the terms of this Agreement.

1. Fiduciary Authority. The account for which SHUSTER is providing investment advisory service is part of a multiple employer trust intended to qualify as a tax-exempt trust of a state or political subdivision thereof for an essential governmental function within the meaning of Section 115 of the Code and any regulations issued thereunder and the EMPLOYER has fiduciary authority with respect to the account for the employer.

2. Term. The term of this Agreement will commence October 17, 2023.

3. Services. SHUSTER agrees to perform the Fiduciary Services described in Appendix B.

4. Fees.
(A) The compensation, direct and indirect, of SHUSTER for the performance of the Services is described in Appendix C.

5. Fiduciary Status: Limitations on Functions. EMPLOYER acknowledges that:
(A) In performing the Fiduciary Services, SHUSTER is acting as an investment fiduciary of the Plan and as a registered investment advisor under the Investment Advisers Act of 1940. (B) In performing Fiduciary Services, SHUSTER does not act as, nor has SHUSTER agreed to assume the duties of, a trustee or the Plan Administrator, and SHUSTER has no discretion or responsibility to interpret the Plan documents, to determine eligibility or participation under the Plan, or to take any other action with respect to the management, administration or any other aspect of the Plan. (C) SHUSTER does not provide legal or tax advice.
(D) Investments are subject to various market, political, currency, economic, and business risks, and may not always be profitable. As a result, SHUSTER does not and cannot guarantee financial results. (E) SHUSTER may, by reason of performing services for other EMPLOYERs, from time to time acquire confidential information. EMPLOYER acknowledges and agrees that SHUSTER is unable to divulge to the EMPLOYER or any other party, or to act upon, any such confidential information with respect to its performance of this Agreement.
(F) SHUSTER is entitled to rely upon all information provided to SHUSTER (whether financial or otherwise) from reputable third parties or by EMPLOYER, EMPLOYER’s representatives or third-party service providers to EMPLOYER, the Plan or SHUSTER, without independent verification. EMPLOYER agrees to promptly notify SHUSTER in writing of any material change in the financial and other information provided to SHUSTER and to promptly provide any such additional information as may be reasonably requested by SHUSTER.
(G) EMPLOYER understands that SHUSTER: (i) may perform other services for other clients, (ii) may charge a different fee for other clients, and (iii) may give advice and take action that is different for each client even when retirement plans are similar.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

(H) SHUSTER has no responsibility to provide any services related to assets not included in the SHUSTER investment portfolio or purchased directly by Client. Such assets shall be referred to collectively as “Excluded Assets.” The Excluded Assets shall be disregarded in determining the Fees payable to SHUSTER pursuant to this Agreement, and the Fees shall be calculated only on the remaining assets (the “Included Assets”).

6. Representations of EMPLOYER. EMPLOYER represents and warrants as follows:
(A) It is the responsible plan fiduciary for the control and/or management of the assets of the Plan, and for the selection and monitoring of service providers for the Plan. SHUSTER is entitled to rely upon this statement until notified in writing to the contrary.
(B) The person signing the Agreement on behalf of EMPLOYER has all necessary authority to do so. (C) The execution of this Agreement and the performance thereof is within the scope of the investment authority authorized by the governing instrument and/or applicable laws. The signatory on behalf of EMPLOYER represents that the execution of the Agreement has been duly authorized by appropriate action and agrees to provide such supporting documentation as may be reasonably required by SHUSTER. (D) The Plan and related Trust permit payment of fees out of Plan assets. EMPLOYER has determined that the fees charged by SHUSTER are reasonable and are the obligation of the Plan; however, if EMPLOYER desires, it may pay the fees directly, rather than with Plan assets.

7. Representation of SHUSTER. SHUSTER represents as follows:
(A) SHUSTER is registered as an investment adviser (“RIA”) under the Investment Advisers Act of 1940. (B) The person signing this agreement on behalf SHUSTER has the power and authority to enter into and perform this Agreement.
(C) SHUSTER agrees to take reasonable steps to protect Private Participant Information and Plan Investment Data in its possession;
SHUSTER is not responsible for the assessment of systems and procedures of third parties for the protection of plan and participant data;
SHUSTER is not responsible for the actions by or the failure to act by EMPLOYER, by other service providers, or by Plan participants to protect Data; SHUSTER shall have no liability in the event of a Data breach or a violation of participant privacy rights (under the California Consumer Privacy Act or otherwise) unless said breach is the direct result of negligence, recklessness, or willful misconduct of an employee of SHUSTER.

8. Standard of Care. SHUSTER will perform the Fiduciary Services described in Appendix B to the Plan in accordance with the standard of care of the prudent man rule set forth in ERISA Section 404(a)(1)(B).

9. Termination. Either party may terminate this Agreement upon 30 days prior written notice to the other party.

Such termination will not, however, affect the liabilities or obligations of the parties arising from transactions initiated prior to such termination, and such liabilities and obligations (together with the provisions of section 8, 17, and 18) shall survive any expiration or termination of this Agreement. Upon termination, SHUSTER will have no further obligation under this Agreement to act or advise EMPLOYER with respect to services under this Agreement.

10. Receipt of Disclosure and Consent to Electronic Delivery. EMPLOYER acknowledges receipt and undertakes to review and consider the disclosures made by SHUSTER (including in this Agreement, the Form Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

ADV Part 2 and SHUSTER Privacy Policy), in particular the portions related to services, compensation, and potential conflicts of interest, as well as the remainder of the disclosures concerning, among other matters, background information such as educational and business history, business practices such as the types of advisory services provided, the methods of securities analysis used, and the like.

Further, EMPLOYER consents to electronic delivery (via email or other generally accepted method) of current and future distributions of SHUSTER’s Form ADV Part 2 and Privacy Policy. Consent to electronic delivery may be canceled at any time by sending a written request to SHUSTER.

11. Notices. Any and all notices required or permitted under this Agreement shall be in writing and shall be sufficient in all respects if (i) delivered personally, (ii) mailed by registered or certified mail, return receipt requested and postage prepaid, or (iii) sent via a nationally recognized overnight courier service to the EMPLOYER’s address listed on Appendix A and SHUSTER’s address, 155 N. Lake Ave, Ste. 500, Pasadena, CA 91101, or such other address as any party shall have designed by notice in writing to the other party.

12. Assignability. This Agreement is not assignable by either Party hereto without the prior written consent of the other Party.

13. Effect. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective heirs, successors, survivors, administrators and assigns.

14. Entire Understanding and Modification. This Agreement constitutes and contains the entire understanding between the parties and supersedes all prior oral or written statements dealing with the subject matter herein. This Agreement can be amended or modified by the written consent of the Parties.

15. Severability. If any one or more of the provisions of this Agreement shall, for any reason, be illegal or invalid, such illegality or invalidity shall not affect any other provision of this Agreement and this Agreement shall be enforced as if such illegal or invalid provision had not been contained herein.

16. Headings. All headings used herein are for ease of reference only and in no way shall be construed as interpreting, decreasing or enlarging the provisions of this Agreement.

17. Applicable Law; Forum. The laws of the State of California shall govern this Agreement in all respects, including but not limited to the construction and enforcement thereof, unless otherwise preempted or superseded by federal law.

18. Arbitration Agreement. To the extent permitted by law, all controversies between EMPLOYER and SHUSTER, which may arise out of or relate to any of the services provided by SHUSTER under this Agreement, or the construction, performance or breach of this or any other Agreement between SHUSTER and EMPLOYER, whether entered into prior to, on or subsequent to the date hereof, shall be settled by binding arbitration in Pasadena, Los Angeles County, California, under the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon any award rendered by the arbitrator(s) shall be final, and may be entered into any court having jurisdiction.

19. Amendment Process. The Agreement may be modified, by written agreement of both EMPLOYER and SHUSTER.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

20. Waiver of Limitation. Nothing in this Agreement shall in any way constitute a waiver or limitation of any rights which EMPLOYER or Plan or any other party may have under federal or state securities laws.

This Agreement constitutes both an agreement between the parties and a disclosure statement. The Parties have caused this Agreement to be executed by their duly authorized officers as of the date set forth above. This Agreement shall not be binding on SHUSTER or the EMPLOYER until each has accepted it, in writing, as indicated by their signatures below.

