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HomeMy WebLinkAboutAdopt Resolution No. 2016-24 authorizing participation in th Dept ID FN 16-003 Page 1 of 3 Meeting Date 5/2/2016 CITY OF HUNTINGTON BEACH Fg>„9 ti REQUEST FOR CITY COUNCIL ACTION f MEETING DATE: 5/2/2016 SUBMITTED TO: Honorable Mayor and City Council Members SUBMITTED BY: Fred A Wilson, City Manager PREPARED BY: Lori Ann Farrell Harrison, Chief Financial Officer SUBJECT: Adopt Resolution No 2016-24 authorizing participation in the Public Agencies Post-Employment Benefits Section 115 Trust administered by Public Agency Retirement Systems (PARS) to Pre-Fund Pension and other Post Employment Benefits and Deposit an Additional Funding $1 5 million into the Trust Statement of Issue The City of Huntington Beach is eligible to participate in a tax-exempt, Internal Revenue Code Section 115 Trust as authorized by the City Council on December 21, 2015, to help pay down the City's unfunded liabilities To further this goal, City Council approval is requested to adopt a Resolution authorizing the Public Agency Retirement Services company (PARS) to administer the trust's assets and ensure the tax exempt status for the Trust Authorization is also requested to deposit additional funding of $1 5 million into the Trust from previously approved and available sources in the City's adopted budget and General Fund set-asides Financial Impact Q On December 21, 2015, the City Council approved the designation and deposit of $1 0 million in available year-end General Fund Balance to a new Section 115 Trust to help the City pre-fund its pension and retiree medical obligations To effectuate this action, a new fund, Fund 716 - Section 115 Trust, was created To further reduce the City's unfunded liabilities, an additional $1 5 million is recommended for deposit into the Trust from sources previously approved by the City Council for the pre-payment of unfunded liabilities First, the FY 2016/17 Adopted Budget already contains $1 0 million for the "One Equals Five" Plan which can be deposited into the Trust, and, utilizing the $500,000 contained in the "One Equals Five" General Fund Reserve that has not yet been expended These actions will help to reduce the City's $346 million Net Pension Liability by paying liabilities off sooner Recommended Action A) Adopt Resolution No 2016-24, "A Resolution of the City Council of the City of Huntington Beach Approving the Adoption of the Public Agencies Post-Employment Benefits Trust Administered by the Public Agency Retirement Services (PARS)," and, B) Approve the appropriation, transfer and deposit of an additional $1 5 million into the Trust to further reduce the City's unfunded liabilities Alternative Action(s) Do not approve the recommended action and direct staff accordingly Item 7. - I HB -96- Dept ID FN 16-003 Page 2 of 3 Meeting Date 5/2/2016 Analysis In 2012, the Governmental Accounting Standards Board (GASB) Issued Statement No 68, Accounting and Financial Reporting for Pensions GASB 68 requires that government employers that sponsor Defined Benefits Plans (pensions) must recognize a Net Pension Liability, previously known as the Unfunded Actuarial Accrued Liability (UAAL) on their balance sheet This is the difference between the City's total pension liability (actuarial accrued liability) and actual plan assets GASB 68 became effective for fiscal years starting after June 15, 2015 For the City of Huntington Beach, the Net Pension Liability totaled $345 9 million and reduced the City's Total Net Position on the balance sheet from $990 1 million to $644 2 million per the audited financial reports CalPERS has also significantly changed the methodology for calculating the City's'Annual Required Contributions (ARC) in regards to amortizing the UAAL Until recently, the City's only option for reducing the UAAL was to commit additional funds to CalPERS These additional funds would be subject to the same market volatility as the CalPERS investment earnings target of 7 5 percent, and are not accessible to the City for other pension or retirement benefit related expenses, such as the City's separate Supplemental Retirement Plan or the City's Retiree Medical Plan PARS is an independent retirement plan administration provider that has sought and received approval from the IRS in the form of a Private Letter Ruling (PLR) on its newly developed Post- Employment Benefits Trust Program or Pension Rate Stabilization Program (PRSP) The PARS IRS ruling allows public agencies to safely and securely set aside funds, separate and apart from state or county retirement systems, in a tax-exempt irrevocable trust to reduce pension liabilities and stabilize pension costs Participating agencies maintain local control of the assets held in the Trust and can determine the appropriate goals and risk tolerance level for the investments, providing greater flexibility As a result, 22 other agencies have opted into the PARS Trust Participation in the Trust provides the City with an alternative to sending funds to CalPERS and provides greater local control over assets and portfolio management PARS has assembled leading professionals to provide the City with the necessary services required under one program to pre- fund both pension and retiree health care liabilities PARS has also secured a Private Letter Ruling from the Internal Revenue Service ensuring the tax-exempt status of the Trust