HomeMy WebLinkAbout06 - Authorization to Establish an Other Post-Employment Benefits Trust with PARSQ �EwPpRT
CITY OF
s NEWPORT BEACH
`q44:09 City Council Staff Report
March 12, 2024
Agenda Item No. 6
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Jason AI -Imam, Finance Director/Treasurer - 949-644-3126,
jalimam@newportbeachca.gov
PREPARED BY: Jason AI -Imam, Finance Director/Treasurer
TITLE: Resolution No. 2024-15: Authorization to Establish an Other
Post -Employment Benefits Trust with Public Agency Retirement
Services
/_1 16"t I:7_T91 6
This report recommends establishing an Other Post -Employment Benefits (OPEB) Trust
with Public Agency Retirement Services (PARS) to prefund the liability for retiree medical
benefits.
RECOMMENDATIONS:
a) Determine this action is exempt from the California Environmental Quality Act (CEQA)
pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because
this action will not result in a physical change to the environment, directly or indirectly;
b) Adopt Resolution No. 2024-15, A Resolution of the City Council of the City of Newport
Beach, California, Adopting the Public Agencies Post -Employment Benefits Trust
(PAPEBT) Administered by Public Agency Retirement Services (PARS), and
Appointing the City Manager as the Plan Administrator; and
c) Authorize the City Manager to negotiate and execute the documents to implement the
program.
DISCUSSION:
In 2008, the City of Newport Beach established an OPEB Trust with California Employers'
Retiree Benefit Trust (CERBT), which is managed by the California Public Employees
Retirement System (CaIPERS). CERBT has three investment strategies that provide for
alternative levels of tolerance for investment volatility risk. CERBT investments are
managed by State Street Global Advisors in lieu of CalPERS investment staff with
investment criteria dictated by an investment policy adopted by the CalPERS Board. The
City's OPEB Trust has a balance of approximately $35 million, which is invested in
Strategy 1 with approximately 50% invested in equities.
6-1
Resolution No. 2024-15: Authorization to Establish an Other Post -Employment
Benefits Trust with Public Agency Retirement Services
March 12, 2024
Page 2
In March 2022, CalPERS approved changes to the asset class allocations for the CERBT
portfolios based on the 2022 Capital Market Assumptions. The changes to the Strategy
1 portfolio resulted in a shift from global equities to global real estate to provide for
diversification. However, it resulted in lower returns (7.59% to 6.0%) that are expected
over the long-term and an increase in volatility (11.8% to 12.1 %). The additional risk
(volatility) for the CERBT Trust does not appear to be commensurate with the overall
expected return. Therefore, in light of the recent changes made by CalPERS to the
CERBT program, the City evaluated and considered other alternatives. Public Agency
Retirement Services, or PARS, manages $6 billion of pension and OPEB assets for
approximately 500 public agencies throughout the United States. PARS has five
investment strategies that provide for alternative levels of tolerance for investment
volatility risk. A distinctive benefit to PARS is that public agencies are permitted to create
a customized investment strategy for their PARS OPEB Trusts, which allows for greater
control of investment risk volatility.
At the Finance Committee meeting on November 9, 2023, the Finance Committee
authorized the formation of a subcommittee to evaluate and consider establishing an
OPEB Trust with PARS. The subcommittee consisted of Finance Committee Members
Collopy, Curry and Scarbrough. On December 11, 2023, the subcommittee met with
representatives from PARS and unanimously supported establishing an OPEB Trust with
PARS, and recommended that the assets be invested in the "balanced" strategy. PARS'
balanced strategy has an expected return of 6.27% (compared to 6.0% for CERBT) net
of fees. The volatility for the PARS' balanced strategy is 10.12%, which is lower than the
12.1 % volatility for CERBT. The following table reflects the asset classes and strategic
range for the balanced strategy:
Asset Class
Strategic Range
Equity Style:
Domestic Large Cap Equity
20%-50%
Domestic Mid Cap Equity
0%-15%
Domestic Small Cap Equity
0%-20%
International Equity (incl. Emerging Markets)
0%-20%
Real Estate Investment Trust REIT
0%-10%
Total Equities
0', i'.
