CITY OF ROHNERT PARK CITY COUNCIL AGENDA REPORT

Transcription

1 Mission Statement We Care for Our Residents by Working Together to Build a Better Community for Today and Tomorrow. ITEM NO. CITY OF ROHNERT PARK CITY COUNCIL AGENDA REPORT Meeting Date: November 10, 2015 Department: Administration Submitted By: Darrin Jenkins, City Manager Prepared By: Darrin Jenkins, City Manager Agenda Title: Authorizing and Approving the Adoption of the Public Agencies Post- Employment Benefits Trust Program Administered by Public Agency Retirement Services (PARS) RECOMMENDED ACTION: That the City Council 1) adopt a Resolution establishing an IRS Section 115 Trust with the PARS Post-Employment Benefits Trust Program to be used to pre-fund pension obligations to be administered by Public Agency Retirement Services (PARS) and U.S. Bank; 2) appoint the City Manager as the City's Plan Administrator; and 3) authorize the City Manager to execute the documents and take other actions necessary to implement the Program. BACKGROUND: Compensation packages for City of Rohnert Park (City) employees include California Public Employees Retirement System (CalPERS) pensions and retiree healthcare benefits known as Other Post-Employment Benefits (OPEB). The City has taken several steps during the last several years to manage and reduce its pension and other employee post-employment benefit liabilities. These actions represent best practices for financial management, have slowed the increases in the City s annual pension costs, and positioned the City for achieving retiree medical cost savings into the future. Steps already taken by the City to address pension costs include implementing pension reform by establishing second-tier and third-tier pension plans for all new employees and employees agreeing to pay the employee share of CalPERS pension costs. However, prior retroactive pension enhancements, changes by CalPERS, and investment market losses by CalPERS have led to rapidly increasing pension costs. The related ramp up in annual costs will continue for at least the next five years. In addition to efforts to reduce pension cost growth, the City implemented a number of measures to reduce Other Post Employment Benefit (retiree medical, vision, dental, and life insurance) costs. This includes establishing an OPEB trust fund, similar to the one discussed here, called the California Employer s Retiree Benefit Trust (CERBT) which is managed by a branch of CalPERS. See below for a summary of that trust fund. 1

2 ITEM NO. Table 1: Rohnert Park s California Employer s Retirement Benefit Trust Performance Account Summary as of November 30, 2014 Initial Contribution (6/28/2011) $1,189,694 Additional Contributions $2,171,000 Disbursements ($0) CERBT Expenses ($10,069) Investment Earnings $575,643 Total Assets $3,926,268 Average Annualized Internal Rate of Return 7.85% Net of expenses, contributions in this OPEB trust fund earned $565,574. For comparison, if these funds had remained in the City s General Fund as a reserve, invested in the County treasury pool they would have earned less than $50,000. This is a demonstration of the value of utilizing a trust fund. Due to recent developments we can now replicate this successful trust fund investing for the City s pension obligations. ANALYSIS: Included as one of the four goals of the City's Strategic Plan is Achieve and Maintain Financial Stability. In support of this strategic plan goal, staff continually examines all options to reduce pension and OPEB obligations and annual costs. As such, this item is before the City Council to request authorization to participate in a Public Agency Retirement Services (PARS) "Post-Employment Benefits Trust Program" as yet another action in continuing to responsibly manage pension and OPEB costs. Public Agencies Post-Employment Benefits Trust In 2012, the Government Accounting Standards Board (GASB) issued Statement No. 68, Accounting and Financial Reporting for Pensions. GASB 68 requires that governmental employers that sponsor Defined Benefit plans (i.e., CalPERS) must recognize a net pension liability on their balance sheet. This is the difference between the City's total pension liability and actual plan assets. GASB 68 became effective for fiscal years starting after June 15, To reduce the GASB 68 net pension liability figure and better manage the City s pension obligations, the City's only prior option was to send additional funds to CalPERS (in excess of its annual required contributions) to reduce its unfunded liability. However, additional funds sent to CalPERS are subject to the same market volatility risk and investment management decisions as the rest of CalPERS and are never again available to the City. 2

