CITY OF SIGNAL HILL
STAFF REPORT
2175 Cherry Avenue • Signal
Hill, California 90755-3799
6/28/2022
AGENDA ITEM
TO:
HONORABLE MAYOR
AND MEMBERS OF THE CITY COUNCIL
FROM:
SHARON DEL ROSARIO
ADMINISTRATIVE SERVICES OFFICER/FINANCE DIRECTOR
SUBJECT:
RESOLUTION APPROVING AN AMENDMENT TO THE INVESTMENT POLICY
STATEMENT FOR THE OTHER POST EMPLOYMENT BENEFIT (OPEB) TRUST FUND
Summary:
The City Council will consider approving an amendment to the investment policy statement for the OPEB/Pension Section 115 Trust fund to change the investment allocation from balanced to moderate growth to take advantage of current investment market strategies.
Recommendation:
Adopt a resolution, entitled:
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SIGNAL HILL, CALIFORNIA,
APPROVING AN AMENDMENT TO THE INVESTMENT POLICY STATEMENT FOR THE OPEB/PENSION SECTION 115 TRUST FUND
Fiscal Impact:
There is no fiscal impact associated with the recommended action.
The OPEB trust is a fiduciary fund that accounts for assets held by the City in a trustee capacity.
Fiduciary funds are not available to support the City’s activities.
Strategic Plan Objectives:
Goal No. 1: Ensure long-term fiscal stability.
Objective No. 5.7.1: Evaluate the attractiveness of employee compensation, work environment and CITY OF SIGNAL HILL Page 1 of 3 Printed on 6/23/2022
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employee appreciation programs.
Background:
OPEB
OPEB refers to benefits, other than pensions, that state and local governments provide to retired employees. Traditionally, these are health care benefits. Governmental Accounting Standards Board (GASB) Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions, requires the City to report costs and obligations for post-employment healthcare and OPEBs. The City must also report its net OPEB liability (difference between total OPEB liability and assets accumulated in an irrevocable trust) on its financial statements.
Funds must be set aside in an exclusive benefit, irrevocable trust that cannot be accessed by creditors in order to be accounted for as assets to reduce the liabilities on the City's financial statements.
Section 115 Trust
A Section 115 Trust is a vehicle authorized by the Internal Revenue Code which allows an agency to segregate funds from general assets for the purpose of funding an essential government function (e.g., pension and post-employment obligations). Funds placed in a Section 115 Trust are irrevocably committed for the specific 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 than the investment rules for the City’s pooled investments. Since investment restrictions that apply to the general fund of a city (California Government Code 53601) do not apply to the assets held in an Irrevocable Section 115 Trust, there is more flexibility in investment strategies. By utilizing a Section 115 Trust, a potentially higher rate of return may be achieved rather than if those same funds were invested with the City.
The City recently transferred the administration of the OPEB Section 115 Trust to Shuster Advisory Group, LLC (Shuster).
Investment Policy Statement
The purpose of the investment policy statement is to:
· Ensure that all fiduciaries involved take prudent and careful action to maintain the investment portfolio;
· Facilitate the process of ongoing communication between the Trust Sponsor and its fiduciaries;
· Confirm the Trust’s investment goals and objectives and management policies as well as cash flow expectations applicable to the investment portfolio and obtained from the Trust Sponsor; · Provide a framework to construct a well-diversified asset mix that can potentially be expected to meet the account’s short- and long-term needs that is consistent with the account’s investment objectives, liquidity considerations and risk tolerance; · Identify any unique considerations that may restrict or limit the investment discretion of the Investment Advisor; and
· Maintain a long-term perspective when market volatility is caused by short-term market CITY OF SIGNAL HILL Page 2 of 3 Printed on 6/23/2022
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· Maintain a long-term perspective when market volatility is caused by short-term market events.
Analysis:
The Trust’s assets will be managed on a total return basis which takes into consideration both investment income and capital appreciation. While the Trust Sponsor recognizes the importance of preservation of capital, it also adheres to the principle that varying degrees of investment risk are generally rewarded with compensating returns. To achieve these objectives, the Trust Sponsor allocates its assets (asset allocation) with a strategic perspective of the capital markets.
The current investment objective is balanced for risk tolerance and strategic asset allocation at 50/50 between equity and fixed income investments. Shuster is recommending changing the asset allocation mix to 60/40 equity to fixed income investments to take advantage of the current investment market and adjusting the risk tolerance to moderate growth to pursue its investment objectives. There are other performance benchmarks and investment limitations that are used to manage and safeguard the fund assets which can be found in Attachment A.
It is anticipated that the Trust will not require a high level of disbursements in the next five years. The Trust will continue to grow with annual contributions from both employee and City contributions. As more employees retire it is anticipated that the OPEB liability will continue to grow over time.
For context purposes, CalPERs strategic asset allocation for the Public Employees’ Retirement Fund (PERF) is currently set at 58/42 equity to fixed income with a 3 to 7% plus/minus relative target range.
The current long-term forecast does not anticipate the use of the OPEB trust to fund the annual retiree expenditures supporting the five-year investment horizon and risk tolerance. Based on this information, staff is recommending changing the asset allocation from a 50/50 (balanced) to a 60/40 equity to fixed income (moderate growth). The proposed strategy is designed for the investor with an investment horizon more than five years who can withstand fluctuations in their portfolio value.
Approved:
_________________________
Hannah Shin-Heydorn
Attachments
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