On May 17, 2011, the Board of Supervisors, through Resolution No. 11-45, approved the creation of an irrevocable trust fund through the Public Agency Retirement System (PARS) Public Agencies Post Retirement Health Care Plan and appointed the County Auditor-Controller (now Chief Financial Officer) as the Plan Administrator for the PARS OPEB program. The purpose of the trust is to accumulate assets for purpose of reducing the liability for costs of retiree health care benefits (also known as OPEB liability), which was estimated to be $153 million as of the June, 2014 actuarial valuation (dated 12/23/14). A new actuarial valuation as of June, 2016 is underway and expected to be completed in fall of 2016.
As these funds are removed from the County Treasurer's pool and placed in an irrevocable trust, they are no longer subject to the County Investment Policy and reporting requirements. Therefore, in December 2011 the Board directed that the Plan Administrator provide an annual report on the status and performance of the PARS OPEB fund.
On 06/09/15, the Board adopted the Policy on Accounting, Funding and Recovery of OPEB Costs, that provides a framework for recognizing the OPEB liability, funding it and recovering the related costs. An essential practice prescribed by the policy was the integration of OPEB cost into personnel cost, which would allow grant-funded departments to recover this cost from funding sources. During fiscal year 2015-16, departments were charged for OPEB costs at a rate of 7% of base payroll cost. As a result, total OPEB funds of $6.4 million were charged to departments, of which $4 million were used to pay OPEB benefits during the year (pay-as-you-go cost) and $2.4 million were transferred to the OPEB Trust on 08/09/16 as part of the pre-funding plan authorized by the Board.
INVESTMENT REPORT FOR THE OPEB TRUST FOR FISCAL YEAR ENDED 06/30/16
The table below summarizes the transactions in the County's OPEB Trust during fiscal year 2015-16, as reported in the County's ledgers. The PARS Annual Account Report for fiscal year 2015-16 (Att. A - PARS Annual Report) is a similar summary.
| OPEB Trust Summary 2015-16 |
| Balance 07/01/15 |
$ 1,804,529 |
| Contributions* |
0
|
| Withdrawals |
0
|
| Transfers |
0 |
| Investment earnings |
(7,380) |
| Investment expenses |
(9,408)
|
| Balance 06/30/16 |
$ 1,787,741 |
*As noted above, contributions of $2,439,944 into PARS for fiscal year 2015-16 occurred in August of 2016.
The funds are held in trust by PARS and invested by HighMark Capital Management, the investment subsidiary of US Bank, which is a trustee for PARS. As of 6/30/16, this portfolio is composed of 59% equity, 38% fixed income and 3% cash. As Plan Administrator, we directed HighMark to invest the funds such that the returns match the discount rate used by actuaries for long-term return, which was 7.50% (using CalPERS as example). To achieve that rate, HighMark recommended that the County allocate assets in its portfolio according to the "Balanced HighMark PLUS model. This is an actively managed portfolio that provides for long-term growth of principal and income. While dividend and interest income are important components of investment return, it is expected that capital appreciation will comprise the larger portion of total return. This long-term objective is associated with a higher level of risk than allowed for county investments, which typically have a shorter duration. Thus, in the short-run and at various times, the portfolio will reflect the vagaries of the market, especially the equity market, as shown below. Only sustained discipline and long-term perspective will ensure achievement of investment objective. PARS reports a rate of return of -0.40% for fiscal year 2015-16. In the long-term we expect this portfolio to achieve close to the 7.5% targeted return.
The return of -0.40% reflects the risk of exposure to the equity markets is in line with other benchmarks, as shown below:
| Comparative Investment Returns |
| Yolo County Treasurer Pool managed by PFM |
FY ended 6/30/16 |
0.93% |
| 5-year US Treasuries |
Yield as of 6/30/16 |
1.76% |
| 10-year AAA GO Bond Index |
Benchmark for Ceres |
1.36% |
| OPEB PARS Trust Fund (25-year horizon) |
FY ended 6/30/15 |
-0.40% |
| 30-year FNMA mortgage backed securities |
Benchmark for Demeter |
2.31% |
| S&P 500 Composite Index |
Large Cap Equity Index |
3.99% |
| Russell 2000 Index |
Small Cap Equity Index |
-6.73% |
| MSCI EAFE Index |
International Equity Index |
-12.06% |
Based on our analysis of the investment results with reference to other relevant indicators, no adjustment to the investment objective or mechanism is necessary and recommended at this time. |