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Page 5 of 7 The Section 115 Trust offered by PARS has five portfolios: Capital Appreciation, Balanced, Moderate, Moderately Conservative, and Conservative. Each portfolio has different risk profiles with various amounts invested in equities and other instruments. The investment portfolios range from “Capital Appreciation,” with 72 percent of funds invested in equities, to “Conservative,” with 15 percent of funds invested in equities. It is important to note that as the amount of equities increases, risk and volatility increases. In contrast, as the amount of equities decreases, risk and volatility decreases. Approximately 85 percent of the 73 public agencies currently participating the PARS Section 115 Trust have selected the “Moderately Conservative” portfolio, with 30 percent of the funds invested in equities. Returns as of December 31, 2016 in the “Moderately Conservative” portfolio were as follows: · 1-year returns: 4.93 percent · 2-year returns: 3.20 percent · 5-year returns: 5.51 percent Should the City Council proceed with staff’s recommendation to establish a Section 115 Trust, staff recommends that the Finance and Audit Committee discuss the portfolios available and recommend an appropriate portfolio for the City Council’s consideration. Funding the Trust The City’s General Fund reserve policy stipulates that the unappropriated balance of the General Fund shall be maintained at a level between 15 and 20 percent of estimated General Fund revenues in any given fiscal year. In an effort to pay down the City’s unfunded pension liabilities and take measured steps to improve the City’s financial status long-term, staff recommends that the initial deposit to the Section 115 Trust be funded by the FY 2016-17 General Fund year-end remaining fund balance that is beyond a 15 percent reserve threshold. This threshold is consistent with the General Fund reserve practice of the City, as well as other regional cities. Comparative reserve levels for many of the cities in San Mateo and Santa Clara Counties, as well as San Mateo County and Santa Clara County, are included in Attachment 2. While agencies vary in their reserve policies, a 15 percent reserve is common. Utilizing a 15 percent reserve level in FY 2016-17 allows for the City to maintain a prudent reserve, while at the same time fulfill the City Council’s Strategic Plan priority of ensuring the City’s long-term fiscal health by addressing accrued liabilities. If a 15 percent reserve level is used, staff estimates that the initial Trust deposit could be approximately $7.8 to $8.8 million, pending final determination of the current fiscal year ending balance. In addition, staff is reviewing the potential for proportional payments to be made to the Trust from all other City funds associated with employee salary and benefit costs, such as the Sewer and Water Funds. 9.A. - Page 5