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1. Section 115 Trust 2. Integral Part Trust 3. Voluntary Employee Beneficiary Association (VEBA) 4. 401(h) Account 5. Rabbi Trust Based on staff analysis of these options, and the advice of the City's legal consultant, Hanson Bridgett, LLC, staff is recommending creation of a Section 115 Trust which is the vehicle most public sector agencies are choosing to pre -fund their liability. This type of fund allows distributions from the trust to be non taxable if they are used for health benefits. The recommended document creating the trust is included as Exhibit A. If Council adopts the attached Resolution establishing a trust and accepts the interim funding strategy recommendations contained in this report, then an individual Section 115 Trust will be established and investments purchased will be held by the City's current investment custodian, Bank of New York. Although the trust is irrevocable, assets held in the trust can be transferred to another qualifying trust in the future. Investments in the trust will consist of low risk fixed income investments and will follow the guidelines included in the City of Pleasanton's Annual Investment Policy (Attachment 2). Investments in the trust will mirror the current City investment portfolio. The Director of Finance for the City of Pleasanton with oversight from the City Manager will serve as the Trustee for the trust during this interim period. Portfolio Management Options As with any significant investment, it is necessary to evaluate options for portfolio management. As can be expected, in anticipation of new GASB accounting rules, a number of trust providers have developed programs that will accept public funds and invest them in a diversified, pension -like, portfolio. Trust providers offer many benefits including access to large investment pools, experience in long -term investments and constant review of regulatory requirements. In general, these providers utilize strategies involving a long -term horizon and have portfolios that include a mix of fixed income, bonds, and stocks. This model assumes higher investment returns that reduce both the unfunded liability and annual contribution rates. Staff has identified the following six trust providers that are capable of managing the City's trust. Also listed as the recommended option for managing assets during the interim funding strategy is an "in- house" management option. CaIPERS established the California Employers' Retiree Benefit Trust Fund (CERBT) Established in 2006 for the purpose of providing public agencies with a vehicle for pre funding retiree medical benefits this trust currently has 134 public agencies under contract with a total of $850 million in assets. Investment returns were -4.8% for June 30, 2008 and as of January 31, 2009 investment returns were 32.3 The actuarial assumption for investment earnings used by CaIPERS is +7.75 Historically, the average annual investment earnings have been over 30 years between 9% and 10 The CERBT is a Section 115 Trust and is governed by a 13- member board of elected and appointed officials whose composition is mandated by law. The CERBT is a Page 10 of 13