File #: 23-0399    Version: 1
Type: Consent
In control: City Council/Successor Agency to the Redevelopment Agency/Public Financing Authority/Parking Authority Concurrent
Final action:
Attachments: 1. Proposed Resolution - Agreement with PFM, 2. Exhibit 1 - PFMAM 115 Trust Agreement




recommended action



It is recommended that the City Council adopt a resolution to:


1.                     Authorize the City Manager to execute a five-year professional service agreement with the option of one one-year extension with PFM Asset Management LLC (“PFM”) for Plan Administration and Investment Advisory services for the City’s Irrevocable Pension 115 Trust;


2.                     Adopt the Post-Employment Benefits Trust Agreement between PFM as Trust Administrator and Principal Bank as Trustee;


3.                     Authorize the City Manager, or designee, to execute any Trust-related documents and agreements to signify its adoption including, but not limited to, an Adoption Agreement and Trust Administrative Services Agreement;


4.                     Approve, ratify, and confirm the appointment of Principal Bank as the Trustee and PFM as the Trust Administrator as of the effective date of the Adoption Agreement; and


5.                     Accept the Account Agreement between the City and Principal Bank as Trustee.


6.                     Approve findings pursuant to Stockton Municipal Code 3.68.070 in support of an exception to the competitive bidding process.


It is also recommended that the resolution authorize the City Manager to take appropriate and necessary actions to carry out the purpose and intent of the resolution.





The City provides pension benefits through the California Public Employees’ Retirement System (CalPERS).  Employee pensions are commonplace in California’s public sector and work as a mechanism to both attract and retain employees for a lifetime of government work. Consequently, this benefit comes with increased employer costs. The annual cost for the upcoming fiscal year 2023-24 is $42.5 million, up from $34.6 million six years prior. These large outflows of cash are a contributing factor to the decrease in the City’s General Fund reserves, which will hit their lowest levels between 2028 and 2030 according to the City’s Long Range Financial Plan (LRFP).



In response to these elevated cost concerns, the City Council established an irrevocable IRS Section 115 Pension Trust in November 2018, with Public Agency Retirement System (“PARS”) as the plan administrator and Union Bank as the Bank Trustee.


The main purpose of any Section 115 Pension Trust is to neutralize the annual budget fluctuations for pension obligations by allowing municipalities to set aside pension-related dollars. It is a fiscal management best practice tool used to pre-fund long-term financial obligations such as retirement benefits.  Prefunding these obligations may reduce the City’s long-term pension liabilities. Additionally, funds set aside in the Section 115 Trust are safeguarded from diversion to other budgetary uses and generally may be invested in a broader range of securities than would typically be permitted for public agency operating funds, potentially increasing earnings for the Section 115 Pension Trust Portfolio.  Leveraging unique investment strategies through active investment management to enhance returns will increase predictability in future years and allow the City to use the Trust fund dollars to meet the annual retirement payments.  It is estimated that the Trust could provide approximately $11.1 million more in earnings through the end of fiscal year 2038 (per the LRFP) than continuing to hold funds in the City’s investment pool, and this would further reduce the burden on the General Fund and other funds that contribute to CalPERS costs.


The current contract with PARS is set to expire in the coming months, therefore, a request for proposal (RFP) was issued on February 2, 2023. The City received five proposals, and through a competitive procurement process, staff recommends awarding the service contract to PFM Asset Management LLC (“PFM”) for trust administration and investment advisory services for the City’s section 115 pension trust and to adopt a post-employment benefits trust agreement between PFM and Principal Bank as directed trustee and designate the City Trust Administrators.






The City has two pension plans with CalPERS: one for Safety employees and the other for Miscellaneous employees. Both have different tiers associated with them based on the employee’s hire date and their prior employment status with a reciprocal public agency.


Funding of CalPERS pensions relies on three sources: employer contributions, employee contributions, and investment earnings on those contributions.  To determine the funding levels necessary to pay retiree pensions, CalPERS uses a set of actuarial assumptions (investment earnings, life expectancy, etc.) to estimate contribution levels.


One of the most critical assumptions is the discount rate (rate of return) on investments in the plans. CalPERS’s current annual discount rate assumption is 6.8 percent.  Assuming this rate of return is attained, then funding of pension obligations would be derived 66 percent from investment gains, and 34 percent from contributions by employers and employees. The actual return has been volatile over the past twenty years and averaged 6.9 percent. If the rate of return falls below assumptions, then the plan will require more contributions from its member agencies, including the City of Stockton.