EMPLOYER: City of Sebastopol Shuster Advisory Group, LLC Signature: _____________________________ Signature: ____________________________ Name: Name: Mark Shuster
Title: Title: Managing Member
Date: Date:_______________________________
*The EMPLOYER is signing this Agreement both as the employer that sponsors the Plan and as the fiduciary responsible for selecting the Plan’s investments and engaging its service providers.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

APPENDIX A – EMPLOYER/PLAN SPONSOR - PLAN INFORMATION
EMPLOYER/Plan Sponsor
City of Sebastopol
Tax ID#
XXXX
Plan Name 1
City of Sebastopol Pension
Stabilization Trust Account
Type of Plan
☐OPEB Plan ☒Pension Plan
☐Other:

Plan Name 2 Type of Plan
☐OPEB Plan ☐Pension Plan
☐Other:

Plan Name 3 Type of Plan
☐OPEB Plan ☐Pension Plan
☐Other:

Plan Name 4 Type of Plan
☐OPEB Plan ☐Pension Plan
☐Other:

Plan Name 5 Type of Plan
☐OPEB Plan ☐Pension Plan
☐Other:

Mailing Address
7120 Bodega Avenue
City
Sebastopol
State
CA
Zip Code
95473
Phone
707-823-1153
Email (for purposes of notice/electronic delivery)
[email protected]
Legal Address (☒Same as Mailing Address) City State Zip Code Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

APPENDIX B – FIDUCIARY SERVICES
SHUSTER will perform the following fiduciary services:

1. Development of an Investment Policy Statement (IPS). The IPS establishes the investment policies and objectives for the Plan(s) as well as the criteria and standards for selecting and monitoring the investments.

The EMPLOYER shall have the ultimate responsibility and authority to establish such policies and objectives and to adopt the investment policy statement.

2. Consistent with the Investment Policy Statement, SHUSTER will select the initial investment options within the Plan(s).

3. SHUSTER will periodically review the investments within the Plan(s) and shall be responsible for making additions/deletions thereto.

4. SHUSTER will provide periodic investment advisory reports that document consistency of fund management and performance to the guidelines set forth in the IPS, and to make recommendations to maintain, or remove and replace investment options. Reports to include: Market Overview, In-Depth Portfolio Summary, Plan Asset Allocation Analysis and Fund Performance Comparison to the Index.

5. Meet with EMPLOYER on a periodic basis to discuss reports and recommendations.

6. Annually review the IPS with the EMPLOYER to ensure it continues to meet the EMPLOYER’s needs.

LIMITATIONS ON FIDUCIARY SERVICES
SHUSTER shall not be responsible or liable for the recommendations of or services rendered by anyone other than SHUSTER. The ability to perform the above services is contingent upon the rules, policies, processes, and responsiveness to our requests for information of EMPLOYER, Plan Sponsor, Custodian, and Trustee.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

APPENDIX C - FEE SCHEDULE

1. SHUSTER will not receive any other compensation, direct or indirect, for its services under this agreement. If SHUSTER receives any other compensation for Services, SHUSTER will disclose the amount of such compensation, the services provided for such compensation, the payer of such compensation, and a description of SHUSTER’s arrangement with the payer to the EMPLOYER and will offset that compensation against its stated fees.

2. All fees are billed in arrears.

3. The initial fee will be the amount, prorated for the number of days included in the initial billing period from the effective payment start date.

4. If this Agreement is terminated prior to the end of a billing period, SHUSTER shall be entitled to a fee, prorated for the number of days in the billing period prior to the effective date of termination.

5. All fees will be due and payable within 30 days and are payable to “Shuster Advisory Group, LLC”

6. The annual fee for services shall be as follows:

Beginning with the effective date of this Agreement, the annual fee for service shall be 0.20% (20 basis points) per annum, charged as 0.0167% monthly to all included assets in each Plan as of the date of the calculation.

Fees will be deducted from Plan assets and will be paid to SHUSTER by the Trust/Custodian for the Plan(s).

At SHUSTER’s discretion the billing period described above may be adjusted to quarterly.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

RESOLUTION NO. XXXX-2023

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SEBASTOPOL

APPROVING AND ADOPTING A PENSION FUNDING POLICY
WHEREAS, the CITY OF SEBASTOPOL, a municipal corporation, hereinafter called CITY, provides pension benefits to eligible employees and retirees as a participant in the California Public Employees Retirement System (“CalPERS”); and
WHEREAS, the City, like most cities in California, has an unfunded accrued liability (“UAL”) associated with its CalPERS pension plans; and
WHEREAS, the annual UAL payment has been, and will continue to be, a significant impact on the City’s budget; and
WHEREAS, the City has worked with its Municipal Advisor, NHA Advisors, LLC (“NHA”) to evaluate and select a Section 115 Trust provider as a strategy to manage the City’s pension costs; and WHEREAS, the City expressed interest in establishing a formal Pension Funding Policy as part of a comprehensive pension cost management strategy that includes implementation of the Section 115 Trust; and
WHEREAS, together with NHA, City staff has drafted a Pension Funding Policy for City Council consideration to ensure that there are guidelines and goals regarding its pension funding going forward.

NOW, THEREFORE, BE IT RESOLVED that the City of Sebastopol City Council hereby adopts a Resolution approving the proposed Pension Funding Policy.

PASSED AND ADOPTED, by the CITY COUNCIL of THE CITY OF SEBASTOPOL, on this 17th day of October 2023.

VOTE:

Ayes:

Noes:

Abstain:

Absent:

APPROVED: _______________________________________
Mayor Neysa Hinton
ATTEST: ______________________________________________________________________ Mary Gourley, Assistant City Manager/City Clerk, MMC
APPROVED AS TO FORM: __________________________________________________ Larry McLaughlin, City Attorney
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

City of Sebastopol
Pension Funding Policy
Introduction:

The City of Sebastopol (“City”) provides its permanent employees with a defined benefit pension through the California Public Employees’ Retirement System (“CalPERS”). Recent investment returns and assumption changes at CalPERS have increased the City’s required payments to the pension plan and decreased the plan’s funded status. The City is anticipating that CalPERS may enact more conservative changes and assumptions in the future to increase the financial stability of its pension program, and that those future changes and assumptions will result in higher City contributions. The City has assessed options to help address the increased pension costs and their volatility and has determined that it would be beneficial to adopt a Section 115 Trust in which to set aside City funds for future pension payments.

Purpose:

The purpose of this Pension Funding Policy (“Policy”) is to establish a plan, methodology and a process for funding current and future costs associated with the City’s contractual obligations to provide pension benefits as set forth in the City’s labor agreements.

Background:

A pension is a retirement account that an employer maintains to give employees a fixed payout when they retire. The City’s plan is a defined benefit plan. The payout typically depends on how long the employee works for the employer, the employee’s benefit factor, and the employee’s salary.

Investment earnings, employee contributions and employer contributions fund the total pension cost, including benefits and expenses. Employer contributions are set by actuaries using an assumed investment rate of return (also known as the discount rate), and other assumptions related to salary, payroll, cost of living, mortality rate, disabilities, terminations and retirements. The employer contributions are determined by periodic actuarial valuations under state law.

Policy:

It is the policy of the City to fulfill its obligation to maintain fiscally responsible management practices and to ensure that promised pension benefits are funded. To that end, the City will meet its pension funding obligations as follows:

1. Actuarially Determined Contributions: Each fiscal year, the City will contribute to CalPERS the amount determined by CalPERS actuaries to be the minimum required employer contribution for that year. The minimum contribution consists of two components, normal cost and unfunded accrued liability (“UAL”). The normal cost is expressed as a rate that is applied to pensionable payroll costs and reflects the cost of pension benefits earned by employees in the current fiscal year. The UAL payment is a flat dollar amount that represents a portion of the cost of past benefits earned by employees, but for which, because of deviations in actual experience and changes in assumptions about investment performance, the normal cost rates established for those prior years have been determined to be insufficient to provide the promised retirement benefit. The CalPERS actuaries recalculate the total UAL each year and an updated multi-year amortization schedule is provided to show the projected annual minimum payments.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

2. Annual UAL Prepayment: CalPERS offers the option to make monthly payments on the UAL or prepay the entire annual UAL amount at a discounted level by the end of July. Assuming the City’s current reserves meet theirrespective reserve policies, at that point the City will prepay its annual UAL payment each July to achieve budgetary savings.

