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 Other Post-Employment Benefits (OPEB) program. The purpose of the trust is to accumulate assets for the purpose of reducing the liability for costs of retiree health care benefits (also known as OPEB liability), estimated to be $86.5 million as of the June, 2016 actuarial valuation (dated November 11, 2016). The new actuarial valuation reflected a decrease in the liability from the $154.0 million reported in the June, 2014 valuation. The decrease mainly reflects new caps in benefits that were negotiated into bargaining agreements since the prior valuation.
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 2016-17, departments were charged for OPEB costs at a rate of 8% of base payroll cost. As a result, total OPEB funds of $7.3 million were charged to departments, of which $3.3 million were used to pay OPEB benefits during the year (pay-as-you-go cost) and $4.3 million were transferred to the OPEB Trust as part of the pre-funding plan authorized by the Board. The $0.3 million dollar difference was due to reclassifying OPEB costs included in the general fund countywide benefits during 15-16.
INVESTMENT REPORT FOR THE OPEB TRUST FOR FISCAL YEAR ENDED 06/30/17
The table below summarizes the transactions in the County's OPEB Trust during fiscal year 2016-17, as reported in the County's ledgers. The PARS Annual Account Report for fiscal year 2016-17 (Att. A - PARS Annual Report) is a similar summary.
| OPEB Trust Summary 2016-17 |
| Balance 07/01/16 |
$ 1,787,741 |
| Contributions* |
4,375,944
|
| Withdrawals |
0
|
| Transfers |
0 |
| Investment earnings |
514,897 |
| Investment expenses |
(23,149)
|
| Balance 06/30/17 |
$ 6,655,433 |
*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 6/30/17, this portfolio is composed of 75% equity, 23% fixed income and 2% 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 "Capital Appreciation" HighMark PLUS model. This is an actively managed portfolio that provides for long-term growth of principal. 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.The "Capital Appreciation" is a change from the previous strategy of "Balanced" Highmark PLUS. The rationale for the change was to focus the portfolio more on capital appreciation rather than income generation as the portfolio size grows due to ongoing contributions through payroll. 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 13.12% for fiscal year 2016-17. In the long-term we expect this portfolio to achieve close to the 7.5% targeted return.
The gross return of 13.12% (return net of fees is 12.87%) reflects the risk of exposure to the equity markets but is less than equity indices due to the portfolio maintaining a level of asset class diversification with 23% of the portfolio invested in fixed income. The table below shows how the portfolio compares with other benchmarks:
| Comparative Investment Returns |
| Yolo County Treasurer Pool managed by PFM |
FY ended 6/30/17 |
0.73% |
| 5-year US Treasuries |
Yield as of 6/30/17 |
1.85% |
| 10-year AAA GO Bond Index |
Benchmark for Ceres |
1.96% |
| 30-year FNMA mortgage backed securities |
Yield for Demeter |
2.07% |
| OPEB PARS Trust Fund (25-year horizon) |
FY ended 6/30/17 |
13.12% |
| S&P 500 Composite Index |
Large Cap Equity Index |
17.90% |
| MSCI EAFE Index |
International Equity Index |
20.27% |
| Russell 2000 Index |
Small Cap Equity Index |
24.60% |
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. |