Facing $47 million in unfunded pension liabilities to the California Public Employees’ Retirement System, the Novato City Council has created a trust fund to pay down the mounting costs.
The council this month chose the Newport Beach-based Public Agency Retirement Services, or PARS, to administer the new Section 115 trust fund. Tuesday’s unanimous vote established the trust fund. The next step for the council is figuring out how to fund it.
The city’s Citizen Finance Advisory and Oversight Committee is expected to begin discussing various funding options in April, according to Assistant City Manager Michael Antwine. The council would then start discussing recommendations from the committee in early May as it moves through the 2019-20 budgeting process.
The new trust fund will be consolidated with another city trust fund already administrated by PARS for the city’s other post-employment benefits, which are non-pension. The two accounts would still be managed separately. The idea behind putting both accounts under one trust is to reduce the amount of fees the city would have to pay on the trust to PARS, U.S. Bank and High Mark Capital Management Inc. for managing and acting as trustees of the trust fund.
Total fees are expected to be at a rate of 1 percent annually, according to city staff.
Mayor Eric Lucan questioned what funding strategies the city can consider. Some suggestions he had were to look at whether to sit on the trust for longer so as to get a better return on investments or to intermittently use the trust fund to pay down the city’s unfunded liability, thereby reducing interest payments on the liabilities through time.
“It might make sense to pay down certain debts we already have and we know exactly the return we’re going to get on it by paying those down as opposed to funding a pot and potentially getting a higher rate of return,” Lucan said during the meeting.
Another option that Lucan said he hopes will be looked at is leveraging the city’s nearly $33 million Hamilton Trust Fund to pay off the city’s 30-year pension obligation bonds. The bonds, created in 2006, have a lower interest rate than the rate CalPERS charges.
In an interview last week, Lucan said the idea behind this proposal would be to reduce interest payments by paying down the bonds using money borrowed from the Hamilton Trust. The borrowed money would have to be returned to the Hamilton Trust, but he said the interest payments on that borrowed money would all go back to the city based on how the Hamilton Trust is set up.
CalPERS has also been lowering its discount rate since 2017. The discount rate essentially indicates how much CalPERS investments of employer and employee pension payments are expected to earn in the future. The rate is being lowered from about 7.4 percent in 2017 to 7 percent by the 2019-20 fiscal year, which begins in July. This results in employers, like the city, and employees having to contribute more to the pension system. Unfunded liabilities for employers like Novato are expected to increase by between 30 to 40 percent as a result.
Novato’s annual payments to the pension system are expected to increase by about 64 percent from the current fiscal year to the 2023-24 fiscal year, from about $4.5 million to about $7.3 million respectively, according to the city’s five-year forecast.