3 ITEM NO. In response to the lack of options to address a city's unfunded pension liability, PARS developed a Section 115 Trust program known as the Public Agencies Post-Employment Benefits Trust (the "Trust") to enable public agencies to pre-fund CalPERS retirement obligations through a locally controlled trust. In June 2015, PARS received a Private Letter Ruling determination from the IRS positively affirming this Trust program is tax exempt and lawful (Attachment 3). This provides the City with a far more flexible and attractive alternative than sending funds to CalPERS. The Public Agencies Post-Employment Benefits Trust (the "Trust") is a combination trust that allows pre-funding of both pension and OPEB obligations. This Trust gives the City the flexibility to prefund one or both of these Obligations. Because the City already established an OPEB trust fund, the primary interest here is in the pension trust aspect of the program. The benefits of establishing the Post-Employment Benefits Trust Fund for pensions are: Complete Local Control Over the Assets -the Trust can be accessed at any time so long as the funds are used to pay the City's pension obligations Lower Net Pension Liability - contributions placed in the trust reduce the City's unfunded pension liability Pension Rate Stabilization - assets can be transferred to CalPERS at the City's discretion, which will help reduce or eliminate large fluctuations in employer contributions towards retirement benefits Investment Flexibility - the trust permits the City, under federal and state law, to invest in a more diversified array of appropriate investments to maximize investment returns long term and reduce the City's liability Investment Management - investment of plan assets will be managed by a professional fund management team selected by and monitored by the City Potential for Improved Credit Ratings - rating agencies may look favorably upon actions to reduce liabilities Table 2 below provides a comparison of three options: 1) keeping funds in the City s General Fund as assigned fund balance, 2) establishing and funding a trust, 3) sending funds directly to CalPERS pension system. Each option is scored within the criteria listed above on a scale of 0 (low/bad) to 5 (high/good). Table 1 Comparison of Options Criteria General Fund Trust Fund CalPERS Directly Control/Access to Assets Lower Net Pension Liability Pension Rate Stabilization Investment Flexibility Investment Management Improved Credit Rating Total Score

4 ITEM NO. As shown in Table 2, establishing and utilizing a trust fund is clearly superior to the other options. Plan Administrator The field of pension trust funds for public agencies is relatively new and PARS provides the security of a Private Letter Ruling from the IRS for Section 115 Trusts that assures participants the tax-exempt status of their investments. PARS also allows the flexibility of the City's participation in selecting the investment strategies for its funds, giving the City control on target yield and level of risk on its investments. Staff also evaluated PFM, a private investment advisor, as a potential trust administrator and found their fees to be higher and they did not have the IRS Private Letter Ruling for their pension trust program. PARS has established a multiemployer irrevocable trust in compliance with the requirements of Section 115 of the Internal Revenue Code. While it is a multiemployer trust, each employer's contributions benefit only its own employees. There is no sharing of either liability or investment earnings, and separate employer accounts are maintained. PARS serves as the administrator for the trust. As such, its duties include: 1. Establishing the master trust and preparing plan documents; 2. Monitoring the receipt of contributions; 3. Processing benefit payments; 4. Preparing monthly statements of account activity; 5. Coordinating actuarial studies; 6. Responding to auditor requests; and 7. Keeping the City informed about legal and regulatory requirements. There is no plan set up fee. The City will pay fees to PARS for management of the trust fund based on the amount of funds under management and according to a sliding scale (see Exhibit 1B of Attachment 2 Administrative Services Agreement). The PARS Administration Fee is 0.25% annually of assets in the trust under $10,000,000 and the rate decreases above that amount. So for $1,000,000 invested, the fee is $2,500. These fees will be netted against interest earnings in the trust. If no funds are in the trust, there are no Administration Fees. Trustee Any contributions made to the program are held and invested by a trustee, which is US Bank. US Bank has one of the largest and most respected trust departments in the country. The Trustee's duties include: 1. Safeguarding assets for the benefit of retirees; 2. Providing oversight protection of the investments; 3. Custodian of the assets; and 4. Disbursing funds to pay for pension costs or retiree healthcare premiums. There is no trustee fee. Investment Advisor 4

