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6.1.C. - Page 44 (3) Establish IRS Section 115 non -revocable trusts. The Cities can also put reserves that are set aside for pension costs into non -revocable trusts under Section 115 of the Internal Revenue Code. Contributions to Section 115 trusts are voluntary and can be made as city budgets allow. Funds in such trusts can only be used to pay pension costs. 143 As with ordinary reserves, the Cities can use funds in Section 115 trusts to manage or smooth payments to Ca1PERS, consistent with their budgetary needs. 144 The non - revocable feature assures employees, retirees and taxpayers that the funds will be used for pension costs. Another advantage of Section 115 trusts is that they offer different investment choices and risk profiles 145 which can yield higher rates of Return on Investments than the rates available to the Cities for their general fund reserves. 146 Payments into a reserve do not reduce the Amortization Costs charged by Ca1PERS. In January 2018 Redwood City deposited $10.5 million into a Section 115 trust,147 representing approximately 7 months of its annual pension costs of $17.7 million in FY 2016-2017.148 Redwood City's finance group has recommended that the City deposit $1.1 million per year from general fund reserves into the Section 115 trust over the 5 -year period from and including FY 2018-2019 through FY 2022-2023.149 This $1.1 million per year would represent slightly less than 50 percent of the estimated $2.5 million per year increase in pension costs that Redwood City is likely to experience. 150 In FY 2016-2017, the Redwood City Council adopted a general fund reserve policy, where the unreserved portion of the general fund's balance would be 15 percent of anticipated general fund revenues. Any excess balance above a 15 percent reserve threshold would be utilized to fund a Section 115 Trust Account to help pay pension expenses."' In October 2017 Burlingame contributed $3.7 million into a Section 115 trust for the purpose of paying pension obligations and, approximately six months later, an additional $1 million. 152 The 143 Ca1PERS, Finance and Administration Committee, Proposed California Employers' Pension Prefunding Trust (CEPPT) Legislation, February 17, 2016, pp. 1-2, 4, <httos://www.calners.ca.2ov/docs/board- agendas/201602/financeadmin/item-6a-00.ndf>. 144 mid. 145 mid. 146 The City of Menlo Park notes that, if it moves funds in its Strategic Pension Funding reserve into a Section 115 trust, it would expect to earn returns on those assets of approximately 4 percent per year, as compared to the approximately 1 percent per year it earns on general fund reserves to due restrictions imposed on available investments for general fund reserves. City of Menlo Park, Adopted Budget, Fiscal Year 2017-18, p. 48. 141 Redwood City Report — FY 2017-18 Mid -Year Budget Study Session, p. 10. City of Redwood City, Fiscal Year 2 01 7-2018Adopted Budget, Budget Message, pp. 13 and 28, <httn://webanns.redwoodcitv.org/files/finance/main/1.- Redwood-City-CA-Adonted-FY-17-18-Budget-.ndf>. 14s Appendix A. 149 City of Redwood City, Fiscal Year 2018-2019 Recommended Budget, p. 174, <htto://www.redwoodcitv.or2/home/showdocument?id= 1 5124>. Iso Table No. 7. 1, above shows that Redwood City's pension costs (Miscellaneous and Safety plans) are projected to increase by $20.1 million between FY 2016-17 and FY 2024-25. $20.1 million / 8 years = $2.5 million in increases per year. 151 City of Redwood City, 2017 CAFR, p. v of Letter of Transmittal. 152 Letter from City of Burlingame to Grand Jury, dated June 7, 2018. Augustine, Carol, Staff Report to Burlingame City Council, March 14, 2018, pp. 11 and 12. 2017-2018 San Mateo County Civil Grand Jury 30