F.9 - PARS Post Employment Benefit TrustCity of Grand Terrace
Unfunded Pension
Liability
Unfunded Pension Liability
Unfunded Pension Liability CalPERS
For CalPERS, the City has three plans, Miscellaneous Plan, PEPRA Miscellaneous Plan,
and the Miscellaneous Second Tier Plan. Per the CalPERS Actuarial Valuation dated
June 30, 2020, the unfunded liability and funded ratio for each of the Plans is as follows:
Misc.PEPRA Second
Plan Plan Tier Plan
Unfunded Accrued Liability 5,526,787$ 56,733$ 53,849$
Funded Ratio 67.70%88.50%91.20%
June 30, 2020 Valuations
Unfunded Pension Liability
The Normal Costs are based on the City’s payroll and are reasonable and
within the City’s annual budget.We need to have a way to reduce the UAL
payment or find an alternative way to fund it annually.
Misc.PEPRA Second
Plan Plan Tier Plan Total
Normal Cost 7,731$ 47,544$ 31,938$ 87,213$
UAL Contribution 579,800 10,202 7,856 597,858
587,531$ 57,746$ 39,794$ 685,071$
Unfunded Pension Liability
Reasons to Prefund
•Greater expected rate of return (discount rate)which lowers your liabilities.
•Investment flexibility with Section 115 Trust compared to restrictions on general
fund investments (Govt. Code 53216).
•Contributions into trust are “assets”that offset liabilities on the financial statements.
•Can help with the City’s credit ratings.
•Prefunding has no downside other than market fluctuation (like pension).
Unfunded Pension Liability
•At its meeting of June 14,2022,Council indicated they would like to further explore the use of a
Section 115 Trust to address the City’s unfunded liabilities.
•In compliance with this direction,staff contacted four providers to solicit proposals from qualified
vendors for IRS Section 115 Pension Trust Services.Finance staff reviewed,compared,and
evaluated the respective proposal responses.
•In total,the City received three responses to the request for information:CalPERS,Keenan,and
PARS.The fourth provider PFM declined to respond.Finance Staff found all three firms to be
professionally qualified to provide trust services.Staff were unanimous in recommending PARS for
providing trust services based on qualifications,experience,staff knowledge,cost,and ease of
administrative process.
•PARS has the most IRS Section 115 pension trusts under management,managing over 420 separate
trusts.PARS provided strong experience and a knowledgeable working group for the City.
Unfunded Pension Liability
•We are looking for alternative ways to increase the funded ratio and reduce our annual costs for
CalPERS and one such option is a Section 115 Trust as offered by PARS.CalPERS is making the
following changes which will directly affect the unfunded liability amounts and employer
contributions,lowering the discount rate from 7%to 6.8%and shortening the amortization period
for the UAL from 30 years to 20 years.
•This would provide the City with an alternative to sending funds to CalPERS that will allow for
greater local control over assets,investment by a professional fund management team selected and
monitored by the City,with future excess contributions transferred to CalPERS at the City’s
discretion to reduce the City’s Net Pension Liability.
Unfunded Pension Liability
IRS Section 115 Trust
Governmental entities can establish an IRS Section 115 Trust,these are irrevocable and must be usedforpensionorOPEBobligations.A couple of the companies that provide the Section 115 Trusts haveIRSPrivateLetterRulingsontheirPlans.CalPERS also offers a Section 115 Trust.
This would provide the City with an alternative to sending funds to CalPERS that will allow forgreaterlocalcontroloverassets,investment by a professional fund management team selected andmonitoredbytheCity,with future excess contributions transferred to CalPERS at the City’s discretiontoreducetheCity’s Net Pension Liability.
These programs can be established as a multiple employer trust so that public agencies regardless ofsizecanjointheprogramtoreceivethenecessaryeconomiesofscaletokeepadministrativefeeslowandavoidanysetupcosts.The trust permits the City,under federal and state law,to invest in a morediversifiedarrayofinvestmentstomaximizeinvestmentreturnslongterm.
Unfunded Pension Liability
Expected benefits offered by the PARS PRSP include:
•Contributions placed in an exclusive benefit trust could address the City’s Net Pension Liability
•Investment flexibility with Section 115 Trust compared to restrictions on general fund
investments (Govt. Code 53216)
•Increased risk diversification of plan assets through different asset management
•Investments can be tailored to the City’s unique demographics
•Oversight and control of fund management selection, monitoring of performance and ability to
replace fund management based on performance criteria
•Increased flexibility on use of trust assets (i.e., trust assets can be accessed at any time as long as
the assets are used to fund the City’s pension obligations)
•Lower investment management and administrative expenses compared to CalPERS
•Potential for positive rating agency and investor consideration.
Unfunded Pension Liability
•The program has been established as a multiple employer trust so that public agencies regardless
of size can join the program to receive the necessary economies of scale to keep administrative
fees low and avoid any setup costs.The trust permits the City,under federal and state law,to
invest in a more diversified array of investments to maximize investment returns long term.
•PARS has partnered with US Bank to serve as trustee and its sub-adviser HighMark Capital
Management,Inc.,to provide investment management services for the program.
Unfunded Pension Liability
Possible Funding Options
•Pension Obligation Bonds
•Use one-time revenue sources, such as proceeds from the sale of property
•Lower the minimum General Fund Reserve level percentage
•Contribute a certain percentage of any given year’s realized General Fund surplus
•Annual appropriation in each year’s budget
Staff is recommending using a portion of the proceeds from the sale of the Fire Station
Unfunded Pension Liability
Staff is recommending the City Council adopt the resolution authorizing participation in the PARS
Post-Employment Benefits Trust Program administered by Public Agency Retirement Services
(PARS)and U.S.Bank,appointing the City Manager as the City’s Plan Administrator,and
authorizing the City Clerk to execute the documents and to implement the Program.
Unfunded Pension Liability
•Questions