5 ITEM NO. Highmark Capital Management (investment sub-advisor to U.S. Bank) is the investment advisor for the PARS program. Highmark offers an open architecture platform, investment policy assistance, annual onsite reviews and takes on fiduciary responsibility for the City's asset management of these funds. They have a number of different investment strategies depending on what rate of return the City expects to earn and the level of risk it is willing to take. Because these strategies are designed for public entities, they range in level of risk from conservative to capital appreciation. The Highmark Capital Management Fee is approximately 0.35% annually of assets held in the Trust, charged monthly and taken from those assets. The fee decreases with investments above $5 million. For illustration, an investment of $1,000,000 in the Trust generates an investment advisor fee of $3,500. FINANCIAL IMPACT: Merely establishing the pension trust fund has no financial impact. However, funding the pension trust fund can have profound positive financial impacts. Funds invested in the trust are expected to earn as much as ten times as much as those held in the City s General Fund because of the different investment options available to trust funds. Nevertheless, trust fund investments, as with any equity market or bond market investment can at times lose value. Over the long-term, the trust investments will significantly outperform the investments available to the City s General Fund. Funding the retirement trust over time has the potential to greatly strengthen the City s financial sustainability because the City s retirement costs are growing much faster than funds held in its General Fund. Also, placing funds in the pension trust preserves them so then can only be used for pension purposes. If the City Council opts to establish the trust, staff will return with a plan to transfer funds to the pension trust later this fiscal year. ALTERNATIVE: If the pension trust is not authorized, the funds will remain in the General Fund as assigned fund balance (reserve) to be used for paying future pension costs. These reserves would not be applied to the Net Pension Liability presented in future financial statements and would earn a much lower rate of return. These reserves would earn approximately 0.5% per year compared to the trust fund expected rate of return after fees of around 5%. RECOMMENDED ACTION: Approve attached resolution establishing and funding a Post-Employment Benefits Trust Program. Attached to this report is a copy of the PARS Agreement for Administrative Services and a copy of the Private Letter Ruling issued by the IRS on the tax qualified status of the PARS Post- Employment Benefits Trust program. 5

6 ITEM NO. Department Head Approval Date: N/A City Manager Approval Date: November 3, 2015 Finance Director: October 30, 2015 City Attorney Approval Date: November 2, 2015 Attachments: 1. Resolution 2. Administrative Services Agreement 3. IRS Letter Ruling 6

7 RESOLUTION NO A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ROHNERT PARK AUTHORIZING AND APPROVING THE ADOPTION OF THE PUBLIC AGENCIES POST-EMPLOYMENT BENEFITS TRUST ADMINISTERED BY PUBLIC AGENCY RETIREMENT SERVICES (PARS) WHEREAS; PARS has made available the PARS Public Agencies Post-Employment Benefits Trust (the Program ) for the purpose of pre-funding pension obligations and/or Other Post-Employment Benefits (OPEB) obligations; and WHEREAS, it is determined to be in the best interest of the City to set aside funds for the pre-funding of its CalPERS pension obligation to be held in trust for the exclusive purpose of making future contributions of the City s required pension contributions and any employer contributions in excess of such required contributions at the discretion of the City; and WHEREAS, the City is eligible to participate in the Program, 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 is a tax-exempt trust under the relevant statutory provisions of the State of California; and WHEREAS, the City s adoption and operation of the Program has no effect on any current or former employee s entitlement to post-employment benefits; and WHEREAS, the terms and conditions of post-employment benefit entitlement, if any, are governed by contracts separate from and independent of the Program; and WHEREAS, the City s funding of the Program does not, and is not intended to, create any new vested right to any benefit nor strengthen any existing vested right of any former, current, or future City employee; and WHEREAS, the City reserves the right to make contributions, if any, to the Program. NOW, THEREFORE, BE IT RESOLVED THAT: 1. The City Council hereby adopts the PARS Public Agencies Post-Employment Benefits Trust, effective November 10, 2015; and 2. The City Council hereby appoints the City Manager or his/her designee as the City s Plan Administrator for the Program; and 3. The City s Plan Administrator is hereby authorized to execute the PARS legal and administrative documents on behalf of the City and to take whatever additional 1