3. Funded Ratio Goal: The City’s goal is to achieve and maintain a funded ratio ranging from 85% to 100% for each of its pension plans. A funded ratio of 100% signifies that the City’s assets held with CalPERS, in addition to assets held in other pension accounts, match its accrued liabilities for pension. If the City has assets in a Section 115 Trust, these assets should be included in the City’s funded ratio calculation.

4. Section 115 Pension Trust: The City will establish and maintain a pension stabilization fund in the form of a Section 115 Pension Trust (“Trust”). Assets in the Trust may be used only for pension related costs and at the direction of the City Council. The City’s objective with the Trust is to accumulate assets to fund its CalPERS pension costs, as well as mitigate the budget impact of costs associated with future UAL. The City will strive to meet the following guidelines:
• Initial Deposit: It is recommended that the balance of the City’s internal pension reserve be transferred to the Trust in FY 2023-24 to initially fund the Trust. • Investment Portfolio Selection: City staff will work with its advisory team, including the Trust’s investment advisor, to select investment portfolios based on the City’s risk tolerance and projected withdrawal schedule from the Trust. • Ongoing Deposits: At the end of each fiscal year, the City will evaluate the economic feasibility of an additional annual contribution to the Trust. Additional annual contributions will be made from surplus remaining after all other City reserve policies have been met.
• Enterprise Funds: A portion of the City’s pension costs within its CalPERS Miscellaneous Plan are attributable to employees within the City’s Enterprise Funds. Therefore, the City will ensure that any deposits to the Trust and withdrawals from the Trust are made in consideration of this fact to ensure equitable cost/benefit between City funds and CalPERS Plans. In years when Enterprise Funds have met their minimum reserve policy goals, such Enterprise Funds can contribute a portion of remaining surplus to the Trust.

The City will strive to ensure that any withdrawals from the Trust benefit the Enterprise Funds equitably.
• Use of Trust Funds: The funds in the Trust may be used for any of the following purposes at the City’s discretion: (1) City’s annual UAL payment to CalPERS, (2) City’s annual normal cost payment to CalPERS, (3) reimbursement to the City for CalPERS pension costs, and (4) Additional Discretionary Payments to CalPERS.
• Funding Goals: As stated above, the City is targeting a funded ratio ranging from 85% to 100% for each of its pension plans. When measuring its funded ratio, the City should incorporate assets in the Trust, in addition to the assets under management by CalPERS.

The City may consider foregoing contributions to the Trust if its funded ratio is determined to be too high, or if the current assets on deposit in the Trust are projected to be sufficient to cover budgetary fluctuations in the future.

5. Additional Discretionary Payments: CalPERS allows member agencies to make Additional Discretionary Payments (“ADPs”) at any time and in any amount, which would serve to reduce the Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

City’s UAL and future required contributions. Once the City’s Trust is established, the City has the option to make ADPs to CalPERS using the assets held in the Trust, if desired. The City will consider ADPs within the context of its annual evaluation of reserve levels, budgetary requirements, funded ratio, and other timing considerations unique to CalPERS’ investment performance. ADPs may prove to be advantageous in the future once Trust levels are funded to sufficient thresholds to stabilize budgetary volatility.

6. Fresh Start: CalPERS member agencies can voluntarily opt into a shorter UAL amortization with level annual payments, called a Fresh Start. A Fresh Start allows the agency to pay off its UAL faster and with level payments, which generates lower cumulative payments and aids in budgeting. However, annual Fresh Start payments are typically higher in the near term and there is no flexibility to undo the Fresh Start. The City will annually evaluate the pros and cons of a Fresh Start after the latest CalPERS actuarial valuation report containing the Fresh Start amortization schedule is released.

7. Pension Obligation Bonds: Pension Obligation Bonds (“POBs”) are a tool that can be used to provide an ADP to CalPERS upon the determination that the cost to borrow the funds for the payment is less than continuing to make the projected prescribed UAL payments at the current discount rate. If the City considers issuing POBs, the following guidelines will apply:
• Expert advice and analysis by actuaries and municipal advisors will be utilized to quantify the risk of CalPERS investment underperformance (including discount rate reductions, stock market crashes, or sustained investment underperformance) and the threshold at which the City would be worse off issuing POBs versus not. • Significant education and evaluation will occur at the City staff and Council level given the complexity of POBs.
• The interest rate on the POBs shall be at least 2.5% less than the current CalPERS discount rate.
• The final maturity date on the POBs will be no greater than the final projected payment date of the UAL at the time the POBs are issued.
• The POBs structure will contain an early call provision. • The POBs shall not finance normal cost and shall only be used to refinance UAL. • The POBs should provide significant demonstrated cash flow savings. • The City shall budget and transfer at least 25% of projected cash flow savings to the Trust to mitigate against future UAL likely to occur. Any cash flow savings not transferred to the Trust shall be transferred to the City’s other reserves.

8. Policy Review: The City will review this policy periodically to determine if changes to this policy are necessary to ensure progress is being made towards funding the City’s CalPERS pension costs and mitigating the impact of the costs associated with future UAL.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

RESOLUTION NUMBER: -2023

CITY OF SEBASTOPOL

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SEBASTOPOL AUTHORIZING APPROVAL OF THE 115 TRUST AND APPROVING A BUDGET AMENDMENT FOR THE INITIAL DEPOSIT WHEREAS, the City of Sebastopol has previously taken steps to control pension costs, including setting aside funds in an internal City pension reserve, which has a current balance of approximately $2.8 million; and, WHEREAS, over the past few years, the City has discussed moving these internal funds into a Section 115 Trust to capture the benefits of a trust; and,
WHEREAS, assets in a Section 115 Trust are irrevocably committed to the government function specified in the applicable trust agreement; and,
WHEREAS, monies held in such trusts can be invested in accordance with the rules governing those trusts, which are different from the investment rules for the City’s pooled investments; and, WHEREAS, setting aside funds in a Section 115 Trust should, over time, allow the City to earn more interest from its reserves than it otherwise would if those funds were left in the General Fund. Especially in today’s higher interest rate environment, even the more conservative/moderate Section 115 Trust investment options are generating a strong yield; and,
WHEREAS, after City Council approval of the Trust, City staff will work with Shuster to finalize the documents and optimize an investment portfolio for the City’s Trust assets (based on the City’s risk tolerance and expected time horizon for withdrawals from the Trust); and, WHEREAS, once this step is completed, the Trust account will be set up and the $2.8 million initial deposit can be made to the Trust; and,
WHEREAS, an appropriation of $2.8M to be transferred to the 115 Trust has not been appropriated in FY23- 24 adopted budget.

NOW, THEREFORE, BE IT RESOLVED that the City of Sebastopol City Council hereby approve a budget amendment in the Pension Reserve Fund as necessary to fund the Trust account that will be set up and the $2.8 million initial deposit can be made to the Trust.