and its assets Expected benefits offered by a separate retirement funding trust include • Pension volatility mitigation - contributions from the trust can be transferred to CalPERS at the City's discretion to offset fluctuations in CaIPERS' required annual contributions Trust assets can be accessed anytime to fund the City's pension obligations and defray reasonable expenses associated therewith • City maintains oversight of investment management and control over the risk tolerance level of the portfolio • Investment flexibility with Section 115 Trust compared to restrictions on General Fund investments (GOUT Code 53216 1) • Investment security with Section 115 Trust compared to CalPERS investment management, risk appetite and portfolio allocation • Oversight and local control of fund management selection and monitoring of performance • Assets in the trust will offset unfunded pension liabilities and will be reported on the City's financial statements • Assets can be accessed to offset unexpected CalPERS rate increases (rate stabilization) • Helps maintain bond ratings as this is viewed as a practical measure to reduce liabilities • Flexibility to access trust assets at any time to pay Employer's pension obligations • The City can also pre-fund retiree medical care (OPEB) liabilities with the same program The PARS program has been established as a multiple-employer trust so that public agencies, regardless of size, can join the program to receive the necessary economies of scale to keep HB -97- Item 7. - 2 Dept ID FN 16-003 Page 3 of 3 Meeting Date 5/2/2016 administrative fees low and avoid any setup costs To properly offset liabilities, funds must be set aside In an exclusive benefit, Irrevocable trust that cannot be accessed by creditors, In order to be accounted for as assets, to reduce the liabilities on the Clty's financial statements The trust permits the City, under federal and state law, to Invest In a more diversified array of Investments to maximize Investment returns over the long-term and reduce the Clty's liabilities On December 21, 2015, the City Council approved the designation and deposit of $1 0 million In available year-end General Fund balance (approximately 25 percent of the year-end balances available) for the new Section 115 Trust Fund at the City to help expedite the pre-funding of Its pension and retiree medical obligations At this time, Staff recommends the additional deposit of $1 5 million, for a total of $2 5 million to be deposited Into the Fund and transferred to PARS, to achieve even greater long-term savings The sources of funding for the additional $1 5 million are previously approved amounts established for the "One Equals Five" plan from the FY 2016/17 Adopted Budget ($1,000,000), and General Fund reserves ($500,000) established In a previous year for the "One Equals Five" Plan that can be deposited Into the PARS Trust in-lieu-of being sent to CalPERS, providing the City greater flexibility In funding Its different types of liabilities (e g the Clty's separate Retiree Medical and Retiree Supplemental Plans In addition to Its CalPERS Plans) and potentially lowering the market risk of the assets To date, more than 190 public agencies have partnered with PARS to either provide customized defined benefits plans for their employees, and/or provide plans to reduce their pension liabilities PARS has partnered with U S Bank to serve as the trustee for the Trust and Its sub-adviser HlghMark Capital Management, Inc to provide Investment management services for the Trust The IRS has also approved the tax exempt status of PARS' Trust pursuant to the Federal tax code Environmental Status Not applicable Strategic Plan Goal Strengthen economic and financial sustalnablllty Attachment(s) 1 Resolution No 2016-24 2 IRS Private Letter Ruling — Pension Rate Stabilization Program (PRSP) 3 Request for City Council Action 12/21/15 Approved 7-0 FN 15-022 - Fiscal Year 2014/15 Preliminary Unaudited General Fund Balance Designation to a Section 115 Trust to Reduce Unfunded Liabilities Item 7. - 3 xB -98- ACIi `� IF 1 RESOLUTION NO 2016-24 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON BEACH APPROVING THE ADOPTION OF THE PUBLIC AGENCIES POST-EMPLOYMENT BENEFITS TRUST ADMINISTERED BY PUBLIC AGENCY RETIREMENT SERVICES (PARS) WHEREAS, PARS has made available the PARS Public Agencies Post-Employment Benefits Trust (the "Piogiam") for the purpose of pie-funding pension obligations and/or OPEB obligations; and The City of Huntington Beach (City) is eligible to participate in the Program, a tax- exempt trust performing an essential goveinrnental function within the meaning of Section 115 of the Internal Revenue Code, as amended, and the Regulations issued thereunder, and is a tax- exempt trust under the relevant statutory provisions of the State of California, and The City's adoption and operation of the Program has no effect on any cuiient of foinner employee's entitlement to post-employment benefits, and The terms and conditions of post-employment benefit entitlement, if any, are governed by contracts separate from, and independent of, the Program, and The City's funding of the Program does not, and is not intended to, create any new vested tight to any benefit nor strengthen any existing vested light; and The City reserves the right to make contributions, if any, to the Program, NOW, THEREFORE, the City Council of the City of Huntington Beach does hereby resolve as follows 1 The City Council hereby adopts the PARS Public Agencies Post-Employment Benefits Trust, effective May 2 , 2016 , and 2 The City Council hereby appoints the City Manages, of his/hei successor or his/her designee as the City's Plan Administrator for the Program, and 3 The City's Plan Administrator is hereby author ized to execute the PARS legal and administrative documents on behalf of the City, to take whatever additional actions are necessary to maintain the City's participation in the Program, to maintain compliance of any relevant regulation issued of as may be issued, and authorizing him/her to take whatever additional actions are required to administer the City's Program. 