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b. Cons —Annual payments will remain high which limits the City's ability to sustain services at current levels. 2. Establish a Trust Fund. Deposit City funds in the Trust Fund to help smooth annual CaIPERS payments from year to year by paying a portion of the growth in annual pension payments from available Trust Fund monies. a. Pros - The Trust Fund would yield higher returns on average than the City can achieve through its investments (4% to 6% versus the City's current return of 1.14%). As a result, the Trust monies can be used to ease budgetary pressures resulting from spikes in annual employer pension contributions. This would help to stabilize annual costs and better sustain overall service levels for the City. If the City chooses this option, the Trust would be irrevocable which means it can only be used to make pension payments. b. Cons — Investments will be more volatile than the City's current investment portfolio and will most likely earn less interest than the new CaIPERS discount rate. Additionally, the Trust will not reduce the City's net pension on unfunded liabilities in the short-term. In addition, while there are a few additional options available to reduce the City's unfunded pension liabilities, staff does not recommend them at this time. They include: 1. Issuance of Pension Obligation Bonds (POBs) to prefund the City's unfunded liability. This basically means issuing debt to pay-off all of the City's unfunded pension obligations. Some Cities have taken advantage of this option because both the interest rate on POBs tend to be less than the CaIPERS discount rate charged on the unfunded liability and the annual debt service payments may be less than the projected annual unfunded liability payments. However, as pension plans like CaIPERS reduce their discount rates below 7% (e.g. 6.5% or 6%), that spread between the POBs interest rate and the discount rate charged on the unfunded liability payments becomes less advantages to municipalities. Also, in Pleasanton's case the POBs would utilize all of the available debt capacity which would severely limit the City's opportunity to finance major capital projects in the future (e.g. new library, community center, etc.). For these reasons, staff does not recommend this option. 2. Borrow from existing capital and/or repair and replacement reserves and make annual inter-fund loan payments at lower interest rates than the CaIPERS discount rate. In this instance, the City's inter-fund loan interest rate is considerably less than the CaIPERS discount rate. An inter-fund loan also has less impact on the City's balance sheet. However, this option does substantially reduce the City's reserves available to address economic downtowns, routine capital projects, and the major repair and replacement of Page 5 of 6