The above and foregoing Resolution was duly passed, approved, and adopted at a meeting by the City Council on the 17th day of October, 2023, by the following vote:

VOTE:

Ayes:

Noes:

Abstain:

Absent:

APPROVED: _______________________________________
Mayor Neysa Hinton
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

ATTEST: ______________________________________________________________________ Mary Gourley, Assistant City Manager/City Clerk, MMC
APPROVED AS TO FORM: __________________________________________________ Larry McLaughlin, City Attorney
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

CITY OF SEBASTOPOL

FISCAL SUSTAINABILITY DISCUSSION
MAY 16, 2023
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

2 Project Objectives
Assess current fiscal condition of City
Understand key aspects of financial forecast
Bonding options/feasibility for new projects
Identify potential financial challenges and risks

Rising pension costs
Inflation, labor, capital needs
Legislative changes
Discuss potential strategies to improve financial position
Pension cost management
Revenue enhancements
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

3 Table of Contents1. Key Aspects of Fiscal Sustainability2. Financial Snapshot3. Headwinds for City’s Financial Health A. Rising Pension Costs
B. StaffingC. Capital Improvement Project FundingD. Legislative/Political

4. Additional Revenue Sources5. Final Takeaways
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4 Executive Summary
City has maintained minimum unassigned reserve targets over last 5 years
Over 22% of annual budget; unassigned reserve target of 15%-20%
Reserves have been bolstered by one-time revenues (not recurring sustainable revenues)
$0.9M FY 2022-23 structural deficit projected to widen to $2.6M in FY 2023-24, increasing to $3.0M by FY 2028-29
Unassigned reserves will be depleted by FY 2024-25 (based on the City’s current forecast)
City can consider revenue enhancement and/or cost management strategies to balance budget and enhance resiliency to future economic shocks
Pension Cost Management: Section 115 Trust to mitigate pension costs increases/volatility
Revenue enhancement considerations: Sales Tax, TOT, UUT, Cannabis Tax, Parcel Tax
Voter approved bonding options for capital: General Obligation, Parcel Tax Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

1. KEY ASPECTS OF FISCAL SUSTAINABILITY
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

6 Are City’s essential service levels at risk if there is an economic downturn or other “Black Swan” events (i.e., COVID, natural disaster)? Delivery of Essential Services
Economic environment; Reserve levels (At/above policy levels created through comprehensive evaluation of areas of specific risk); Revenue and expense historical trends and projections; Budgetary performance; Budgetary flexibility; Debt burden; Policies & practices Financial Health
Pay-as-you-go vs. Debt; Reserve levels; Bonding Capacity; Are critical assets being maintained to prevent potential catastrophic events and/or essential service disruptions? Capital Funding
Sustainability under financial and/or operational duress; 5-10-year forecasting; How would the City fare assuming a near-term recession or a catastrophic event? Resiliency
NHA’s Fiscal Sustainability Criteria
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

2. FINANCIAL SNAPSHOT
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

8 2022-23 General Fund Budget Revenues
$12.1M Total Budget
$9.3M (77%) derived from
taxes

Property Tax and Sales/Use
Taxes are the City’s largest revenue categories

$0.7M (6%) increase in total
revenues (including transfers
in) compared to FY 2021-22

Notable increase to
Intergovernmental revenue, due to one-time Covid-19 relief funds in FY 2022-23 Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast Property Taxes

26.6%
Sales & Use Tax

20.4%
Measure T - 1/4 cent

6.7% Measure Y - 1/2 cent

13.4%
Utility
User
Tax

6.0%
Transient
Occupancy Tax

3.7% Franchise Fees

3.0%
Licenses & Permits

5.4%
Fines & Forfeitures

0.2%
Interest & Rents
Intergovernmental 0.6%

7.7% Charges for Current
Services

1.1%
Community Center
Fees

0.5%
Miscellaneous/Other
Income

3.8%
Transfers In:

0.8%
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

9 2022-23 General Fund Budget Expenditures
$13.0M Expenditures
$7.3M (56%) Public Safety

$2.0M (18%) increase in
total expenditures
(including transfers out) compared to FY 2021-22
Notable increases in public safety and public works
expenditures
Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast City Council

3.7%
City Manager

1.8%
City Attorney

2.3%
City Clerk

3.1%
Finance

2.6%
Planning

4.6%
Building

1.4%
Engineering / Storm
Water

2.6% Fire

10.6%
Police

45.7%
Public Works

11.3%
Community Center

4.9%
Non Departmental

2.2%
Debt Service

2.0%
Total Transfers Out

1.2%
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

10 43.4% 56.5% 32.7% 22.9% 27.6%
$0.0$2.0
$4.0$6.0$8.0
$10.0$12.0$14.0
FY 2017-18 FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22
Millions
Unassigned Reserves BalanceTotal Resources Available:(Revenues & Transfers In)Total Resources Used:(Departmental, Other Expenditures & Transfers Out)Policy Reserve Level (15%) General Fund Revenues, Expenses, & Fund Balance5-Year History
City has been operating with a
structural deficit for several years

Unassigned reserves have decreased by
39% (from $5.0M to $3.1M) over last three years, despite $3.0M in one-time funds
Without one-time funds, reserves would have been depleted

One-time funds:

$900K of one-time ARPA funds FY 2021-22
City also received one-time funds FY 2019- 20 ($1.6M; State flood-related money + insurance reimbursement) and FY 2020-21 ($0.5M; County homeless initiatives + CARES Act) Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast $3.9M
$5.0M
$4.0M
$2.7M $3.1M
Includes one-time
funds
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

11 16.5% 3.1%
-16.3%
-28.4%
-41.0%
-55.4%
-71.6%
($12.0)($10.0)
($8.0)($6.0)($4.0)($2.0)
$0.0$2.0$4.0$6.0$8.0
$10.0$12.0$14.0$16.0
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Millions
Unassigned Reserves Balance Total Resources Available:
(Revenues & Transfers In)
Total Resources Used:(Departmental, Other Expenditures & Transfers Out) Policy Reserve Level (15%)
General Fund Budget + ProjectionResources Used projected to exceed Resources Available
FY 2022-23 budget
deficit and
projected FY 2023-24 deficit decrease reserve levels to 3.1% by FYE 2024
Revenue decrease
for FY 2023-24 due to one-time funds (ARPA + donation) in FY 2022-23
Projected deficits
impact unassigned reserve balance ($11.3M) by FYE 2029 Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast $2.1M $0.4M
($2.2M)
($3.9M)
($5.8M)
($8.3M)
($11.3M)
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

12 General Fund Budget + ProjectionKey Forecast Assumptions
Forecasted revenues & expenses are based off
the FY 2023-24 proposed budget data

Projected deficits
exaggerated by inflationary expenditure assumptions compared to conservative revenue growth rates Annual Growth Rate (2025 - 2029)
Revenues:

Property Tax 2.00%
Sales & Use Tax 2.00%Measure T - 1/4 cent 2.00%Measure Y - 1/2 cent 2.00%Utility User Tax 1.50% Expenses:

Salaries 3.00%CalPERS Rates 7.70% - 25.70% (depending on plan)Health Insurance 5.00% - 12.00% (depending on provider)Materials & Supplies 5.00% Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

13 16.5% 3.1%
-16.3%
-28.4%
-41.0%
-55.4%
-71.6%
($12.0)($10.0)
($8.0)($6.0)($4.0)($2.0)
$0.0$2.0$4.0$6.0$8.0
$10.0$12.0$14.0$16.0
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Millions
Unassigned Reserves Balance Total Resources Available:
(Revenues & Transfers In)
Total Resources Used:(Departmental, Other Expenditures & Transfers Out) Policy Reserve Level (15%)
General Fund Budget + Projection
Additional Revenue and/or Cost Containment Required to Maintain Reserves
New Revenue of
$3.1M required by FY 2028-29
to maintain 15% reserve target

Strong Property
Tax and Sales Tax Revenue Growth (5% annually) would generate $1.4M/year by FY 2028-29 Source: City of Sebastopol General Fund/Transaction & Use Fund History and Forecast Additional Revenue to Maintain 15% Reserve Policy
$1.6M $2.7M $1.7M $2.0M $2.6M $3.1M
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

14 Credit Rating ScorecardEstimated “AA” Category GO Rating Using S&P Scorecard
Strengths:

Economy: Median Household Income 127% of
national

Liquidity: $11.2M in governmental
cash/investments

Budgetary Flexibility***: $8.1M in General Fund
balance (74% of General Fund expenditures)

Debt & Contingent Liabilities: Low debt burden

Weaknesses:

Budgetary Performance***: Negative net result
in General Fund and total governmental funds

Pension Liability
*** Denotes potential area of credit concern – structural deficit (budgetary performance) could lead to weakening reserve levels (budgetary flexibility) S&P's Local Government GO Criteria (Issuer Credit Rating) Key Rating Factors Weight Score
Institutional Framework 10% 2.00 Economy 30% 1.50 Management 20% 3.00 Financial Measures
Liquidity 10% 1.00 Budgetary Performance 10% 3.00 Budgetary Flexibility 10% 1.00 Debt & Contingent Liabilities 10% 1.00 Estimated Score 1.85 Indicative Rating Outcomes
Estimated Score Indicative Rating

