COUNTY CLERK/AUDITOR/RECORDER/ELECTIONS - J. P. GONZALEZ

County Auditor-Controller recommends that the Board of Supervisors direct notification to CalPERS that half of the CERBT balance is to be transferred to PARS no later than July 31, 2019.

SBC FILE NUMBER: 608

The prefunding of the retirement benefits trust was discussed at a presentation of the County’s Other-(Than Pension) Post-Employment - Benefits (OPEB) provided to the Board of Supervisors at the April 23, 2019 Special Meeting. The County of San Benito along with several other California counties, cities, schools and special districts have prefunded OPEB obligations by establishing their Internal Revenue Code (IRC) 115 Irrevocable Trust for OPEB obligations with either the CalPERS California Employers' Retiree Benefit Trust (CERBT) or with the Public Agency Retirement Services (PARS) private firm or with both. The County of San Benito has established two OPEB IRC 115 trusts but only the CalPERS CERBT trust is being utilized for prefunding purposes.

 In 2009, San Benito County established an OPEB IRC 115 trust with CalPERS with an initial contribution of $2.3m.  The CalPERS Trust (CERBT) was dutifully funded annually with the Annual Required Contribution (ARC) as recommended in the Governmental Accounting Standards Board (GASB) Statement No. 45 and with Annually Determined Contributions calculated under GASB Statement No. 75. With OPEB disbursements of $1.3m, CERBT expenses of $145,662 and investment earnings of over $10m; the current balance as of June 4^th is $23,574,239. The CERBT average annualized internal rate of return is 8.65% since inception utilizing the most aggressive investment strategy, Investment Strategy 1. While the CERBT investment management and low fees contributed to the success of the Trust investment performance, much of the credit lies squarely on the timing of the Board of Supervisor’s decision to begin prefunding OPEB in 2009 and commitment to make the Annual Required/Determined Contributions.

 Since the CalPERS plan assets are not FDIC insured; originally, the thought behind the establishment of this trust was to provide an opportunity for the County to invest half of its OPEB plan assets with a different investment vehicle.   After a full-year investment period, the strategy would also provide the County with an objective measurement of earning performance. On May 17, 2016, the County of San Benito adopted the PARS Section 115 Public Agencies Post-Employment Benefits Trust irrevocably dedicated to the pre-funding of OPEB, as defined by Governmental Accounting Standards Board (GASB) Statement No. 45/75, and the prefunding of pension obligations appointing the authority to the County Auditor as Plan Administrator.  Public Agency Retirement System (PARS) serves as Trust Administrator, and U.S. Bank, N.A. serves as Trustee.    The recommendation to utilize the PARS trust for prefunding OPEB was not brought to the Board of Supervisors previously because the administrative and investment fees charged by PARS are higher than those charged by CalPERS; PARS charges 15 basis to CalPERS 8 basis points. Though not quite an apples to apples comparison with PARS using a 22% and CalPERS using a 25% fixed income strategy, the recent decision to recommend utilizing the PARS OPEB trust was recently sparked by the results of the Net Performance Fee Analysis that was prepared by PARS (attached). In the last 10 year period, while employing Strategy 1, CalPERS had outperformed the PARS Capital Appreciation Strategy by 17 basis points; however, the performance results reverse significantly when comparing investment periods of 5 years or less (results independently verified). There is an opportunity for the County to realize greater earnings and increase net assets by employing the PARS OPEB trust. The other more compelling reason is the excellent service provided by PARS and HighMark Capital Management over the past three years with the managing of the County’s $3,000,000 Rainy Day fund. While being restricted to employing the most conservative 50% fixed income strategy at my direction, PARS has realized investment earnings of $345,000 increasing the Rainy Day/Pension fund balance to $3,345,000, quarter-ending March 31, 2019.  In addition to greater net performance in recent comparison periods, PARS also offers more risk tolerance strategies than CalPERS, overall greater transparency and other strategic advantages (attachment provided ).

The Board of Supervisors direct notification to CalPERS that half of the CERBT balance is to be transferred to PARS no later than July 31, 2019.

Additionally, after one year, the County Auditor-Controller will present a net of fees comparative performance results for both CERBT and PARS trusts for further evaluation.