PREPARED BY: ARTURO CASTILLO DATE OF MEETING: 06/02/2025
SUBJECT:
TITLE
CONSIDER ADOPTING RESOLUTIONS OF THE CITY COUNCIL OF THE CITY OF SAN PABLO AUTHORIZING THE CITY MANAGER TO EXECUTE AGREEMENTS TO TRANSFER ADMINISTRATION OF THE CITY’S PENSION AND OPEB IRC SECTION 115 TRUSTS TO SHUSTER ADVISORY GROUP, LLC, TO TRANSFER THE TRUST ASSETS TO CHARLES SCHWAB TRUST BANK, AND TO NAME ALTA TRUST COMPANY AS DIRECTED TRUSTEE
CEQA: This proposed action is not a project as defined by CEQA.
Label
CITY MANAGER RECOMMENDATION
Recommendation
Adopt two (2) Resolutions
Body
Compliance statements
Continue Best Management Practices, Fiscal Excellence, and Fiscal Transparency is an adopted City Council Priority contained in the adopted Fiscal Year 2025-2027 City Council Priority Workplan, effective April 7, 2025.
RECOMMENDATION:
City staff recommends that the City Council adopt two (2) resolutions authorizing the City Manager to execute agreements to transfer administration of the City’s Section 115 Trust for funding pension and OPEB (other post employment benefits) obligations to Shuster Advisory Group, LLC, to transfer the Trust assets to Charles Schwab Trust Bank, and to name Alta Trust Company as Directed Trustee.
BACKGROUND
Assets in an Internal Revenue Code Section 115 Trust are irrevocably committed for the government function specified in the applicable trust agreement. In the City’s case, the funds set aside in its Section 115 Trust are dedicated to pre-funding the City’s future pension and OPEB obligations. Additionally, monies held in such trusts can be invested in accordance with the rules governing those trusts, which are different than the investment rules for the City’s investment portfolio. Investment restrictions that apply to the investment portfolio of a City (set forth in California Government Code Section 53601 et. seq.) do not apply to the assets held in an irrevocable Section 115 Trust, thus allowing for more flexibility in the investment strategy. Setting aside funds in a Section 115 Trust can potentially earn a higher rate of return than funds invested within the Government Code Section 53601 guidelines.
The City currently has two Section 115 Trusts: one for the purpose of funding pension obligations and one for the purpose of funding OPEB obligations. The pension funds are currently administered by the Public Agency Retirement Services (“PARS”), where assets are held by U.S. Bank and managed by PFM Asset Management LLC (“PFMAM”), a subsidiary of U.S. Bancorp Asset Management, Inc., which is a subsidiary of U.S. Bank. MissionSquare Retirement currently provides all administration and trust services for the OPEB funds. After a review of the current fee structures and fund line ups, it was determined that savings could be achieved by transferring our plan administration and portfolio management to another provider, Shuster Advisory Group, LLC.
On August 1, 2016, the City Council approved Resolution 2016-252 authorizing the City’s participation in the ICMA-Vantagetrust II and now MissionSquare Employer Investment Program (EIP). MissionSquare provides administrative and trustee services and serves as the investment manager for the strategy currently selected by the City. Later, on December 13, 2023, the City Council approved Resolution 2023-166 authorizing the establishment of a Section 115 Trust with PARS to prefund pension liabilities. PARS partnered with U.S. Bank to serve as Trustee/Custodian and U.S. Bank’s subsidiary, PFM Asset Management LLC (“PFMAM”), to provide investment management services for the program.
ANALYSIS
It has been over 9 years since the creation of the MissionSquare OPEB Trust in 2016 and over a year since the approval of the Section 115 Trust in 2023 with PARS. The City is not obligated to stay in the current trust arrangements with PARS, MissionSquare, or any provider for that matter. To the extent that cost savings for administering the trusts can be achieved, that is additional money that will stay in the trusts and earn interest over time. Based on available options, significant savings in administration costs are available by transferring the administration of the trusts to the Shuster Advisory Group, LLC (“Shuster”). This transfer will also provide the City with greater control of our funds through the customization Shuster’s program provides, more timely reporting, and potentially higher portfolio returns.
As of December 31, 2024, the City has $1,102,230 in the pension trust account with PARS and as of January 31, 2025, the City has $15,935,570 in the OPEB Trust with MissionSquare, totaling $17,037,800. A switch from the current administration of our Pension 115 trust account by PARS and U.S. Bank and MissionSquare could result in a reduction in fees of approximately $281,000 over 10 years, $1.0 million over 20 years, and $2.8 million over 30 years, assuming both programs earned an average 6% gross rate of return, a beginning value of $17.0 million, no contributions or distributions, and no change in fee structures.