1.00-1.64 AAA1.65-1.94 AA+1.95-2.34 AA2.35-2.84 AA2.85-3.24 A+3.25-3.64 A3.65-3.94 ASource: City of Sebastopol 2022 ACFR Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

15 City’s Debt ProfileLow Debt Burden; CalPERS UAL Debt is Largest Debt on Balance Sheet *As of 6/30/2022** Energy conservation debt offset by energy savings Source: City of Sebastopol 2022 ACFR
Annual Debt Service as % of FY
2022-23 General Fund Budget
Source of
Repayment
Final Maturity
(FYE)
Outstanding
Debt Principal*Governmental Activities
Special Assessment Bonds (Improvements to Woodstone Center) $35,000 2023 Assessments N/ACapital Lease Agreement (Clean Renewable Energy Projects) $292,767 2025 General Fund 0.75%Lease Financing Agreements (Purchase of a Mobile Home Park) $308,102 2028 General Fund 0.50% $338,264 2026 General Fund 0.66% 2021 Refunding Lease (Refunds 2006 Financing Used for Various Projects, Including a Sewer Force Main, Skate Park, Water Booster Pump, Solar Panels, and more) $1,126,307 2037 General Fund 0.66% 2022 Finance Purchase Agreement (Energy Efficiency and Conservation Equipment and Improvements)** Total $2,100,440 --Business-Type Activities
$955,734 2035 Water Fund N/A 2021 Refunding Loan (Refunds 2015 Financing Used for Removal of Arsenic from Water Well Seven and its Treatment System)$487,375 2026 Water/ Wastewater N/A 2021 Refunding Lease (Refunds 2006 Financing Used for Various Projects, Including a Sewer Force Main, Skate Park, Water Booster Pump, Solar Panels, and more) $3,812,582 2037 Water/ Wastewater N/A 2022 Finance Purchase Agreement (Energy Efficiency and Conservation Equipment and Improvements)** Total $5,255,691 --CalPERS Pension Liability
General Fund/ 8% - 10% (FY 2022-23)
Water/Wastewater
Unfunded Accrued Liability (“UAL” – More Detail in Section 3A of Presentation) $15,770,000 2046 Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

16 Annual Operating Budget Policy• Maintain multi-year financial forecast
Capital Improvement Program• Maintain 5-year capital
improvement program
Revenue Policies• Maintain diversified and stable
revenue base
Expenditure Policies• Expenditures are to be budgeted
and controlled to not exceed estimated revenues
Cash Management/ Investment Policy• Investments will prioritize safety, liquidity, and return on investment, in that order
Debt Management Policy• City should plan and use debt in a manner that sustains financing payments at manageable levels Fund Balance Policies• Unassigned General Fund
balance of 15-20% of annual operating expenditures
• Maintain CalPERS Retirement &
OPEB Reserve
Financial Reporting Policy• City’s accounting and financial reports are to be maintained in conformance with GAAP
Security & Risk Practices• Having faced a cyber/fraud
incident in 2021, the City has recently implemented protective measures recommended by Kroll, a leading risk consultant.

Pension Funding Policy• Recommended; outlines longterm strategy for managing and stabilizing rising pension costs
Very Comprehensive City Policies & PracticesNew Pension Funding Policy Could be Considered This policy is a
recommendation and
has not yet been
approved by the City
Source: City of Sebastopol FY 2022-23 Budget
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

3. HEADWINDS FOR CITY’S FINANCIAL HEALTH
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

18 Headwinds for City’s Financial Health
Labor•CalPERS Costs: Poor CalPERS investment performance is projected to increase the City’s UAL by 50% or more
•Staffing: Additional
annual costs as new positions are added. Inflationary pressures and salary increases Capital Project Funding•Limited bonding capacity projected in the General Fund and Enterprise Funds •Due to weakened General Fund reserve levels, it is currently not feasible to use reserves to pay for various capital projects, especially large ones Economy•Current recessionary pressures •Sales Tax revenue, which makes up almost 40% of the City’s governmental activities revenue, can be volatile under recessionary pressures
•TOT revenue could
also be affected
Legislative/Political•Local or statewide legislation that impacts the City’s ability to raise revenues •California Business Roundtable Initiative (November 2024 Ballot) •City’s UUT would need to be readopted in compliance with the Initiative, if it passed Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

3A. HEADWINDS FOR CITY’S FINANCIAL HEALTH:

RISING PENSION COSTS
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

20 Background - Retirement Plans
2 CalPERS plans

Miscellaneous: 100 covered members
Safety (Police & Fire): 61 covered members

PEPRA (2013) helpful to manage
long-term pension costs for new employees

99% of UAL is attributable to Classic
employees
Benefit Group # of Actives % of Actives Benefit FormulaMiscellaneous 18 64.3% 2.0% @ 55 PEPRA Miscellaneous 10 35.7% 2.0% @ 62
Total Active Members 28 100.0% -
Total Covered Members 100 - -
Benefit Group # of Actives % of Actives Benefit Formula Safety Fire 1 7.1% 3.0% @ 50
Safety Police 7 50.0% 3.0% @ 50
PEPRA Safety Fire 1 7.1% 2.7% @ 57
PEPRA Safety Police 5 35.7% 2.7% @ 57
Total Active Members 14 100% -
Total Covered Members 61 - -

MISCELLANEOUS PLANS

SAFETY PLANS
Source: City of Sebastopol CalPERS Actuarial Valuation Reports (June 30, 2021) Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

21 $39 Million
$55 Million
$17 Million
$-
$5
$10 $15 $20 $25 $30 $35 $40 $45 $50 $55
Millions
CalPERS Pension Funded Status
Background on How CalPERS WorksTwo Payments Made to CalPERS Annually
(1) Normal Cost (“NC”) = Annual cost for current employees
(2) Unfunded Accrued Liability (“UAL”): Annual payment to amortize the “debt” to CalPERS

CalPERS actuaries calculate how much the City is required to have in its account with them to pay out benefits to City’s retirees over the next 30-40 years (Actuarial Liability)
CalPERS annually calculates the Market Value of City’s assets held on account with them; Most public agencies have less assets than required to meet Actuarial Liability
This shortfall (i.e., the “UAL”) is not repaid all at once but amortized over time with the City paying down a portion each year (principal and interest)  CalPERS uses a “discount (i.e., interest) rate” of 6.80%  CalPERS annually adjusts this repayment schedule by adding a new “base” (i.e., layer) which adds to (in bad investment years) or lowers (good investment years) the overall repayment schedule  Over the past 20 years, the addition of these “layers,” along with other CalPERS assumption changes, has created a very irregular repayment shape for most CalPERS public agencies Actual Market
Value of Assets
Actuarial
Liability
Shortfall (UAL)
Note: The numbers reported in this chart assume FY 2021-22 returns of -7.5%, FY 2022-23 returns of 3.35%, and 6.80% returns from FY 2023-24 onward.Due to rounding, amounts may not add up exactly.

Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

22 Now …
Sluggish returns outlook (<7%)
Assumptions have changed/changing
Discount Rate: 8.25% → 7.00% → 6.80%
Inflation rate (prices going up)
Mortality rates (people living longer)
Actuarial ValuaSon → Market ValuaSon
Shorter (20 year) amortization
UAL payments have grown rapidly from
past changes, remain exposed to the effects from future poor investment returns and assumption changes Why CalPERS Costs have Trended Higher
Then (late 1990s)…
Robust investment returns (10%+)

Retirement plans were “SuperFunded” through the late 1990s
Earnings on funds were more than
adequate to cover retirement costs

Super-funded status induced
widespread retirement benefits enhancements….