16-5186/134302 1 RESOLUTION NO 2016-24 PASSED AND ADOPTED by the City Council of the City of Huntington Beach at a regular meeting thereof held on the 2nd day of May • 20 16 yoi REVIE D APPROVED APPROVED AS RM City a a r City Attorney D\w j12A1\to 1N TIATED ND AP?,RqVED Diiectoi of Finance 16-5186/134302 2 Res. No. 2016-24 STATE OF CALIFORNIA COUNTY OF ORANGE ) ss: CITY OF HUNTINGTON BEACH ) I, JOAN L FLYNN the duly elected, qualified City Clerk of the City of Huntington Beach, and ex-officio Clerk of the City Council of said City, do hereby certify that the whole number of members of the City Council of the City of Huntington Beach is seven, that the foregoing resolution was passed and adopted by the affirmative vote of at least a majority of all the members of said City Council at a Regular meeting thereof held on May 2, 2016 by the following vote AYES: Posey, O'Connell, Sullivan, Katapodis, Hardy, Delgleize, Peterson NOES: None ABSENT: None ABSTAIN: None City lerk and ex-officio Clerk of the City Council of the City of Huntington Beach, California FATTACHMENT #2 e Internal Revenue Service Department of the Treasury Washington, DC 20224 Third Party Communication None Index Number 115 00-00 Date of Communication Not Applicable U S. Bank National Association Person To Contact c/o Susan Hughes, Vice President Robin J Ehrenberg, ID No 1000219292 3121 Michelson Drive (Suite 300) Telephone Number Irvine, CA 92612 (202) 317-5800 Refer Reply To- CC:TEGE:EOEG EO3 PLR-146796-14 Date.June 5, 2015 Legend Trust = Public Agencies Post-Employment Benefits Trust Trust Agreement = Public Agencies Post-Employment Benefits Trust Agreement Trustee = U.S. Bank National Association Dear Ms Hughes, This letter responds to a letter from your authorized representative dated December 22, 2014, requesting rulings that (1) the Trust's income is excludable from gross income under section 115 of the Internal Revenue Code (IRC) and (2) the Trust is not required to file annual federal income tax returns under IRC section 6012(a)(4) The Trust represents the facts as follows: FACTS The Trust is a multiple employer trust established to enable public-agency employers to fund post-retirement employee benefits Each participating employer must be a public agency that is a state, political subdivision of a state, or an entity the income of which is excludable from gross income under IRC section 115 The employer's governing body must authorize in writing the adoption of the Trust and the employer must execute the adoption agreement, which approves the Trust's administrator and provides that the agency adopts and agrees to be bound by the Trust Agreement. In the adoption agreement, the employer elects to fund obligations to provide benefits under a post- employment health care plan and contribute to a defined-benefit pension plan maintained by the employer that is qualified under IRC section 401(a). The employer may elect to fund either or both obligations HB -101- Item 7. - 6 i PLR-146796-14 2 The Trust Agreement provides that assets are held by the Trust for the exclusive purpose of funding participating employers' benefit obligations and defraying the reasonable expenses of the Trust The Trust's assets may not be used for any other purpose Each employer's contributions to the Trust, together with any allocable investment earnings and losses, are held in a separate account for that employer Assets allocated to satisfy an employer's health and welfare benefit obligation or the employer's pension obligation may only be used for purposes of satisfying that particular obligation. The assets held in an employer's account are not available to pay any obligations incurred by any other employer. The employers appoint the Trustee and the Trust's administrator and may remove the Trustee or the administrator by a two-thirds vote of all employers The employers may amend the Trust Agreement with the approval of two-thirds of all employers then participating in the Trust The employers may terminate the Trust by unanimous agreement of all employers Upon termination of the Trust, any assets remaining in an employer's account, after satisfaction of benefit and the Trust's obligations are returned to the employer to the extent permitted by law and consistent with the requirements of IRC section 115 LAW AND ANALYSIS Issue 1 - IRC section 1150) IRC section 115(1) provides that gross income does not include income derived from any public utility or the exercise of any essential governmental function and accruing to a state or any political subdivision thereof Rev Rul. 77-261, 1977-2 C B 45, holds that income generated by an investment fund that is established by a state to hold