8 actions are necessary to maintain the City s participation in the Program and to maintain compliance of any relevant regulation issued or as may be issued; therefore, authorizing designee to take whatever additional actions are required to administer the City s Program. DULY AND REGULARLY ADOPTED this 10 th day of November, CITY OF ROHNERT PARK ATTEST: Amy O. Ahanotu, Mayor JoAnne M. Buergler, City Clerk CALLINAN: MACKENZIE: STAFFORD: BELFORTE: AHANOTU: AYES: ( ) NOES: ( ) ABSENT: ( ) ABSTAIN: ( ) I, JoAnne M. Buergler, the City Clerk of the City of Rohnert Park, State of California, hereby certifies that the above foregoing resolution was duly and regularly adopted by said City at a regular meeting thereof held on the, and passed by a vote of said Council. ( 2 )

9 AGREEMENT FOR ADMINISTRATIVE SERVICES This agreement ( Agreement ) is made this day of, 2015, between Phase II Systems, a corporation organized and existing under the laws of the State of California, doing business as Public Agency Retirement Services and PARS (hereinafter PARS ) and the [Agency Name] ( Agency ). WHEREAS, the Agency has adopted the PARS Public Agencies Post-Employment Benefits Trust for the purpose of pre-funding pension obligations and/or OPEB obligations ( Plan ), and is desirous of retaining PARS as Trust Administrator to the Trust, to provide administrative services. NOW THEREFORE, the parties agree: 1. Services. PARS will provide the services pertaining to the Plan as described in the exhibit attached hereto as Exhibit 1A ( Services ) in a timely manner, subject to the further provisions of this Agreement. 2. Fees for Services. PARS will be compensated for performance of the Services as described in the exhibit attached hereto as Exhibit 1B. 3. Payment Terms. Payment for the Services will be remitted directly from Plan assets unless the Agency chooses to make payment directly to PARS. In the event that the Agency chooses to make payment directly to PARS, it shall be the responsibility of the Agency to remit payment directly to PARS based upon an invoice prepared by PARS and delivered to the Agency. If payment is not received by PARS within thirty (30) days of the invoice delivery date, the balance due shall bear interest at the rate of 1.5% per month. If payment is not received from the Agency within sixty (60) days of the invoice delivery date, payment plus accrued interest will be remitted directly from Plan assets, unless PARS has previously received written communication disputing the subject invoice that is signed by a duly authorized representative of the Agency. 4. Fees for Services Beyond Scope. Fees for services beyond those specified in this Agreement will be billed to the Agency at the rates indicated in the PARS standard fee schedule in effect at the time the services are provided and shall be payable as described in Section 3 of this Agreement. Before any such services are performed, PARS will provide the Agency with a detailed description of the services, terms, and applicable rates for such services. Such services, terms, and applicable rates shall be agreed upon in writing and executed by both parties. 5. Information Furnished to PARS. PARS will provide the Services contingent upon the Agency s providing PARS the information specified in the exhibit attached hereto as Exhibit 1C ( Data ). It shall be the responsibility of the Agency to certify the accuracy, content and completeness of the Data so that PARS may rely on such information without further audit. It shall further be the responsibility of the Agency to deliver the Data to PARS in such a manner that allows for a reasonable amount of time for the Services to be performed. Unless specified in Exhibit 1A, PARS shall be under no duty to question Data received from the Agency, to compute contributions made to the Page 1