Historical PERS
Returns
5-Year: 6.7%
10-Year: 7.7%20-Year: 6.9%30-Year: 7.7%
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

23 $0.0$0.2$0.4$0.6$0.8$1.0$1.2$1.4$1.6$1.8$2.0
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Historical and Projected UAL Payment ScheduleCurrent Estimated Pension Debt Approaching $20 Million
The City’s UAL balance had nearly
doubled from $7.9M in FYE 2014 to
$14.7M in FYE 2020

The City’s UAL balance as of FYE 2021 is
$4.2M lower than FYE 2020 but is expected to increase $5.3M in the next CalPERS valuation
The City’s UAL balance could increase
another $1.1M if CalPERS earns 3.35% in FY 2022-23 (CalPERS’ investment returns as of end of March)
City’s $0.8M UAL payment in 2018 has
increased to $1.3M in 2023. Projected payments peak at nearly $1.9M in 2032.
Rapidly increasing impact to City’s budget
Note that the UAL will fluctuate annually
moving forward based on future CalPERS investment returns & assumption changes 2023:
$16.9M
2022:
$15.8M
2021:
$10.5M
2020:
$14.7M
UAL
Balance
(FYE):

Returns: 4.7% 21.3% -7.5% 3.35% (est.)
UAL Payments (6/30/2021
Actuarial Valuation)
New UAL Payments from
-7.5% FY 2021-22 Returns
Historical UAL
Payments
Source: CalPERS Pension Outlook Tool. Assumes FY 2021-22 returns of -7.5%, FY 2022-23 returns of 3.35%, and 6.80% returns from FY 2023-24 onward.

New UAL Payments from
Hypothetical 3.35% FY
2022-23 Returns
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

24 UAL Cost-Containment Strategies – Not Mutually Exclusive (1) Prepay UAL early in Fiscal Year (≈ 3.3% discount)(2) Negotiate Cost Sharing With Employees • Require employees to pay their share; new employees already governed by lower cost/benefit PEPRA plans • Negotiated cost sharing of the City’s share
(3) Fresh Start Amortization offered by CalPERS
• Pros: Smooths payment, shortens repayment period; reduces overall interest paid from shorter amortization period • Cons: New structure “locked-in” + increased annual payments in near term; still amortized at discount rate (4) Use Cash Reserves to Pay Extra (two options)
• Section 115 Trust - Separate trust solely dedicated to pension/OPEB• ADP – Reduce UAL through direct lump sum payment to CalPERS • Choose optimal amortization bases to pay off
(5) Restructure All or Portion of Remaining UAL
• Restructure portion of UAL at lower bond interest rate and “smooth out” payments for enhanced budget predictability, near and mid-term potential savings, and preservation of cash for other critical projects Currently not
recommended;
Continue to
Monitor
Currently not
recommended
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

25 Use Cash Reserves: Section 115 Trust
What is it? Dedicated (restricted to pension/OPEB) account managed by 3rd party
Pros:

Potential for increased investment returns vs. current General Fund reserves
General Fund investments restricted by Government Code (limits types of instruments and maturities)
Flexibility – more investment options than CalPERS and the City can decide when and how to use
Longer-Term: Trust funds can grow over time and pay off full UAL in the future
Shorter-Term: Apply during challenging budget years or to “smooth” payment spikes in UAL and/or Normal Cost

Diversify asset management away from CalPERS
Potential shock absorber for volatility from CalPERS investment performance & assumption changes

Cons:

Market risk (dependent on type of investment portfolio)
Note: The Trust will show up as an asset on the City’s financial statements, but will not technically offset UAL until funds are transferred to CalPERS
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

26
What is it? City makes Additional Discretionary Payment (“ADP”) directly to CalPERS and designates which amortization base(s) / layer(s) shall be paid off
CalPERS will eliminate payments associated with the portion of the UAL paid off, essentially giving the City credit at the discount/interest rate (currently 6.8%)
Pros:

Reduced future payments
Reduced UAL / higher CalPERS funding ratio
Broader, less restrictive CalPERS investment portfolio has potential for higher returns
Cons:

Re-investment and market timing risk with ADP funds
No options for other investment portfolios like there is with a Section 115 Trust Use Cash Reserves: ADP
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

27 Section 115 Trust vs. CalPERS ADP Comparison
OPTION Section 115 Trust CalPERS ADP
No Yes Reduced UAL & UAL Payments with CalPERS
Yes No (but the Trust will show up as an asset on the City’s financial statements) Reduced Pension Liability in ACFR Control of Investment Strategy Yes NoFunds Managed By Trust Administrator CalPERS No Yes (annual pension or OPEB expense, ADP, OPEB, etc.) Flexibility in Uses Immediate; Length of time varies based
on which amortization component is
paid off (City's amortization bases
currently range from 1 - 27 years)
Varies; Depends on when City utilizes
funds to pay liabilities Savings
Enhanced Budgetary Flexibility Yes Limited
Historically, hundreds of ADPs made by
CA agencies annually
Hundreds of CA agencies maintain
Section 115 Trusts How Many Agencies in CA Have Used?
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

28 $-
$0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 $1.8 $2.0
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Deposits to TrustProjected UAL Payments (CalPERS Pension Outlook Tool)*Net Payments (Incl. Deposits & Withdrawals) Considerations for Managing New 6.80% UAL Debt
Apply Section 115 Trust Assets to Smooth Out Peak UAL Payments
Assumes City’s existing pension reserve of
$2.8M is transferred to a Section 115 Trust

A main benefit of moving funds to a Section 115
Trust is the increased potential for interest
earnings vs. current General Fund investments (especially in today’s inflationary environment)
Assumes an additional total of $0.4M is
deposited in 2024 - 2025

Assumes a 4.50% long-term investment
returns rate**

Funds could be withdrawn from the Section
115 Trust during higher payment years to stabilize net impact to the General Fund
Smooth annual payments at $1.4M
Projected to generate $1.4M of savings, net of existing pension reserves and additional deposits

Budgetary savings during elevated UAL
payments in years 2027 – 2037 will help protect the City’s General Fund deficit from widening *Assumes FY 2021-22 returns of -7.5%, FY 2022-23 returns of 3.35%, and 6.80% returns from FY 2023-24 onward. **This long-term investment returns rate is not
fixed/guaranteed
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

29 Section 115 TrustOverview of Steps to Select the Provider and Establish the Trust Evaluate potential
Section 115 Trust
Providers
Select Provider and
work with its
Investment Advisor to
determine preferred
investment portfolio
Formal City Council
adoption of necessary
documentation
Trust established and
funded by City (if
desired at that time)
Establishment of the Trust can be completed in 30 – 90 days Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

3B. HEADWINDS FOR CITY’S FINANCIAL HEALTH:

STAFFING
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

31 Summary of City-Wide Staffing Study
In the fall of 2021, the City engaged Regional Government Services (RGS) to conduct a City-wide staffing study
Study completed in September 2022
City has approved a couple of the staffing changes recommended by RGS
City staffing is a long-term solution that will continue to be discussed and evaluated

Additional annual staffing costs estimated by the study are not factored into the City’s forecast
Source: RGS City-Wide Staffing Study (2022)
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

3C. HEADWINDS FOR CITY’S FINANCIAL HEALTH:

CAPITAL IMPROVEMENT PROJECT FUNDING
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

33 Overview of City’s Capital Improvement Plan (CIP)
$30.8M of CIP expenditures for FY 2022-23 through FY 2027-28
Expenditures concentrated in bikes, pedestrians & safety projects and paving projects
Does not include larger potential facility projects such as a fire station, library, City hall, etc.

