Facing millions of dollars in unfunded pension liabilities, Novato took the first step toward creating a pension trust fund.
The Novato City Council on Tuesday voted unanimously to select Public Agency Retirement Services, or PARS, to administer the new Section 115 fund.
“We are the pioneer of this program,” said Mitch Barker, executive vice president of PARS. “We’re the first to introduce this concept three years ago.”
City staff said that creating such a trust fund allows the city to dedicate funds to its defined benefit pension plan under the California Public Employees’ Retirement System, or CalPERS, over an extended time and with more investment options than is allowed by other funds. PARS was selected by the council to help city staff prepare the investment and funding strategies as well as guidelines for the trust.
“As the council knows, increased pension costs due to the CalPERS reduction discount rate has been something that has affected cities throughout the state and nationally as well, where applicable,” said Michael Antwine, assistant city manager.
Novato had more than $30 million in unfunded liabilities as of 2017. An updated figure was not discussed at the council meeting or provided in the staff report. The unfunded liability is the difference between what agencies have in assets and what they require to meet their obligations to retirees.
The discount rate is the long-term interest rate used to fund future pension benefits, according to CalPERS. It is also known as the “assumed rate of return” because it is what CalPERS expects its investments to earn during the fiscal year.
CalPERS’ Board of Administration voted in 2016 to lower its discount rate from 7.5 percent to 7 percent for three years. While the board said lowering the rate would give employers more time to prepare for its contributions, it would also increase their normal costs and unfunded liabilities.
Antwine said the next steps will be for the council to formalize the adoption of the trust fund and the plan administrator, which the council has indicated will be PARS. The city’s Finance and Oversight Committee will then begin developing different funding and investment strategies, which are expected to be adopted by the council as part of its 2019-20 budget process.
PARS, which is based in Newport Beach, was selected out of three groups that applied. The others were San Francisco-based PFM Asset Management LLC and the Torrance-based Keenan Financial Solutions. The city will not pay anything to establish the pension trust, according to a staff report.
Antwine said staff recommended PARS because it had a private letter ruling from the U.S. Internal Revenue Service and because it would allow the city to consolidate its existing Other Post-Employment Benefits, or OPEB, trust fund.
“It would give us the option to put both of these in one trust, which gives you economies of scale and eventually lower fees,” Barker said of the benefits.
The city’s other post-employment benefits, which are non-pension, are limited to health care, excluding dental, vision and life insurance.
Barker said 180 other agencies have adopted a similar trust fund, including Sausalito, Healdsburg and Rohnert Park.
