Newport Beach council backs one-time $5M test of Section 115 pension trust while keeping aggressive CalPERS paydown

Newport Beach City Council on Jan. 27 examined whether to continue heavy prepayments to the California Public Employees' Retirement System (CalPERS) or seed a locally controlled Section 115 pension trust with surplus OPEB funds. After presentations from staff and outside advisers, the council gave a unanimous straw vote to move $5 million from the overfunded OPEB trust into a Section 115 account as a one-time test and to revisit performance within the year.

Finance Director Jason Aleman opened the study session with the city's funding picture, saying the latest actuarial valuation showed a funded status of “75.9% as of 06/30/2024,” and that a projection incorporating CalPERS' 2024 returns raised the city’s funded status to about 82.4% with a $235 million pension liability. He told the council the finance committee had recommended targeting a 95% funded status, which would require continuing approximately $45 million per year in additional discretionary payments to CalPERS through 2031.

Pillsbury attorney Marcus Wu described legal limits on holding pension-designated surplus in general city accounts and explained the mechanics of a Section 115 trust, noting it is tax-exempt under Section 115 of the Internal Revenue Code and, once assets are placed in such a trust, they may be invested more broadly than general-fund assets. Wu emphasized the fiduciary responsibilities of trustees and the requirement that trust assets be reserved for the singular purpose of funding pension contributions.

Dennis Yu of PARS, which administers many local-government 115 trusts, said Newport Beach already maintains an OPEB trust that is materially overfunded and that the city’s OPEB account could be a source to seed a pension 115 account. Yu described PARS' program experience and noted the city could either seed a new 115 pension account or instead send surplus directly to CalPERS.

Keith Stribling of PFM Asset Management described several target allocations for 115 accounts and contrasted them with CalPERS' heavier private-equity exposure. “Our balanced strategy was up 10.5% while CalPERS was up 12%,” Stribling said, noting 115 portfolios tend to emphasize liquidity so funds are available when the city needs to draw on them.

Council members expressed a mix of support for continuing the city’s aggressive CalPERS paydown and interest in creating a small locally controlled pension trust as a risk-management tool. Council member Stapleton said he supports the $45 million annual paydown and described using a $5 million, one-time transfer from OPEB to a 115 trust as a reasonable experiment; Council member Wagon urged diversification to avoid being fully bound to CalPERS' changing rules; and Council member Weber framed the 115 trust as “managing risk more responsibly,” not as taking more risk with taxpayer dollars.

During public comment, residents asked about management fees, whether OPEB funds may be repurposed, and the risk of creating "trapped assets" if OPEB remains overfunded. Aleman and staff explained that withdrawals from the OPEB trust must be for eligible OPEB expenditures and that withdrawing $5 million would reimburse budgeted expenditures and free up budget dollars that could be used to seed a pension trust. Staff reported the OPEB trust balance at about $52 million with a liability near $38 million (roughly $14 million overfunded).

Following the presentations and discussion, the council took a nonbinding straw vote to allocate $5 million from the OPEB surplus into a Section 115 pension trust, while continuing the $45 million annual prepayment to CalPERS; the straw vote passed by a 7–0 tally. Council members directed staff to return with a formal agenda item that includes investment strategy options and a schedule for review, suggesting a six- to 12-month reassessment of performance.

What happens next: staff will prepare a formal agenda item with options for trust adoption, investment strategy alternatives, fee schedules, and a recommended oversight structure so the council can take a formal action at a future meeting.