Newport Beach council backs $5 million pilot to seed a Section 115 pension trust

Newport Beach — The City Council on Jan. 27 directed staff to move forward with a limited pilot to place $5 million of surplus funds into a Section 115 pension trust, following a study session that examined whether surplus contributions should continue as additional discretionary payments to CalPERS or be placed in a locally controlled investment trust.

Finance Director Jason Aleman opened the study session with an actuarial snapshot of the city's CalPERS exposure, noting the city's most recent valuation showed a 75.9% funded status as of June 30, 2024, and that projected improvements could raise funded status to 82.4% with an estimated pension liability of $235,000,000. "Today, we'll discuss investment options for pension surplus funds that exceed the required minimum CalPERS contributions," Aleman said.

City staff and outside consultants explained the alternatives. Marcus Wu, an attorney with Pillsbury, summarized the legal framework and said a Section 115 trust is a tax-exempt vehicle reserved for pension purposes that — if properly drafted and governed — allows broader, prudently diversified investments than general-fund reserves. "Once you put that money in the trust ... the only restriction you have is that those assets have to be invested prudently," Wu said.

Representatives from PARS and PFM Asset Management described how a 115 trust would be administered and invested. Dennis Yu of PARS noted the city already maintains an OPEB 115 trust that is currently overfunded and could seed a pension account. "The city has approximately 52 and a half million dollars on the OPEB side," Yu said, and the city could transfer up to $5 million of that surplus without creating trapped assets in OPEB.

PFM's Keith Stribling described five standard strategy profiles — conservative to capital-appreciation — and emphasized liquidity needs for a municipal trust that may need to cover pension contribution shortfalls on short notice.

Council members generally supported continuing the council's aggressive pay-down policy — a finance committee recommendation to target a 95% funded status that would require about $45,000,000 per year in additional discretionary payments — while also testing a local trust. Council member Stapleton said he favored maintaining the aggressive pay-down but supported a one-time $5 million transfer as a test. Council member Weber framed a 115 trust as a risk-management tool, not a gamble: "It's about managing risk more responsibly with CalPERS," Weber said.

Public commenters urged caution about who would define a trust's investment policy and about moving money from an account dedicated to retiree health. Staff answered that withdrawals from the OPEB trust are limited to eligible OPEB expenditures and explained a mechanism by which reimbursing budgeted OPEB expenditures can free up budget dollars that could legally fund a pension trust.

Rather than changing the city's ADP plan, the council reached a straw consensus to allocate $5,000,000 from the overfunded OPEB trust into a Section 115 pension trust and to reevaluate performance in six to 12 months. The straw vote passed 7–0. Councilmembers emphasized the intent to continue the current aggressive payments to CalPERS unless a future review indicates otherwise.

Next steps: Staff will return with an agenda item setting the transfer amount and presenting specific investment strategy options, fee schedules, and governance language for the proposed Section 115 trust.