Fixed Income Style:
Long -Term Bonds (Maturities > 7 Years)
0%-20%
Intermediate -Term Bonds Maturities 3-7 Years
15%-50%
Shorter -Term Bonds Maturities < 3 Years
0%-15%
High Yield Bonds
0%-8%
FixedTotal Income
30%-50%
Total Cash
0', 0',
Historical returns for the balanced strategy with PARS compared to Strategy 1 with
CERBT are reflected in Attachment A, which shows the balanced strategy provides for a
competitive return with less volatility compared to CERBT.
6-2
Resolution No. 2024-15: Authorization to Establish an Other Post -Employment
Benefits Trust with Public Agency Retirement Services
March 12, 2024
Page 3
On January 11, 2024, the Finance Committee directed staff to bring forward an item for
the City Council's consideration that would, if approved, establish an OPEB Trust with
PARS to prefund the liability for retiree medical benefits, and to transfer the assets from
CERBT to PARS.
FISCAL IMPACT:
The City's most recent actuarial valuation reflects a $7.5 million net OPEB liability as of
June 30, 2023, which reflects a funded status of 82.4%, excluding amounts related to the
implied rate subsidy. The valuation of the City's net OPEB liability was based on a
discount rate of 6.0%, which is the expected rate of return on CERBT assets. If the City
Council approves the transfer of OPEB trust assets from CERBT to PARS, the City will
be able to utilize a discount rate of 6.27%, which is the expected rate of return on assets
held by PARS. If the City utilizes a discount rate of 6.27%, it will reduce the net OPEB
liability by approximately $1 million. On October 24, 2023, the City Council approved
allocating $5.8 million of the surplus for Fiscal Year 2022-23 toward the City's OPEB
liability. The impact from the change in the discount rate along with the contribution from
the Fiscal Year 2022-23 surplus and budgeted contribution in Fiscal Year 2023-24 will
fully fund the City's OPEB liability.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California
Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
ATTACHMENTS:
Attachment A — Historical Returns
Attachment B — Resolution
6-3
Attachment A
Historical Returns
BALANCED STRATEGY VS CERBT
Over 1 Year
Over 3 Years
Over 5 Years
As of September 30, 2023
Over 10 Years
Balanced
Balanced
Balanced
Balanced
(40% Fixed Income/Cash)
10.59%
(40% Fixed Income/Cash)
3.28%
(40% Fixed Income/Cash)
4.39%
(40% Fixed Income/Cash)
5.76%
minus weighted PARS
minus weighted PARS
minus weighted PARS
minus weighted PARS
administration fee
o
() 0.15/o
administration fee
o
() 0.15/o
administration fee
(-) 0.15%
administration fee
(-) 0.15%
minus weighted
(-) 0.16%
minus weighted
(-) 0.16%
minus weighted
(-) 0.16%
minus weighted
(-) 0.16%
HighMark investment
HighMark investment
HighMark investment
HighMark investment
management fee
management fee
management fee
management fee
1-Year Net Return
10.28%
3-Year Net Return
2.97%
5-Year Net Return
4.08%
10-Year Net Return
5.45%
Strategy 1
Strategy 1
Strategy 1
Strategy 1
(28% Fixed Income/Cash) 10.33%
(28% Fixed Income/Cash) 2.33%
(28% Fixed Income/Cash) 4.02%
(28% Fixed Income/Cash) 5.32%
minus fees (-) 0.10%
minus fees (-) 0.08%
minus fees (-) 0.09%
minus fees (-) 0.09%
1-Year Net Return 10.23%
3-Year Net Return 2.25%
5-Year Net Return 3.93%
10-Year Net Return 5.23%
PUB"c PARS
AGENC)
RETIREMENT
SERVICES
TRUSTED SOLUTIONS. LASTING RESULTS.
Subject to change due to rebalancing, • fees are based on assets of $35,000,000.
Past performance does not guarantee future results.