10 Plan, to determine or inquire whether contributions are adequate to meet and discharge liabilities under the Plan, or to determine or inquire whether contributions made to the Plan are in compliance with the Plan or applicable law. In addition, PARS shall not be liable for non performance of Services to the extent such non performance is caused by or results from erroneous and/or late delivery of Data from the Agency. In the event that the Agency fails to provide Data in a complete, accurate and timely manner and pursuant to the specifications in Exhibit 1C, PARS reserves the right, notwithstanding the further provisions of this Agreement, to terminate this Agreement upon no less than ninety (90) days written notice to the Agency. 6. Records. Throughout the duration of this Agreement, and for a period of five (5) years after termination of this Agreement, PARS shall provide duly authorized representatives of Agency access to all records and material relating to calculation of PARS fees under this Agreement. Such access shall include the right to inspect, audit and reproduce such records and material and to verify reports furnished in compliance with the provisions of this Agreement. All information so obtained shall be accorded confidential treatment as provided under applicable law. 7. Confidentiality. Without the Agency s consent, PARS shall not disclose any information relating to the Plan except to duly authorized officials of the Agency, subject to applicable law, and to parties retained by PARS to perform specific services within this Agreement. The Agency shall not disclose any information relating to the Plan to individuals not employed by the Agency without the prior written consent of PARS, except as such disclosures may be required by applicable law. 8. Independent Contractor. PARS is and at all times hereunder shall be an independent contractor. As such, neither the Agency nor any of its officers, employees or agents shall have the power to control the conduct of PARS, its officers, employees or agents, except as specifically set forth and provided for herein. PARS shall pay all wages, salaries and other amounts due its employees in connection with this Agreement and shall be responsible for all reports and obligations respecting them, such as social security, income tax withholding, unemployment compensation, workers compensation and similar matters. 9. Indemnification. PARS and Agency hereby indemnify each other and hold the other harmless, including their respective officers, directors, employees, agents and attorneys, from any claim, loss, demand, liability, or expense, including reasonable attorneys fees and costs, incurred by the other as a consequence of PARS or Agency s, as the case may be, acts, errors or omissions with respect to the performance of their respective duties hereunder. 10. Compliance with Applicable Law. The Agency shall observe and comply with federal, state and local laws in effect when this Agreement is executed, or which may come into effect during the term of this Agreement, regarding the administration of the Plan. PARS shall observe and comply with federal, state and local laws in effect when this Agreement is executed, or which may come into effect during the term of this Agreement, regarding Plan administrative services provided under this Agreement. Page 2

11 11. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. In the event any party institutes legal proceedings to enforce or interpret this Agreement, venue and jurisdiction shall be in any state court of competent jurisdiction. 12. Force Majeure. When a party s nonperformance hereunder was beyond the control and not due to the fault of the party not performing, a party shall be excused from performing its obligations under this Agreement during the time and to the extent that it is prevented from performing by such cause, including but not limited to: any incidence of fire, flood, acts of God, acts of terrorism or war, commandeering of material, products, plants or facilities by the federal, state or local government, or a material act or omission by the other party. 13. Ownership of Reports and Documents. The originals of all letters, documents, reports, and data produced for the purposes of this Agreement shall be delivered to, and become the property of the Agency. Copies may be made for PARS but shall not be furnished to others without written authorization from Agency. 14. Designees. The Plan Administrator of the Agency, or their designee, shall have the authority to act for and exercise any of the rights of the Agency as set forth in this Agreement, subsequent to and in accordance with the written authority granted by the Governing Body of the Agency, a copy of which writing shall be delivered to PARS. Any officer of PARS, or his or her designees, shall have the authority to act for and exercise any of the rights of PARS as set forth in this Agreement. 15. Notices. All notices hereunder and communications regarding the interpretation of the terms of this Agreement, or changes thereto, shall be effected by delivery of the notices in person or by depositing the notices in the U.S. mail, registered or certified mail, return receipt requested, postage prepaid and addressed as follows: (A) To PARS: PARS; 4350 Von Karman Avenue, Suite 100, Newport Beach, CA 92660; Attention: President (B) To Agency: [Agency]; [Address]; [City, State, Zip]; Attention: [Plan Administrator] Notices shall be deemed given on the date received by the addressee. 16. Term of Agreement. This Agreement shall remain in effect for the period beginning, 2015 and ending, 2018 ( Term ). This Agreement may be terminated at any time by giving thirty (30) days written notice to the other party of the intent to terminate. Absent a thirty (30) day written notice to the other party of the intent to terminate, this Agreement will continue unchanged for successive twelve month periods following the Term. 17. Amendment. This Agreement may not be amended orally, but only by a written instrument executed by the parties hereto. 18. Entire Agreement. This Agreement, including exhibits, contains the entire understanding of the parties with respect to the subject matter set forth in this Agreement. In the event a conflict arises between the parties with respect to any term, condition or Page 3