Furthermore, in 2012, the Government Accounting Standards Board (GASB) issued Statement No. 68, Accounting and Financial Reporting for Pensions.  GASB 68 requires that governmental employers that sponsor defined benefit plans (e.g., CalPERS) must recognize a net pension liability (also known as an unfunded actuarial accrued liability (UAL)) on their balance sheet.  This is the difference between the City's total pension liability and actual plan assets.  GASB 68 became effective for fiscal years starting on June 15, 2014.  The City’s most current audited financial statements for FY 2021-22 presented an unfunded pension liability of approximately $321.9 million.


Fortunately, the Council anticipated much of the CalPERS cost increases and accounted for them in the LRFP.  Council acted to plan and pay for the pension obligations through its budgeting and reserve actions, continuing its practice of saving for future costs and continuing its sound fiscal practices post-bankruptcy.  The City made its first contribution of approximately $21.2 million to the Section 115 Pension Trust in 2018 with additional contributions since that time. As of the most recent statement, the trust holds approximately $68.5 million.


Present Situation


Section 115 Trust


The current City of Stockton agreement with PARS expires on September 30, 2023. On February 2, 2023, the City advertised a RFP to obtain services to administer the City’s Section 115 irrevocable pension trust.  On March 9, 2023, five proposals were received from the following firms:


                     Phase II Systems, dba Public Agency Retirement Services

                     PFM Asset Management LLC

                     Keenan and Associates




A Selection Committee ranked all proposals based on each firm’s understanding of the services to be provided, experience providing the service, qualifications of the firm members, recommended approach, and interviews.  PFM received the highest ranking based on the noted criteria and was determined to be the most qualified firm for this service.


PFM offers the security of a Private Letter Ruling from the Internal Revenue Service, which assures member agencies their investment returns will be tax-exempt and will work with the City to develop a pension trust policy that will clearly define the investment strategy needed to yield the highest allowable returns while limiting the risk associated to its investments. PFM plan installation services also include:


A.                     Take over the administration of City’s Section 115 trust with a goal of assisting the client to meet a quick transition timeline from the incumbent, if needed.

B.                     Offer an IRS-approved irrevocable funding vehicle to provide for the investment of the City’s assets.

C.                     Provide trust administration, trustee and investment management services.

D.                     Work directly with City staff to prepare asset allocation guidelines for the trust based upon the City’s investment objectives and risk tolerance parameters.

E.                     Provide assistance to the City in the effort to effectively manage and position its investment strategies in the time of market volatility.


F.                     Provide education and presentations regarding the pension trust program to City staff and City Council, as requested.

G.                     Provide quarterly and annual comparative performance analyses and evaluation reports of the investments of the trust.

H.                     Coordinate all contributions into the trust and process requests for distributions.




Pursuant to the Stockton Municipal Code Section 3.68.070(A)(3) relating to exceptions to the competitive bidding process, the following proposed findings support the use of an RFP process to select a firm to administer the City’s pension 115 trust plan:


1.                     A pension trust administrator and investment advisor will provide the City with a clearly defined pension trust policy, sound investment advice and continued education.

2.                     The City of Stockton does not have staff with the expertise required to administer a pension trust program nor provide investment advice.

3.                     In determining the most qualified firm, the most important considerations are a firm’s ability to meet the full scope of work, experience with similar scopes of work, and the ability to work in conjunction with City staff to attain the most prudent investment results within the City’s investment trust account.

4.                     The use of the RFP process is appropriate in this case because it allows staff to evaluate proposals based upon experience and quality of the scope of work rather than solely by cost.

5.                     The RFP process, which included proposal evaluation with a technical consultant and a review of financial terms and performance, allowed the City to select the firm best suited to administer a pension trust plan.




Annual Consultant fees paid to PFM are based on the assets deposited in the Trust.


PFM Assets Under Management

Standard Fees in Basis Point (bps)

Up to $25 million


Next $75 million


Next $150 million


Next $250 million


Over $500 million



Annual Trustee fees paid to Principal Bank are similarly based on assets deposited in the Trust.


Principal Bank Fees

Base Fee

$0 - $20 million


$20 million - $100 million


Over $100 million

Individually priced on a deal-by-deal basis


This negotiated fee schedule with PFM is inclusive of trust administration and investment management fees and generates substantial savings compared to our current contract fees. The percentage of Basis Points dramatically declines because of larger deposited amounts. Our current contract cost was tiered based on the assets under management for both the administrator and the trustee, which increased the overall cost of managing these funds.


These fees will be deducted from investment earnings and expensed in the City’s Internal Service-Pension Fund.