Public Agency Retirement Services (PARS)
The PARS option for OPEB and Pension Stabilization is the Public Agencies Post-Employment Benefits Trust, a multiple employer trust arrangement to which cities adopt the Trust to hold assets. It is important to note that although PARS provides services to public agencies, PARS is not a public agency or a public retirement system. PARS provides trust administration for the PARS Post-Retirement Healthcare Plan and the PARS Pension Rate Stabilization Program, both held in the same Public Agencies Post-Employment Benefits Trust. The advisor to the PARS investment portfolios is U.S. Bank, and PFM Asset Management LLC (“PFMAM”), a subsidiary of U.S. Bancorp Asset Management, Inc., which is a subsidiary of U.S. Bank, manages the portfolios. U.S. Bank also serves as Trustee for the multiple employer trust. The fees for PARS administrative services and U.S. Bank/PFMAM trust and investment advisory services are separate fees, both a tiered structure based on assets. Based on the trust balance as of December 31, 2024, annualized PARS fees are approximately 0.275% or $3,031 per year. The PARS Target-Index Strategies program provides four portfolio options that are invested entirely in passive funds and are managed by PFMAM.
MissionSquare
The MissionSquare option for funding for OPEB liabilities is the MissionSquare Retirement Employer Investment Program (EIP), and MissionSquare does not offer a program for funding for pension liabilities. MissionSquare provides administration and trust services all with a single provider. The fees for administration and trustee services are not charged as explicit fees; instead MissionSquare receives revenue from the investment option that has been selected. Based on the trust balance as of January 31, 2025, the EIP fees are estimated to be 0.28% or $44,620 per year. The MissionSquare EIP provides a range of risk-based models to invest in that are managed by MissionSquare; however, the models are not transparent, nor customizable, and MissionSquare is not a fiduciary. The City is currently invested in the MissionSquare II Model Portfolio Aggressive.
Shuster Advisory Group, LLC
Shuster Advisory Group, LLC (Shuster) is an independent investment advisory firm and fiduciary. They provide governmental and institutional retirement plan consulting services as well as private wealth management. Shuster is a SEC-Registered Investment Advisor with over $8 billion in assets under management focusing on serving the unique needs of governmental agencies and special districts serving over 100 cities, agencies and public entities. Shuster serves as a fiduciary to plan investments and provides investment selection, monitoring, and management.
Shuster conducted an analysis of the Section 115 Trust programs available to cities and agencies and determined that cities were being over-charged and underserved, which has a direct impact on the taxpayer-funded savings that a city is putting aside for their future obligations. As a result, Shuster created and offers a Section 115 Trust program. Within the Shuster Section 115 Trust program, Shuster provides trust administrator, consultant and investment advisor functions, Charles Schwab Trust Bank provides trust custodian services, and Alta Trust Company provides directed trustee services.
Based on the City’s current trust balance, annualized Shuster fees will be approximately $30,958 per year. By transferring the City’s Section 115 Trust to the Shuster Advisory Group, LLC, the City will save approximately $17,000 per year, which when reinvested each year, will result in an estimated $2.8 million in savings over 30 years. Additionally, Shuster will provide the City with daily online access to our trust account, timely customized reports, investment monitoring and advice, greater control over our funds, projected higher yields, and a significantly more interactive dialogue regarding our trust account investments.
Budget, Fiscal & Legislative Standing Committee (BFLSC) Review
On May 28, 2025, the BFLSC (Pabon-Alvarado; Ponce) reviewed the Shuster Advisory, LLC Section 115 Trust proposal and agreements to be formally considered and approved by the City Council on June 2, 2025.
FISCAL IMPACT
Staff has analyzed Shuster's pricing model and the services to be provided in comparison to the current PARS program. The current fee schedule from the PARS program results in a 0.275% annualized fee and the MissionSquare program results in a 0.28% annualized fee, totaling $47,651. In contrast, the Shuster program would result in a 0.18% annualized fee, or $30,958, which provides a 36% reduction in the expenses of the program. Assuming both programs earned an average 6% gross annual rate of return, the reduction of fees alone will result in an estimated $281,000 over 10 years, $1.0 million over 20 years, and $2.8 million over 30 years. These results assume there are no fee changes and $17.0 million of assets as of December 31, 2024 (Pension) and January 31, 2025 (OPEB). Future contributions by the City will only increase the comparative savings.
Shuster will provide ten investment strategies that combine both active and passive (index) investment solutions to take advantage of the optimal mix of investments from both an investment return and cost perspective. If desired by the City, Shuster will also provide a custom portfolio at no additional cost.
ATTACHMENTS:
Att: A Resolution - San Pablo 115 Trust OPEB
Att: B Resolution - San Pablo 115 Trust Pension Stabilization
Att: C Administrative Contract: Shuster Advisory Group, LLC
Att: D Investment Advisory Contract: Shuster Advisory Group, LLC
Att: E Trust Adoption Agreement