revenues in excess of the amounts needed to meet current expenses is excludable from gross income under IRC section 115(1), because such investment constitutes an essential governmental function The ruling explains that the statutory exclusion is intended to extend not to the income of a state or municipality resulting from its own participation in activities, but rather to the income of an entity engaged in the operation of a public utility or the performance of some governmental function that accrues to either a state or political subdivision of a state The ruling points out that it may be assumed that Congress did not desire in any way to restrict a state's participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and that are within the ambit of a sovereign to conduct Item 7. - 7 HB -102- PLR-146796-14 3 Rev Rul 90-74, 1990-2 C.B 34, holds that the income of an organization formed, funded, and operated by political subdivisions to pool various risks (e g., casualty, public liability, workers' compensation, and employees' health) is excludable from gross income under IRC section 115(1), because the organization is performing an essential governmental function The revenue ruling states that the income of such an organization is excludable from gross income so long as private interests do not participate in the organization or benefit more than incidentally from the organization The benefit to the employees of the insurance coverage obtained by the member political subdivisions was deemed incidental to the public benefit Through the Trust, participating public agency employers fund health and welfare and pension obligations for retired employees. Each of the Trust's participating employers is required to be a state, political subdivision of a state or an entity the income of which is excludable from gross income under IRC section 115 Providing health, welfare and pension benefits to current and former employees constitutes the performance of an essential government function within the meaning of IRC section 115(1) See Rev Rul 90-74 and Rev. Rul 77-261. The Trust's income accrues to its participating employers, all of which are political subdivisions of a state or entities the income of which is excludable from gross income under IRC section 115 No private interests will participate in, or benefit from, the operation of Trust, other than as providers of goods or services The benefit to employees is incidental to the public benefit. See Rev Rul. 90-74 In no event, including dissolution, will the Trust's assets be distributed or revert to any entity that is not a state, a political subdivision of a state, or entity the income of which is excludable from its gross income by application of IRC section 115(1) Issue 2- IRC section 6012(a)(4) Section 301 7701-1(b) of the Procedure and Administration Regulations (Regulations) provides that the classification of organizations that are recognized as separate entities is determined under sections 301 7701-2, 301.7701-3, and 301 7701-4, unless a provision of the IRC provides for special treatment of that organization Section 301 7701-4(a) of the Regulations provides that, in general, an arrangement will be treated as if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. The Trust enables public-agency employers to set aside funds to be used to satisfy each employer's separate pension and health and welfare benefit obligations The xB -103- Item 7. - 8 PLR-146796-14 4 Trustee is charged with the responsibility of the protection and conservation of the Trust property for the benefit of the beneficiaries of the Trust. The beneficiaries of the Trust cannot share in the discharge of the Trustee's responsibility for the protection and conservation of property and, therefore, are not associates in a joint enterprise for the conduct of business for profit IRC section 6012(a)(4) provides that every trust having for the taxable year any taxable income or having gross income of$600 or more, regardless of the amount of taxable income, shall make returns with respect to income taxes under Subtitle A. Based solely on the facts and representations submitted by the Trust, we conclude that 1 Because the income of the Trust derives from the exercise of an essential governmental function and will accrue to a state or a political subdivision thereof, the Trust's income is excludable from gross income under IRC section 115(1) 2 The Trust is classified as a trust within the meaning of IRC section 7701(a) and section 301 7701-4(a) of the Regulations Because Trust's income is excludable from gross income under IRC section 115, the Trust is not required by IRC section 6012(a)(4) to file an annual income tax return Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter This ruling concerns only the federal tax treatment of the Trust's income and may not be cited or relied upon by any taxpayer, including the Trust, employers participating in the Trust, and any recipients of benefits paid under the terms of the Trust, as to any matter relating to the taxation of accident or health contributions or benefits This ruling is directed only to the taxpayer who requested it. IRC section 6110(k)(3) provides that it may not be used or cited as precedent In accordance with the Power of Attomey on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Item 7. - 9 HB -104- PLR-146796-14 5 The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Kenneth