The Pleasanton City Council last week signed off on investing $28 million in a trust account to help raise additional funds to offset rising employee pension costs, a move city leaders see as leaving Pleasanton better positioned for the years and decades down the line when higher pension bills come due.
The two-pronged strategy calls for investing $6.7 million in a shorter-term, conservative portfolio and $21.3 million in a longer-term, more active portfolio with the goal of earning better returns than the city's typical investments or the California Public Employees' Retirement System (CalPERS).
Based on performance trends of trusts administered by their firm, PARS, city officials hope to have their investment turn into $43.9 million after 10 years -- money that would be available to soften the annual budget impacts of higher pension payments to be required by CalPERS.
"This is something that this council can feel really good about, putting a plan in place for future councils to generate the funds that they will use to help us get out of this, hopefully without cutting services and amenities," Councilwoman Kathy Narum said during the June 5 meeting.
"And I think it's worth commenting that one of the reasons we're able to do this, quite frankly, is because of the past fiscal management of this city that allows us to have this reserve that we can invest, where some cities may not have that luxury," she added.
Pleasanton has an estimated $160 million in unfunded liabilities associated with city employee pensions, a figure that is expected to grow in the years ahead. The city's annual payments to CalPERS are also expected to increase each year before relatively leveling off in 14 years.
Knowing the pension problem was approaching, council members have worked to set aside more than $20 million in recent years to pre-fund the city's pension liabilities. In March, they authorized staff to pursue investing that money through an irrevocable trust -- a Section 115 pension trust administered by PARS.
The trust fund offers benefits including local control over assets, higher yields, pension rate stabilization, investment flexibility, addresses unfunded pension liabilities and improves credit rating, according to city finance director Tina Olson.
Councilman Jerry Pentin said he supported the strategy for allowing "continued local control of this money," which he much preferred to "the idea of sending $20 million or $28 million directly to CalPERS, and the black hole that we know is CalPERS these days."
The irrevocable trust funds can only be used to pay the city's pension contributions, Olson noted.
The city's two-part strategy sees $21.3 million -- primarily funds set aside for future pension payments -- invested in a custom active portfolio that comprises 70% equities and 30% fixed income. City officials recommend not withdrawing from the investment for at least 10 years, though they will regularly track fund performance and can make adjustments if needed, Olson said.
The second allotment of $6.7 million, an amount equivalent to the city's pension contribution for the 2018-19 fiscal year, would be a PARS conservative passive portfolio, designed to be kept in the account for up to three years.
Olson said the $6.7 million is not money that actually needs to go to CalPERS next year, rather an amount equivalent to that total that the city would have otherwise set aside and invested with regular reserves for future pension payments.
Last year, the PARS conservative portfolio yielded 6.29% rate of return (net of fees) and the custom active portfolio yielded about 16.28% net of fees, Olson said. The city's average investment return was 1.7% and CalPERS' was 11.2% during that same time, she added.
"One of our guiding principles is the continued implementation of sustainable fiscal practices," City Manager Nelson Fialho said after last week's meeting. "This investment strategy will allow us to maintain core city services, while also ensure funds are available in the future to help pay off our long-term pension obligations."
Though city officials recommend not touching the investment funds for the initial terms, the council last week did adopt trust withdrawal policy guidelines in the event the city wants to pull from the account in the future.
The trust money would be used to make a pension payment that would otherwise come from the city's general fund.
The adopted guidelines allow for early withdrawal if:
* Annual CalPERS employer pension contribution rate increase (in dollars) is greater than the growth rate (in dollars) of the city's general fund.
* The general fund has a structural deficit that needs to be addressed (i.e. non-discretionary expenditures exceed revenues).
* General fund reserves have been used and need to be replenished in order to maintain a reserve equal to 20% of general fund expenditures.
* Paying off specific pension liabilities that will result in interest savings greater than interest earnings on the trust fund.
The council's approval of the PARS trust and withdrawal guidelines was 4-0, with Councilwoman Karla Brown absent. City officials plan to update the council quarterly on how the trust investment is performing.