Source: City of Sebastopol 5-Year Capital Improvement Program from the DRAFT FY 2023-24 Budget
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Total Project Category Expenditures
Bikes, Pedestrians & Safety $48,500 $1,601,000 $3,411,000 $9,801,000 $0 $0 $14,861,500 Transition Plan ADA Projects $35,000 $338,500 $0 $0 $0 $0 $373,500 Housing Projects $0 $10,500 $402,000 $0 $0 $0 $412,500
Parks Projects $256,500 $779,000 $445,000 $0 $0 $0 $1,480,500 Paving Projects $472,400 $1,470,000 $2,577,500 $1,255,000 $0 $0 $5,774,900 Sewer/Wastewater Projects $79,000 $1,730,500 $581,500 $0 $0 $0 $2,391,000Stormwater Projects $52,000 $202,000 $1,366,500 $400,000 $0 $0 $2,020,500Water Projects $392,000 $635,000 $808,500 $1,642,000 $0 $0 $3,477,500 Arts Projects $6,500 $50,500 $0 $0 $0 $0 $57,000Total $1,341,900 $6,817,000 $9,592,000 $13,098,000 $0 $0 $30,848,900 Unfunded $0 $205,500 $1,686,500 $1,655,000 $0 $0 $3,547,000 Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

34 Funding Options for Capital ProjectsPay-Go, Debt, & Grants Cash/
Pay-Go
•Pro: Minimize ongoing
cashflow (no debt payments)
•Con: Deplete cash
balance
Debt
•Pro: Maintain cash
balance and financial liquidity
•Con: Pay financing costs
and annual debt service
Grants
•Pro: Free/cheap money
•Con: Highly competitive;
timing of funds may be out of City’s control; “strings” sometimes attached Funding
Options
Lease Revenue Bond/COP
General Obligation Bond
General Fund repayment
(new/existing revenue
source)
Property tax repayment
(voter-approval required)
New revenue source
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

35 Funding Options for Capital Projects (Hypothetical $10M Project)Lease Revenue Bond, General Obligation Bond, Parcel Tax Lease Revenue Bond General Obligation Bond Parcel Tax
$750,000 $750,000 $750,000 Annual Debt Service (30-year repayment) Property Owners: ~$270 per
parcel per year
Property Owners: ~$34 per
$100K A.V. per year;
~$170 per $500K A.V. per year
Paid for by General Fund
No Yes – 2/3rds Yes – 2/3rds Voter Approval Required
Tax Formula N/A Based on % of Assessed Value Fixed Tax Formula Capital Improvements,
Programs or Services Capital Improvements Only Capital Improvements Only Use of Bond Proceeds Use of Tax Revenue N/A Debt Service Only Debt Service and OperationsKey Benefit No voter-approval required Lowest interest rate Most equitable tax distribution Higher homeowner tax
amount than GO Bond
No ability to fund operational
costs Key Negative General Fund Budget Burden
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

36 Capital Funding Capacity in Water & Wastewater Enterprise Funds
Water/Wastewater Rate Study (Willdan 2019)

Water/Wastewater rates implemented in
FY 2019-20 through FY 2022-23

Water/wastewater revenues insufficient
to meet rising operating expenses

Net Revenues insufficient to generate
bonding capacity or fund CIP
New debt will typically require debt service coverage of 1.20x

The City has authorized a contract for a
new utility rate study
This rate study will propose new utility rate increases to support future capital
Wastewater Enterprise Fund
Actual
FYE 2019 FYE 2020 FYE 2021 FYE 2022
Net Revenues: $251,222 ($142,289) $6,037 ($377,713)Debt Service: $90,117 $89,132 $96,423 $72,852 Debt Service Coverage: 2.79x -1.60x 0.06x -5.18x Water Enterprise Fund
Actual
FYE 2019 FYE 2020 FYE 2021 FYE 2022
Net Revenues: $590,697 $255,283 $500,786 $143,907 Debt Service: $141,949 $142,515 $192,484 $158,197 Debt Service Coverage: 4.16x 1.79x 2.60x 0.91x Source: City of Sebastopol Annual Comprehensive Financial Reports Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

3D. HEADWINDS FOR CITY’S FINANCIAL HEALTH:

LEGISLATIVE/POLITICAL
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

38 Possible Legislative/Political Headwinds to Consider • Limits ability of voters and state and local governments to raise revenues for government services
• Revisions to local tax authority: Requires voter approval for taxes applied to territory that is annexed; Requires sunset date on all new taxes; General tax ballot label must say “for general government use” • Revisions to local fee authority: Fees must be
“reasonable to the payor”. “Actual cost” of providing the product or service for which the fee is charged is defined as the “minimum amount necessary to reimburse the government…” • Retroactive Window: Taxes and fees approved after
January 1, 2022, will sunset in December 2025 if not readopted in compliance with the initiative California Business Roundtable Initiative (Initiative #21-0042A1) Local initiatives to
terminate existing
transaction and use
tax measures
California Business
Roundtable
Initiative (November
2024 Ballot)
Any other legislation
impairing the City’s
current/future
revenue
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4. ADDITIONAL REVENUE SOURCES
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

40 Voluntary Taxes
Transaction and Use TaxBusiness/Franchise TaxTransient Occupancy TaxUtility Users Tax Studies
Fire Department Feasibility Study (Completed 2023)City-Wide Staffing Study (Completed 2023)Fee Study (Completed 2020)Utility Rate Study (Currently in progress; previously completed in 2019)Fiscal Sustainability Assessment (in progress) Actions for the Future
Potential Sales Tax IncreasePotential Utility User Tax IncreasePotential Transient Occupancy Tax IncreasePotential Parcel Tax (June 2024)?*Cost Allocation Study (Most recently completed in 2000)Cannabis Tax Feasibility Study Sebastopol Has Done A Lot… What are Actions for the Future? *Use of tax revenues to be determined
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

41 Potential Revenue Enhancements$2.5M Hypothetical Funding Gap Goal
Hypothetical $2.5M funding gap is filled in with the following:

Sales & Use Tax Increase of 0.50% 
$1.40M/year

UUT Increase of 1.25%  $0.23M/year

TOT Increase of 2.00%  $0.08M/year

Potential Parcel Tax in June 2024 
$0.79M/year

This $2.5M funding gap goal can be
reached in various ways
E.g., larger parcel tax and lower sales & use tax increase; cost containment strategies
$1.40M
Sales & Use Tax
Increase (0.50%)
$0.23M
UUT Increase
(1.25%)
$0.08M
TOT Increase
(2%)
$0.79M
Parcel Tax
($790K/yr)
$0.00$0.25
$0.50$0.75$1.00$1.25$1.50$1.75$2.00$2.25$2.50
Millions
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

42 Sales & Use Tax Rate
City sales & use tax rate (9.25%) 2nd highest within nine major Sonoma County cities
Cotati/Petaluma (9.50%)
Sales & use tax rate for Sonoma County, any of its
cities, and the Sonoma County Transportation Authority is currently capped at 10.25%
CA Senate Bill 152 (2018) raised the cap from 2% to 3% above the State/local base sales & use tax rate of 7.25%
The City currently has capacity for 1% in new taxes,
however future countywide taxes could utilize some of this capacity
Increasing the City’s rate by 0.50% is projected to
generate an additional ~$1.4M/year

9.25%

9.00%

8.50%

8.50%

9.50% 9.00%

9.50%

9.00%

9.25%
Source: California Department of Tax and Fee
Administration
Sonoma County:

8.50%
Sales & Use Tax $1.10M Funding Gap
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

43 83.4%

16.6%
0%
10%
20%30%40%50%60%70%80%90%
100%
Yes No
Sebastopol Measure N (November 2022)
Utility Users Tax
In the November 2022 election, the City’s Measure N passed, maintaining the City’s 3.75% Utility
Users Tax (“UUT”) and removing the tax’s sunset clause
Primary Objective: Maintain City services including Police and Fire, 9-1-1 emergency services, park maintenance and repair, youth and senior recreation and for unrestricted general revenue purposes
Revenue projection: $700,000/year

Santa Rosa UUT rate  5.00%

Measure N increase from 3.75% to 5.00% = an
additional ~$230K/year
Passed
Sales & Use Tax UUT $0.87M Funding Gap
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

44 Transient Occupancy Tax
In the November 2018 election, the City’s Measure R passed, increasing the City’s Transient Occupancy Tax
(“TOT”) from 10% to 12%
Revenue projection: $514K/year
City’s TOT rate is 2nd highest (tied) of the nine major Sonoma County cities
Healdsburg has the highest (14%)

Increasing rate to 14% is projected to generate an
additional ~$80K/year

Additional TOT revenue also possible from future hotel development, such as the anticipated Hotel Sebastopol
9%
14%
10%
12%
10% 10%
N/A
12%
12%
*Levied in Sonoma County at a rate of 12% for accommodations at lodging and camping facilities in the unincorporated areas of the County.Source: Sonoma County Economic Development Board Transient Occupancy Tax Report (Q3 2022) Sonoma County:
12%*
Sales & Use Tax UUT
TOT
$0.79M Funding
Gap
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

