CITY COUNCIL REGULAR MEETING AGENDA PACKET 3-17-26 (3)

Page 2 of 5 and enhanced, the discount rate was above 8.0 percent. Every time the discount rate is reduced, the unfunded accrued liability (UAL) for all CalPERS members increases. Based on the latest projections (which are subject to change based on a number of factors), the City’s CalPERS contributions are expected to peak around FY 2030/31 and then decrease until the Unfunded Accrued Liability (UAL) is fully paid off. Citywide annual pension costs are budgeted at $29.0 million for FY 2025/26 and $31.0 million for FY 2026/27. Pension contributions are expected to stabilize in the future as a higher percentage of current members will be subject to reduced pension benefits under the Public Employees’ Pension Reform Act of 2013 (PEPRA). While the UAL is projected to fully amortize by FY 2046 based on the latest actuarial reports published by CalPERS, that assumes that CalPERS consistently meets its investment return assumptions and doesn’t make any changes to actuarial assumptions in the future. New UAL will be added when CalPERS underperforms or makes changes to actuarial assumptions, with impacts being paid off over a 20-year period. The City has allocated $38.0 million to the Section 115 Pension Trust Fund. The current Trust balance is $60.0 million, with investment earnings accounting for close to 40.0 percent of the balance. Due to the City’s ongoing fiscal challenges with General Fund structural deficits, the City Council approved the use of $2.0 million from the Trust Fund for FY 2026/27 to help balance the City's operating budget. DISCUSSION In developing the pension cost management strategy and the funding policy, the City evaluated the options presented below. These strategies are incorporated into the pension funding policy attached to this report. The policy establishes a clear plan and methodology for funding current and future pension costs/liabilities. It also promotes long-term fiscal sustainability and demonstrates prudent financial management practices. To provide more immediate relief to the General Fund budget and help sustain core services and programs, the City also conducted a more in-depth analysis on the use of Section 115 Pension Trust Fund. Because the City’s fiscal conditions may change over time, one or more of the strategies listed below—including hybrid approaches—may be implemented to reduce the unfunded liability and achieve cost savings. 1. Annual Unfunded Accrued Liability Prepayment: CalPERS offers the option to make monthly payments on the UAL or prepay the entire annual UAL amount at a discounted level by the end of July. The City will continue to prepay its annual UAL payments each July to achieve budgetary savings. 2. Section 115 Pension Trust: The City will continue to maintain a pension stabilization fund in the form of a Section 115 Pension Trust (Trust). Assets in the Trust may be used only for pension-related costs and at the direction of the Council. The City’s objective with the Trust is to accumulate assets to fund its CalPERS pension costs and mitigate the budget impact of future UAL costs. Target Trust Balance: At a minimum, the Trust balance will be maintained at a level totaling 100 percent of annual pension costs (UAL + Normal Costs for the current fiscal Page 190 of 242