by Steven Felschundneff | steven@claremont-courier.com

The Claremont City Council approved a request from the city’s finance department to open a pension stabilization program, section 115 trust, creating a savings vehicle for a portion of Claremont’s pension obligation.
The irrevocable trust will be administered by Public Agency Retirement Services (PARS) which manages similar accounts for 114 cities and 22 counties in California. The Council’s action Tuesday night, which included authorizing the city manager to be the plan administrator, is just the first step, and no pension monies have yet been committed to the account.
There is no cost to establish the trust, but once funded the city will pay fees to two agencies. PARS, under authority from the IRS, acts as the trust administrator, while HighMark Capital Management acts as the investment firm for the portfolio.
The city will pay a management fee to PARS on a sliding scale beginning at 0.25 percent for the first $10 million and 0.2 percent for $10 to $15 million. In addition, U.S. Bank, HighMark Capital Management charges 0.35 percent for the first $5 million and .025 for the next $5 million. The fees continue to be lower the higher the balance in the account, reaching 0.1 percent for assets over $50 million. Total fees will not exceed 0.6 percent and there are no sales or trading commissions, according to Rachel Sanders a senior manager with PARS.
“Over the last several years, the city council has authorized over $2.6 million in additional payments to the California Public Employees’ Retirement System (CalPERS) to pay down the city’s unfunded pension liabilities. These discretionary payments have been above and beyond the annual contributions required by CalPERS, and have been deposited into the city’s pension accounts. The establishment of a Section 115 Trust would provide additional options to prefund the city’s unfunded pension liabilities,” David Cain, the interim finance director, wrote in his report to the council.
The city has two pension trusts with CalPERS, one for public safety employees and one for “miscellaneous” employees. The trusts are funded by city and employee contributions and through returns on the investments inside the trust. However, as required by state law, the current pension fund is in fixed income investments, which have performed poorly due to low interest rates.
The city’s two existing funds are below the benchmark level of 85 percent funded, with the public safety employees 68.6 percent funded and the “miscellaneous” employees at 68.8. According to the presentation Tuesday, this puts Claremont somewhere in the middle of other cities regarding the unfunded liability.
“One of the most critical assumptions in attaining full funding goals is the rate of return on investments in the trusts. CalPERS’ current annual investment return assumption is 7 percent. Assuming this rate of return is attained, funding of future pension obligations would be derived 55 percent from investment gains, 32 percent from employer contributions, and 13 percent from member contributions. If the 7 percent rate of return is not realized, contributions from employers are likely to increase,” according to the staff report.

The assumed return on investment has not been achieved by CalPERS over the past several years and the outlook for the future is increasingly pessimistic. Over the past three years the fund has returned 6.6 percent, over five years 6.3 and over 10 years 8.5. At twenty years it’s 5.5 percent. As a consequence of the poor performance, CalPERS has gradually reduced its investment return assumption which will result in greater contributions from employees and employers.
The city council approved the resolution, 4-1, with Councilmember Corey Calaycay casting the no vote. Mr. Calaycay’s main objection focused on the extra payments the city has made to CalPERS and the significant savings the city realized because of that proactive move. Even though the section 115 trust would have a similar function, he was concerned that a future city council would elect to pay current year pension costs with money from the trust, rather than apply it to pay down the debt to CalPERS.
Ms. Sanders explained that once money has been deposited into a PARS trust it can only be withdrawn for pension costs. However, the city does not have to use the funds to offset the unfunded liability, even if that is the goal of opening the trust account.
If the council elects to fund the trust, the finance staff recommends it select a “moderately conservative” fund offered by HighMark, with a 20 to 40 percent equity investment including domestic and international stocks. As of March 31, the one-year rate of return is an impressive 20.82 percent, but Ms. Sanders cautioned that it was a particularly good year for stocks. At three years that return drops to 7.49 percent and at five years 6.92. At ten years the fund’s performance is a dismal 5.75 percent, however, that is an average of both good and very bad years for the stock market including the years immediately after the Great Recession.
The 20 to 40 percent range in the equity position allows HighMark to adjust the portfolio based on current economic activities, according to Mr. Cain.
“The city will not make a funding decision at this time. Tonight’s action is simply to authorize setting up the pension trust. The city will then work on developing policies and procedures for future discretionary contributions. No funding will take place at this time. There is no cost for setting up the plan and no fees until the plan is funded,” Mr. Cain said on Tuesday.
The next steps in the process include: PARS drawing up legal documents for the plan administrator; the development of an investment policy and guidelines for the investment manager; city council approving initial deposit in the PARS trust; and the city developing policies and procedures for future annual contributions and disbursements.