The City considers its pension and OPEB obligations very seriously, and continually examines all options to reduce pension and OPEB obligations and annual costs. When feasible, and legally permissible, staff recommends responsive pension and OPEB reform measures that ensure the long-term fiscal viability and resiliency. Employee compensation packages for Brea City employees include California Public Employees' Retirement System (“CalPERS”) pensions and CalPERS’ Public Employers Medical Care Health Act (“PEMCHA”) healthcare benefits (“OPEB” – Other [than pensions] Post-Employment Benefits) following the completion of active service.
On November 17, 2015, in order to responsibly manage pension and OPEB costs, the City Council unanimously authorized participation in both the Public Agency Retirement Services (PARS) Post-Employment Benefits Trust Program, and the PARS Post-Retirement Health Care Trust Program. This action created two separate mechanisms by which the City will be able to pre-fund (one-time and/or annually) a portion of unfunded pension and OPEB actuarial liabilities.
To date, the City has contributed $6,000,000 in Fiscal Year 2015-16 and an additional $756,800 in Fiscal Year 2018-19 for a total contribution of $6,756,800 to pre-fund pension obligation costs. As of March 31, 2020, the current market value of the Trust was $7,663,519.44.
During the Budget Workshop on May 21, 2019, the City Council expressed interest in contributing any revenues over expenditures from Fiscal Year 2018-19 to PARS to address the City's OPEB obligations. As of June 30, 2019, the City's OPEB obligations were calculated to be $25.6 million.
At the February 18, 2020, Council meeting, the City Council was presented with the financial results for the fiscal year ending 2018-19 and reported that there was approximately $2.5 million available in revenues over expenditures, as well as an additional $155,000 from the City's OPEB Fund (Fund 150) that can be contributed to PARS to address the City's OPEB obligations. The intent is to gradually move from a "pay-as-you-go" method to the recommended Annual Required Contribution (ARC) method. Based upon the 2017 Actuarial Valuation Report for the City's Retiree Healthcare Plan, the ARC is calculated to be approximately $2.56 million. The ARC covers the cost of the current retiree benefit obligations (“pay-as-you-go”), as well as pays down the City’s unfunded liability obligation. The actuarial valuation and the ARC are re-calculated every two years, and the 2019 Actuarial Valuation Report is expected to be completed later this year.
DISCUSSION
The Investment Advisory Committee (IAC) is tasked to establish guidelines for the City's OPEB Trust Program ("Plan") which includes identifying a preferred investment strategy for the Plan. PARS and their third-party investment advisory firm, HighMark Capital Management, offers five portfolio objectives that vary in risk tolerance and investment strategies and they include Conservative, Moderately Conservative, Moderate, Balanced and Capital Appreciation. Attachment A details the risk tolerance and investment strategy of each of the portfolio options.
The goal of the Plan's investment program is to provide a reasonable level of growth which will result in sufficient assets to pay the present and future obligations of the Plan. The following objectives are intended to assist in achieving this goal:
- The Plan should seek to earn a return in excess of its policy benchmark over the life of the Plan;
- The Plan’s assets will be managed on a total return basis which takes into consideration both investment income and capital appreciation. While the Plan Sponsor recognizes the importance of preservation of capital, it also adheres to the principle that varying degrees of investment risk are generally rewarded with compensating returns. To achieve these objectives, the Plan Sponsor allocates its assets (asset allocation) with a strategic perspective of the capital markets.
The purpose of the guidelines are to:
- Facilitate the process of ongoing communication between the Plan Sponsor and its plan fiduciaries;
- Confirm the Plan’s investment goals and objectives and management policies applicable to the investment portfolio identified below and obtained from the Plan Sponsor;
- Provide a framework to construct a well-diversified asset mix that can potentially be expected to meet the account’s investment needs that is consistent with the account’s investment objectives, liquidity considerations and risk tolerance;
- Identify any unique considerations that may restrict or limit the investment discretion of its designated investment managers; and
- Help maintain a long-term perspective when market volatility is caused by short-term market movements.
Based upon staff review, the Moderate Investment Objective is recommended as it has a dual goal to seek growth of income and principal and its risk tolerance demonstrates that the Plan can accept price fluctuations to pursue its investment objectives. The below chart summarizes the Strategic Asset Allocation for the Moderate Investment Objective:
| Strategic Asset Allocation Ranges |
| Cash |
Fixed Income |
Equity |
| 0-20% |
40%-60% |
40%-60% |
| Policy: 5% |
Policy: 45% |
Policy: 50% |
The proposed Investment Guidelines with the Moderate Investment Objective is provided as a Attachment B for your review and consideration.
|