In August 2019, the City Council adopted the City of Garden Grove Pension Funding Policy.  The Policy creates a proactive formal commitment to address the City’s pension liability.  Six options were discussed during the policy adoption and the City Council directed staff to establish an IRC Section 115 Trust.  The trust would be funded with cash flow savings from prepaying our unfunded actuarial liability beginning Fiscal Year 2019-20 in the amount of $673,159.

An IRC Section 115 trust is a tax-exempt irrevocable pension trust designated to pre-fund pension obligations.  Some of the benefits that a Section 115 trust can provide include:

• A means for achieving the City’s funding objectives outlined in the Pension Funding Policy;

• Act as a reserve fund to offset potential volatility in annual contribution requirements determined by CalPERS;
•  Decrease risk through diversification of plan assets;
•  Potential to earn higher investment returns, since a Section 115 trust allows investment in a wider array of investment options compared to the City’s portfolio which is strictly restricted by the State regulations; and
•  An opportunity to improve the City’s overall credit rating as it demonstrates the City’s proactive approach to address its long-term liabilities.

With the adoption of the City of Garden Grove Pension Funding Policy, a competitive process to select a Section 115 trust administrator was conducted.  A Request for Proposal (RFP) was issued on August 21, 2019.  Three proposals were received by September 20, 2019. A comprehensive evaluation of all proposals was performed by a team of three staff members from the Finance and Police departments.  Evaluation results are shown in the table below.

Public Agency Retirement Systems (PARS) received the highest score.  PARS is a leading provider of Section 115 trust for governmental entities.  It has developed a multiple-employer trust, and any public agency, regardless of size, can join the program.  PARS has partnered with U.S. Bank to serve as trustee and HighMark Capital Management, Inc. to provide investment management services.  PARS currently has nearly 300 members participating in their program, among which, 112 are city governments.  Staff recommends the City partner with PARS for the Section 115 trust administration services.  The scope of services is included in Exhibit 1A of the Agreement for Administrative Services between the City and PARS (Attachment 2).

The Section 115 trust administered by PARS provides five investment options (Attachment 3) for the City to choose from.  Each option has different risk profiles based on asset allocation.  The higher the percentage of assets allocated in equity which includes both domestic and international stocks, the higher return on investment, as well as volatility and risk.  The options range from 5% of asset invested in equity (“Conservative”) to up to 85% asset allocated in equity (“Capital Appreciation”).  Staff recommends selecting the “Moderate” option which places 40% to 60% of the investment in equity.  This is the option nearly 32% of current PARS pension trust participants elected, the second most popular option (Attachment 4).    Return on investment for each option is presented on Attachment 3.

There is no cost to set up the Section 115 trust, and there is no fee until funds are contributed into the account.  Once funds are invested in the trust, PARS will charge a tiered annual fee up to 25 basis points (0.25%) of the assets held in the City’s trust account.  As the investment balance increases, the fee rate will decrease.  Exhibit 1B in Attachment 2 presents a comprehensive schedule of service fees.

The City Council approved an initial investment of $673,159 into the trust for Fiscal Year 2019-20.  This amount will be paid from the Employee Benefits internal service fund, where CalPERS contribution are collected through the payroll process from all departments Citywide.

Future asset additions or withdrawals from the trust will be considered as part of the biennial budget process.

It is recommended that the City Council:

•  Adopt the Resolution approving the adoption of the Public Agencies Post-Employment Benefits Trust administered by Public Agency Retirement Services (Attachment 1).

• Approve and authorize City Manager to execute an “Agreement for Administrative Services” between the City of Garden Grove and Public Agency Retirement Services for the administration of the City’s Section 115 trust (Attachment 2).

• Authorize the City Manager or his designee as the City’s Plan Administrator for the Section 115 trust.