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2018/19 to the PARS Trust Conservative Portfolio and withdrew it throughout the year to cover the City's required CaIPERS payment, the City would have earned $443,700 more than it did through the City's investment portfolio. While staff does not expect the PARS Trust Conservative Portfolio to sustain those levels of earnings, based on historic earnings, staff expects the PARS Trust Conservative Portfolio to earn at least 200 basis points more than the City's investment portfolio. The City will use PARS Trust investment earnings to help pay its increased annual pension contributions when it becomes a financial hardship to do so within the City's annual operating budget. Staff will draw down the principal of additional investments throughout the year to cover the City's CaIPERS payments. BACKGROUND After considering options to prepay the City's approximate $160 million pension liability, on March 6, 2018, City Council authorized adoption of a Section 115 Trust to be administered by PARS. On June 5, 2018 City Council adopted a PARS investment strategy, Section 115 Pension Trust Fund Policy Guidelines and allocated $28 million to the City's PARS Trust. Of the $28 million, $6.7 million was deposited into the PARS Conservative Portfolio and the balance into PARS Capital Growth Custom Portfolio. The City's objective is to ensure there will be sufficient funds in the PARS Trust to meet the City's expected increased pension contributions associated with the City's unfunded pension liability and CaIPERS policies that require cities and other jurisdictions to fully fund pension liabilities by 2047. Between July 1, 2018 when the City initially deposited funds into the PARS Trust Fund and December 31, 2019, the Capital Growth Custom Investment portfolio earned 11.4 percent and the Conservative Portfolio earned 7.96 percent. The City's Section 115 Pension Trust policy guidelines do not permit City staff to make additional deposits to the PARS Trust and only allow withdrawals under limited circumstances. In addition, the City's Section 115 Pension Trust Fund Policy Guidelines do not specify which investment portfolio to withdraw from first. DISCUSSION Because the PARS Conservative Portfolio has consistently outperformed the City's investment portfolio, staff believes it is in the City's best financial interest to allow staff to deposit up to the City's required annual CaIPERS pension payment into the PARS Conservative Portfolio and make withdrawals to make the CaIPERS periodic pension payments throughout the year. The investment earnings would remain in the PARS Trust Fund to be available in the future to cover the City's increased pension payments when the City needs it most such as during an economic downturn and/or after a major natural disaster. Finally, the proposed amendment to the Section 115 Pension Trust Fund Policy Guidelines specifies that when the City needs to withdraw from the PARS Trust Fund, the initial withdrawal will be from the Conservative Investment Portfolio. The objective of this proposed amendment is to ensure the City is withdrawing from the investment portfolio that is least likely to have incurred losses during an economic downturn. Page 2 of 3