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City Council Agenda Report Pension Trust and Reserve Analysis and Use Policy March 18, 2025 Page 3 Since FY21, the City’s UAL balance has grown 52%, from $102 million to $155 million due to investment underperformance and assumption changes by CalPERS. Annual payments made to amortize the existing CalPERS UAL balance have grown rapidly from $5.6 million in FY18 to $13.0 million in FY25 and are projected to grow to $16.6 million by FY31. This has had, and will continue to have, a significant impact to the City’s budget. Pension costs are projected to begin to decline in 2034. Modeling Use of the Pension Resources Based on the strong growth of the Trust balance, and in light of the City’s forecasted budget deficits (Attachment 2), the City must consider analyzing when and how to begin withdrawing funds from the Trust while still maintaining enough liquidity to handle future economic uncertainty. Staff engaged NHA Advisors to analyze the different strategies to use the Trust and Pension Reserve (collectively referred to as Pension Resources) in a financially sustainable, judicious manner to mitigate the rising pension costs and the impacts to the operating budget until pension costs are projected to begin declining. A few key considerations guided the assessment by NHA Advisors, including: (1) should the City grow the trust to higher levels, (2) when and how much to withdraw from the Trust, (3) how CalPERS’ assumption changes might impact the utilization strategy of the Trust, and (4) how beneficial can the Trust be in mitigating the impact of the City’s projected budget deficits. NHA Advisors modeled three scenarios to demonstrate how the City can leverage Pension Resources to mitigate rising costs under different assumptions: 1. Status Quo – CalPERS earns 9.3% preliminary investment returns in FY24; stabilizing UAL costs at $12.1 million annually. 2. Discount Rate Reduction – CalPERS lowers its discount rate from 6.8% to 6.5%; stabilizing UAL costs at $13.7 million. 3. Deficit Mitigation – City withdraws from the Trust to mitigate the City’s forecasted deficits based on the General Fund 10-Year Financial Forecast (Moderate Recession). Proposed Pension Trust and Reserve Policy Based on the in-depth analysis, staff developed a Pension Trust and Reserve Policy for consideration. The Pension Trust and Reserve Policy aims to responsibly manage rising pension costs by using funds strategically to stabilize the budget while ensuring long-term sustainability. Key provisions of the proposed policy include: • Only use the Pension Resources during deficit years to maintain service levels, not to expand services, and withdrawals would be based on actual financial needs. • Balance use of the Pension Resources with other reserves. • Avoid relying on one-time funds for ongoing expenses. Docusign Envelope ID: BB80A86F-2853-4F40-B02D-18F5B9DD615F