CITY OF NEWPORT BEACH 12
6-5
ATTACHMENT B
RESOLUTION NO. 2024- 15
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF NEWPORT BEACH, CALIFORNIA, ADOPTING THE
PUBLIC AGENCIES POST -EMPLOYMENT BENEFITS
TRUST (PAPEBT) ADMINISTERED BY PUBLIC AGENCY
RETIREMENT SERVICES (PARS), AND APPOINTING
THE CITY MANAGER AS THE PLAN ADMINISTRATOR
WHEREAS, on March 25, 2008, the City Council of the City of Newport Beach
("City") approved investing Other Post -Employment Benefit ("OPEB") funding into the
California Employer's Retiree Benefit Trust ("CERBT") managed by the California Public
Employees' Retirement System ("CalPERS"), to address the unfunded liability remaining
after conversion of the City's Retiree Medical Program from a defined benefit plan to a
defined contribution plan;
WHEREAS, on September 11, 2012, the City Council adopted Resolution 2012-
12, delegating the Finance Director, Deputy Finance Director, Accounting Manager, and
Budget Manager authority to request disbursements on behalf of the City from the
CERBT;
WHEREAS, on January 11, 2024, the City Finance Committee recommended
that the City move the OPEB funds to the Public Agencies Post -Employment Benefits
Trust ("PAPEBT"), managed by Public Agency Retirement Services ("PARS");
WHEREAS, the PAPEBT is a multi -employer trust established to provide
economies of scale and efficiency of administration to public agencies, and is tax-exempt
under Section 115 of the Internal Revenue Code;
WHEREAS, the OPEB funds will continue to be held in trust for the purpose of
pre -funding the City's Retiree Medical Program and defraying the reasonable expenses
associated therewith;
WHEREAS, moving the OPEB funds from the CERBT to the PAPEBT will have
no effect on any current or former employee's entitlement to post -employment benefits,
will not create any new or vested right to any benefit nor strengthen any existing vested
right or benefit, and the City reserves the right to make contributions, if any, to the
PAPEBT; and
WHEREAS, PARS requires a resolution of the City Council adopting the
PAPEBT, and designating an officer as the Plan Administrator.
Resolution No. 2024-
Page 2 of 3
NOW, THEREFORE, the City Council of the City of Newport Beach resolves as
follows:
Section 1: The City Council hereby adopts the PARS Public Agencies Post -
Employment Benefits Trust, effective March 12, 2024.
Section 2: The City Council hereby appoints the City Manager, or designee, as
the City's Plan Administrator for the City's participation in the Public Agencies Post -
Employment Benefits Trust, and authorizes the Plan Administrator to execute any and all
legal and administrative documents on behalf of the City, and to take whatever additional
actions necessary to establish and maintain the City's participation in the Public Agencies
Post -Employment Benefits Trust, and to ensure compliance with any relevant rule,
regulation, or law related thereto.
Section 3: The recitals provided in this resolution are true and correct and are
incorporated into the operative part of this resolution. Any previously adopted resolution,
or portion thereof, in conflict with the provisions of this resolution is hereby repealed to
the extent it conflicts.
Section 4: If any section, subsection, sentence, clause or phrase of this
resolution is, for any reason, held to be invalid or unconstitutional, such decision shall not
affect the validity or constitutionality of the remaining portions of this resolution. The City
Council hereby declares that it would have passed this resolution, and each section,
subsection, sentence, clause or phrase hereof, irrespective of the fact that any one or
more sections, subsections, sentences, clauses or phrases be declared invalid or
unconstitutional.
Section 5: The City Council finds the adoption of this resolution is not subject to
the California Environmental Quality Act ("CEQA") pursuant to Sections 15060(c)(2) (the
activity will not result in a direct or reasonably foreseeable indirect physical change in the
environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378)
of the CEQA Guidelines, California Code of Regulations, Title 14, Division 6, Chapter 3,
because it has no potential for resulting in physical change to the environment, directly or
indirectly.
mo
Resolution No. 2024-
Page 3 of 3
Section 6: This resolution shall take effect immediately upon its adoption by the
City Council, and the City Clerk shall certify the vote adopting the resolution.
ADOPTED this 12th day of March, 2024.
Will O'Neill
Mayor
ATTEST:
Leilani 1. Brown
City Clerk
APPROVED AS TO FORM:
CITY ATTORNEY'S OFFICE
aron C. Harp
City Attorney