45 Parcel Tax
A parcel tax is a special tax (similar to a CFD) on a parcel/unit of real property
The tax differs from a property tax in that it is not based on the value of the property
It is generally based on either a flat per-parcel rate or a rate that varies based on use or size of the parcel
Parcel taxes may be imposed for any municipal purpose, such as funding services, improvements to infrastructure, streets or parks, and protection of open space
Limitations of Use: A parcel tax may be levied as a general tax or restricted for a special purpose
Procedure for implementation: Parcel taxes may be levied for general purposes or restricted to a particular purpose. Parcel taxes require two-thirds voter approval
Potential levy as it relates to the City: Generating $790K in annual revenues (the amount remaining to fill the hypothetical funding gap goal) would require an annual ~$290/parcel levy
The annual levy would need to be verified by a special tax consultant Sales & Use Tax UUT
TOT
Parcel Tax
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
Millions
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

46 Local Cannabis Tax
Tax imposed on the sale, cultivation, distribution or manufacturing of cannabis

5 of 9 Sonoma County cities have Cannabis
Tax
Sonoma County also has a Cannabis Tax

Cannabis Tax Revenue:

Cotati: $0.59M (FY 2020-21 actual)
Santa Rosa: $1.8M (budgeted for FY 2022-23)
Healdsburg: $0.5M (projected in ballot measure)

Sonoma: $0.15M (budgeted for FY 2022-23)
Cloverdale: $0.27M (FY 2021-22 actual) YES
YES
YES
NO
NO YES
YES
NO
NO
Sonoma County:

YES
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

5. FINAL TAKEAWAYS
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

48 Final Takeaways
Without action or significant growth in revenues (not projected), the City’s projected structural financial deficit will reduce / eliminate its reserves over the next 3-5 years
Recommended that the City of Sebastopol…

1. Identify economic development (i.e., increasing the tax base) opportunities

2. Evaluate and attempt to secure revenue enhancements (i.e., increasing the tax rate on existing tax base)

Sales Tax Increase, UUT Increase, TOT Increase, Potential Parcel Tax (June 2024), Cannabis Tax

3. Develop long-term pension funding strategy to manage CalPERS UAL, the City’s largest debt
A Section 115 Trust can be created and dedicated towards stabilizing future pension costs

4. Identify cost containment opportunities
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

CITY OF SEBASTOPOL
ADOPTION OF A SECTION 115 TRUST & PENSION FUNDING POLICY OCTOBER 17, 2023
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

2 Executive Summary
 The City has previously taken steps to control pension costs, including setting aside funds in an internal City pension reserve, which has a current balance of approximately $2.8 million
 Over the past few years, the City has discussed moving these internal funds into a Section 115 Trust to capture the benefits of a trust
 The topic of the Section 115 Trust was brought back up to Council earlier this year when the City’s Municipal Advisor, NHA Advisors (“NHA”), delivered a fiscal sustainability presentation that touched on the City’s pension challenge and recommended the City consider a Section 115 Trust for pension  Together with NHA, City staff evaluated multiple Trust programs, and determined the Trust administered by Shuster Advisory Group, LLC to be the best for the City’s goals  In addition to adopting a Section 115 Trust, the City would also like to adopt a formal pension funding policy as part of a comprehensive pension cost management strategy
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

3 $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
20242025202620272028202920302031203220332034203520362037203820392040204120422043204420452046 Millions
CalPERS UAL Recap + Benefits of a Section 115 Trust
 City’s UAL increased from $10.5M to $16.6M
due to CalPERS’ -7.5% investment returns in FY
2021-22 (this is reflected in the latest CalPERS
actuarial reports)
 City’s UAL is projected to increase another
$0.2M due to CalPERS’ 5.8% investment
returns in FY 2022-23
 Increase will be reflected in the next CalPERS
actuarial reports released in summer/fall of 2024
 The 5.8% returns will increase the City’s annual
UAL payment beginning in FY 2025-26
 The City will be able to withdraw funds from
its Section 115 Trust during years of higher
UAL payments to stabilize the net impact to
the General Fund
 Another key benefit of the Section 115 Trust is
the potential for higher investment returns on
assets
*Assumes CalPERS investment returns of -7.5% in FY 2021-22, 5.8% in FY 2022-23, and 6.80% from FY 2023-24 onward
Projected UAL Payments*
Net Payments (Includes
Deposits and
Withdrawals from Trust)
Additional
Deposits to
Trust
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

4 Trust Evaluation and Selection
 Together with NHA, City staff evaluated
multiple Section 115 Trust administrators
based on experience, fees, investment
options, investment performance, and
other criteria
 The Trust administered by Shuster
Advisory Group, LLC (“Shuster”) was
determined to be the best for the City’s
goals
 Lowest fees and best investment
performance across comparable portfolios
 Client assets are not co-mingled with the
assets of other agencies
 Fully customizable investment portfolios (at
no additional cost)
Shuster Advisory Group, LLC
• Independent investment advisory firm and fiduciary
providing governmental and institutional retirement
plan consulting services and private wealth
management
• SEC-Registered Investment Advisor with over $5
billion in assets under management
• Currently serving over 80 cities, agencies, and public entities
• Serves as fiduciary to plan investments and provides
investment selection, monitoring, and management
• Within its Section 115 Trust program, Shuster
provides the trust administration, consultant and
investment advisor functions; Charles Schwab Trust
Bank provides trust custodian services; and Alta
Trust Company provides directed trustee services
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

5 Fiscal Impact – Trust Fees
Service Provider Annual Fee (% of Assets) Annual Fee ($) Administration Shuster Advisory Group, LLC 0.05%1 $1,400 Custody Charles Schwab Trust Bank 0.01%2 $400
Trustee Alta Trust 0.02%3 $560
Investment Management Shuster Advisory Group, LLC 0.20% $5,600 Total Annual Fees 0.28% $7,960
 At a $2.8 million asset level, the total annual fee is $7,960, which is composed of $1,400 for administration, $960 for custodian and trustee services, and $5,600 for investment management
 Annual fees are paid from Trust assets
1 – Administration fee will convert to a flat dollar fee after the end of contract year-3 based on the highest year-end balance of the first 3 contract years 2 – Custodial fee is 0.01% with an annual minimum of $400 3 – Trustee fee is 0.02% with an annual minimum of $500 and annual maximum of $5,000 Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

6 Timeline of Trust Implementation
Oct. 17: Approval of Trust;
Delegation of Authority
City staff will work with
Shuster to sign agreements
and finalize investment
policy
Trust account will be set up
and the City can make a
deposit
• Adoption Agreement for the Multiple Employer
OPEB/Pension 115 Trust
• Administrative Services Agreement
• Investment Advisor Agreement
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

7 Pension Funding Policy
 As part of a comprehensive pension cost management strategy, the City would also like to adopt a formal pension funding policy to ensure there are guidelines and goals regarding its pension funding going forward
 The City’s Pension Funding Policy outlines the following:
 The City will pay at least the minimum required employer contribution to CalPERS each year  The City will prepay its annual UAL payment each July to achieve budgetary savings  The City will have a target funded ratio ranging from 85%-100% for its pension plans  The City will establish and maintain a Section 115 Trust dedicated to pensions  The City will consider ADPs and Fresh Starts within the context of its annual evaluation of reserve levels, budgetary requirements, funded ratio, and other metrics  The City will only consider POBs as a cost management strategy under very strict guidelines and after thorough due diligence and risk assessment
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023

8 Action Needed from City Council

1. Adopt Resolution approving the adoption of the Multiple Employer OPEB/Pension 115 Trust administered by Shuster Advisory Group, LLC and appointing the City Manager, or his/her successor or his/her designee, as the City’s Plan Administrator for the 115 Trust

2. Authorize the City Manager, or his/her successor or his/her designee, to enter into all related or required agreements

3. Authorize the City Manager, or his/her successor or his/her designee, to transfer $2,800,000 to the City's 115 Trust upon completion of the Trust establishment documents

4. Adopt Resolution approving the adoption of the City’s Pension Funding Policy
Agenda Item Number 7
City Council Meeting Packet of October 17, 2023