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AGENDA NO:

STAFF REPORT
MEETING DATE: August 21, 2017

To: Honorable Mayor and City Council

Date: August 21, 2017

From: Carol Augustine (650) 558-7222

Subject: Selection of Public Agency Retirement Services (PARS) as Administrator of


the 115 Trust to Address Funding of Pension Liabilities

RECOMMENDATION

Staff recommends that the City Council adopt the attached resolution authorizing participation in
the Pension Rate Stabilization Program (PRSP) administered by Public Agency Retirement
Services (PARS), with U.S. Bank as trustee; appointing the City Manager as the Plan Administrator;
and authorizing her to negotiate and execute the documents to implement the program.

BACKGROUND

In establishing the budget for the current 2017-18 fiscal year, the City of Burlingame analyzed
various options for funding its pension trusts obligations with the California Public Employees
Retirement System (CalPERS): one to fund public safety employees, and one for miscellaneous
employees. Recent adjustments of critical assumptions needed to attain CalPERS funding goals
will result in higher contribution rates for employers and employees, and exacerbate existing
pension funding challenges. As of June 30, 2015 (the latest actuarial valuation from CalPERS),
the Citys Unfunded Actuarial Accrued Liability (UAAL) for the Miscellaneous Plan was $29.0
million, and $20.3 million for the Safety Plan, totaling $49.3 million. The total unfunded liability is
projected to grow to approximately $51.9 million as of June 30, 2017.

In response to these adjustments, the City procured an actuarial report to assist in projecting its
future employer contribution rates. The City Council subsequently requested that staff provide
alternatives for responsibly prefunding these obligations. At the May 10th budget study session,
staff presented a funding scenario whereby a target rate is used to determine the amount to be
set aside for these obligations, rather than the required (lower) rate determined by CalPERS.
Under this scenario, the required funding would be paid to CalPERS each pay period, and the
excess amounts would be contributed to a dedicated trust or reserve fund, to be drawn upon when
the required employer rate invariably exceeded the target rate. The amounts needed from all
operating funds for the higher rate of pension funding ($3.7 million for an initial contribution) was
approved with the adoption of the 2017-18 fiscal year budget.

Having established a systematic funding methodology for the amount of employer contribution that
would serve to smooth future rate increases (and pension costs), the City Council further reviewed
and discussed options and future strategies for pre-funding the Citys pension obligations at its July

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PARS 115 Trust to Address Funding of Pension Liabilities August 21, 2017

3rd meeting. Council approved the establishment of a Section 115 Trust for this purpose, in order
to optimize the interest earnings on the fund, while still allowing flexibility in the timing and sources
to be used to fund the trust. Funds placed in an irrevocable pension supplemental Section 115
Trust would be restricted in use solely for pension obligations.

DISCUSSION

There are currently only two independent retirement plan administrators in California authorized to
offer Section 115 Trusts: Public Agency Retirement Services (PARS) and Public Financial
Management Group (PFM). Both administrators have received a Private Letter Ruling from the
Internal Revenue Service, which assures participants of the tax-exempt status of their investments.
Both providers were responsive to the Citys request for a presentation of their services and fee
schedules. Staff examined their offerings to determine which trust/plan best provides for the needs
of the City.

The rates for the two administrators do not vary significantly, yielding similar costs (approximately
$22,000) for administrative and investment services for the first year of trust funding planned by
the City. Both firms have many years of experience in managing funds for public agencies in
California, and dedicated investment management teams. And both firms have consistent track
records of strong performance using a combination approach of active and passive portfolio
management. However, with 95 local government agencies in California participating in the PARS
Pension Rate Stabilization Program, PARS has the most widely adopted Section 115 Trust
program to date. The program offers flexible investment options with five investment strategies,
and the ability to diversify and customize investments in a judicious fashion. PARS has partnered
with U.S. Bank to serve as a trustee for this program.

The Section 115 Trust offered by PARS has five portfolios: Capital Appreciation, Balanced,
Moderate, Moderately Conservative, and Conservative. Each portfolio has different risk profiles
with various amounts invested in equities and other instruments. The investment portfolios range
from Capital Appreciation, with 72 percent of funds invested in equities, to Conservative, with
15 percent of funds invested in equities. It is important to note that as the amount of equities
increases, risk and volatility increases. In contrast, as the amount of equities decreases, risk and
volatility decreases.

Approximately 85 percent of the public agencies currently participating the PARS Section 115 Trust
have selected the Moderately Conservative portfolio, with 30 percent of the funds invested in
equities. Returns as of June 30, 2017 in the Moderately Conservative portfolio were as follows:

1-year returns: 6.67 percent


2-year returns: 3.64 percent
5-year returns: 5.42 percent

PARS has partnered with Highmark Capital Management to manage its 115 Trust portfolios.
Should the City Council proceed with staffs recommendation to establish a Section 115 Trust, staff
will discuss the portfolios available with Highmarks Senior Portfolio Manager for Northern California
to determine which portfolio is most appropriate for the City.

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PARS 115 Trust to Address Funding of Pension Liabilities August 21, 2017

Additional Future Strategies

The trust fund as envisioned for use by the City of Burlingame would primarily be used for rate
stabilization, but will likely not reduce GASB 68 Net Pension Liabilities. Because funding was
established to provide a buffer against the higher employer contributions that are projected to be
required in the next 10-15 years, the trust could be funded and then depleted over that period of
time, with the same anticipated funding status as would have been achieved by paying at the
required employer contribution (baseline) rate. However, it should be noted that funds from the
trust can be used to make additional payments directly to CalPERS as well as the supplemental
payments initially proposed.

As noted in the discussions of the various funding mechanisms available, it may be prudent to
incorporate other options into the Citys pension strategy so as to more efficiently amortize the
Citys UAL balance with CalPERS in order to realize long-term savings from interest on these
significant liabilities. Staff will continue working with its actuary and CalPERS to determine what
further strategies would maximize interest savings and achieve a higher funding ratio for the Citys
pension obligations. These strategies will be visited with the FY 2017-18 mid-year budget analysis
and report.

FISCAL IMPACT

There is no fiscal impact on establishing the Pension Trust Fund. Funding the trust will have a
cash impact as funds must be withdrawn from existing accounts and transferred to the irrevocable
trust account. As part of the fiscal year 2017-18 Budget adopted in June, the City Council
authorized the following contributions to a pension trust mechanism:

Exhibits:
Resolution of the City Council of the City of Burlingame Approving the Adoption of the Public
Agencies Pension Rate Stabilization Program Administered by Public Agency Retirement
Services (PARS)
Draft Administrative Services Agreement