M n in Branch Chief, Exempt Organizations Branch 3 (Tax Exempt and Government Entities) cc. Marcus Wu Pillsbury Winthrop Shaw Pittman LLP 12255 El Camino Real, Suite 300 San Diego, CA 92130-4088 Paul Marmolejo Director, Office of Federal, State and Local Governments SE T•GE:FSL HB -105- Item 7. - 10 AR MOM HMEM fiR w9mm ommo ff E em, ,a AMI AO% I I cgs&" ly Sma m N Dept ID FN 15-022 Page 1 of 2 Meeting Date 1 2/21120 1 5 F J —0 CITY OF HUNTINGTON BEACH REQUEST FOR CITY COUNCIL ACTION MEETING DATE: 12/21/2015 SUBMITTED TO: Honorable Mayor and City Council Members SUBMITTED BY: Fred A Wilson, City Manager PREPARED BY: Lori Ann Farrell, Director of Finance SUBJECT: Fiscal Year 2014/15 Preliminary Unaudited General Fund Balance Designation to a Section 115 Trust to Reduce Unfunded Liabilities Statement of Issue At the August 17, 2015 Long-Term Financial Plan Update, the Finance Department recommended the use of one-time revenue to establish an Internal Revenue Service Section 115 Trust to further expedite the pre-payment of unfunded liabilities City Council authorization is requested to establish a Section 115 Trust and to allocate $1 0 million from one-time revenues received in FY 2014/15 to help mitigate unfunded pension liabilities Financial Impact This action approves the designation and deposit of $1 0 million in preliminary, unaudited General Fund balance to a separate Section 115 Trust Fund to help pre-fund the City's pension and retiree medical obligations Recommended Action Authorize the City Manager to execute into any and all documents necessary for the creation of a Section 115 Trust Fund and set aside a $1 0 million deposit and appropriation for the initial funding of the Trust to help pay down the City's unfunded liabilities Alternative Action(s) Do not approve the recommended action and direct staff accordingly Analysis The CalPERS Board of Administration has implemented numerous changes to its actuanal methodologies and practices in order to improve the funded status of the pension plans for its member agencies statewide In order to accomplish this goal, localities will experience significant increases in their future Employer contribution rates starting in FY 2015/16 and FY 2016/17 and into the foreseeable future While the City has built these projected rate increases into the Long Term Financial Plan projections, more still needs to be done to prepare for these increased pension costs As one of the City's Council's Strategic Planning Goals is to "Strengthen Economic and Financial Sustainability", staff recommends the creation of a Section 115 Trust with one-time funds remaining at year end from General Fund balance, to help reduce the City's unfunded liabilities and/or help mitigate future rate increases Item 7. - 11 HB -]06- Dept ID FN 15-022 Page 2 of 2 Meeting Date 12/21/2015 Pension Benefits The Governmental Accounting Standards Board (GASB) Issued Statement No 68, Accounting and Financial Reporting for Pensions, which requires that government employers that sponsor Defined Benefit plans (i e , pensions) recognize a net pension liability (unfunded accrued liability) on the balance sheet This is the difference between the City's total pension liability (actual accrued liability) and actual plan assets Benefits of a Section 115 Trust The use of an irrevocable Section 115 Trust (trust) designed to pre-fund retirement obligations can help the City reduce its GASB 68 Net Pension Liability Investments held in trust are designed for the long term horizon and are likely much higher in investment returns - 5 to 7 percent - given the increase in flexibility and rate of investment choices The trust is restricted to be used only for transferring proceeds to CalPERS and/or directly reimburse the employer for CalPERS or other retiree pension and retiree medical contributions It also gives the City flexibility to contribute a large amount, thus significantly reducing the City's unfunded liabilities The trust can also act as a rainy day fund when the City's revenues are impaired based on economic or other unexpected conditions Lastly, the Trust's investment mix and allocations can be determined by the City, thereby allowing the City to develop a unique mix of investments tailored to its own risk tolerance and with lower investment return assumptions than even CalPERS, thereby decreasing the plan's volatility A publicly available Request for Proposals would need to be issued to select the actual Plan Administrator and Investment Manager of the Trust While CalPERS is currently exploring providing a Section 115 Trust tool to participating agencies in the future, it is not likely such a tool will be available in the next three years Ultimately, the Section 115 Trust gives more local control over the City's assets while creating a more actuarially sound retirement system Lastly, please note that the preliminary unaudited available General Fund Balance is an estimate and is still subject to potential change The City's final unaudited figures for the fiscal year ended September 30, 2015, will be available on or before March 31, 2016, pursuant to Generally Accepted Accounting Principles and Governmental Accounting Standards Board requirements Environmental Status Not applicable Strategic Plan Goal Strengthen Economic and Financial Sustainability Attachment(s) None HB -107- Item 7. - 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