12 provision of this Agreement, the remaining terms, conditions and provisions shall remain in full force and legal effect. No waiver of any term or condition of this Agreement by any party shall be construed by the other as a continuing waiver of such term or condition. 19. Attorneys Fees. In the event any action is taken by a party hereto to enforce the terms of this Agreement the prevailing party herein shall be entitled to receive its reasonable attorney s fees. 20. Counterparts. This Agreement may be executed in any number of counterparts, and in that event, each counterpart shall be deemed a complete original and be enforceable without reference to any other counterpart. 21. Headings. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 22. Effective Date. This Agreement shall be effective on the date first above written, and also shall be the date the Agreement is executed. AGENCY: BY: TITLE: DATE: PARS: BY: TITLE: Tod Hammeras Chief Financial Officer DATE: Page 4

13 EXHIBIT 1A SERVICES PARS will provide the following services for the [Agency Name] Public Agencies Post- Employment Benefits Trust: 1. Plan Installation Services: (A) Meeting with appropriate Agency personnel to discuss plan provisions, implementation timelines, actuarial valuation process, funding strategies, benefit communication strategies, data reporting, and submission requirements for contributions/reimbursements/distributions; (B) Providing the necessary analysis and advisory services to finalize these elements of the Plan; (C) Providing the documentation needed to establish the Plan to be reviewed and approved by Agency legal counsel. Resulting final Plan documentation must be approved by the Agency prior to the commencement of PARS Plan Administration Services outlined in Exhibit 1A, paragraph 2 below. 2. Plan Administration Services: (A) Monitoring the receipt of Plan contributions made by the Agency to the trustee of the PARS Public Agencies Post-Employment Benefits Trust ( Trustee ), based upon information received from the Agency and the Trustee; (B) Performing periodic accounting of Plan assets, reimbursements/distributions, and investment activity, based upon information received from the Agency and/or Trustee; (C) Coordinating the processing of distribution payments pursuant to authorized direction by the Agency, and the provisions of the Plan, and, to the extent possible, based upon Agency-provided Data; (D) Coordinating actions with the Trustee as directed by the Plan Administrator within the scope this Agreement; (E) Preparing and submitting a monthly report of Plan activity to the Agency, unless directed by the Agency otherwise; (F) Preparing and submitting an annual report of Plan activity to the Agency; (G) Facilitating actuarial valuation updates and funding modifications for compliance with GASB 45, if prefunding OPEB obligations; (H) Coordinating periodic audits of the Trust; (I) Monitoring Plan and Trust compliance with federal and state laws. 3. PARS is not licensed to provide and does not offer tax, accounting, legal, investment or actuarial advice. Page 5

14 EXHIBIT 1B FEES FOR SERVICES PARS will be compensated for performance of Services, as described in Exhibit 1A based upon the following schedule: (A) An annual asset fee paid by the Agency or paid from Plan Assets based on the following schedule: For Plan Assets from: Annual Rate: $0 to $10,000, % $10,000,001 to $15,000, % $15,000,001 to $50,000, % $50,000,001 and above 0.10% Annual rates are prorated and paid monthly. The annual asset fee shall be calculated by the following formula [Annual Rate divided by 12 (months of the year) multiplied by the Plan asset balance at the end of the month]. Trustee and Investment Management Fees are not included. (B) The annual asset fee referenced above shall be paid as follows: Annual Asset Fee Payment Option (Please select one option below): Annual Asset Fee shall be paid from Plan Assets. Annual Asset Fee shall be invoiced to and paid by the Agency. Page 6

15 EXHIBIT 1C DATA REQUIREMENTS PARS will provide the Services under this Agreement contingent upon receiving the following information: 1. Executed Legal Documents: (A) Certified Resolution (B) Adoption Agreement to the Public Agencies Post-Employment Benefits Trust (C) Trustee Investment Forms 2. Contribution completed Contribution Transmittal Form signed by the Plan Administrator (or authorized Designee) which contains the following information: (A) Agency name (B) Contribution amount (C) Contribution date (D) Contribution method (Check, ACH, Wire) 3. Distribution completed Payment Reimbursement/Distribution Form signed by the Plan Administrator (or authorized Designee) which contains the following information: (A) Agency name (B) Payment reimbursement/distribution amount (C) Applicable statement date (D) Copy of applicable premium, claim, statement, warrant, and/or administrative expense evidencing payment (E) Signed certification of reimbursement/distribution from the Plan Administrator (or authorized Designee) 4. Other information pertinent to the Services as reasonably requested by PARS and Actuarial Provider. Page 7

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