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

Page 3 of 5 year). The target/ideal balance for the trust shall be 150 percent of annual pension costs. 3. Additional Discretionary Payments: CalPERS allows member agencies to make Additional Discretionary Payments (ADPs) at any time and in any amount, which would serve to reduce the City’s UAL and future required contributions. The City has the option to make ADPs to CalPERS using the assets held in the Trust or other available resources, such as one-time revenues or year-end surplus, if desired. 4. Contributions from Employees: This requires employee contributions towards the employer portion of the CalPERS normal cost (on top of the employee share). Currently, certain employee groups (Classic members) contribute 3.0 percent or 3.5 percent towards employer contributions, depending on the tier. The City intends to maintain these contributions from employees through labor negotiations. 5. Pension Obligation Bonds: Pension Obligation Bonds (POBs) are a tool that can be used to provide an ADP to CalPERS upon the determination that the cost to borrow the funds for the payment is less than continuing to make the projected prescribed UAL payments at the current discount rate. If the City considers issuing POBs, the guidelines in the funding policy, such as significant projected cash flow savings and POB interest rates at least 2.25 percent below the current CalPERS discount rate, will apply. 6. Fresh Start Amortization: CalPERS allows for permanent adjustments to be made to the UAL amortization schedule by combining amortization bases, resulting in a shorter payment period and level payments. Despite higher payments in the early years, the shorter repayment period leads to interest savings in the later years. While less common and restrictive, this tool should be evaluated as a potential strategy when appropriate. As shown in Table 2 below, four options were analyzed on the use of the Section 115 Pension Trust Fund, with Table 1 summarizing the assumptions used in the analysis. For each option, the analysis presents: (1) the City’s annual net payment from the General Fund and Non- General Funds; (2) the cumulative cost reduction over the withdrawal period (approximately 12 to 16 years); (3) the average annual cost reduction (i.e., use of trust funds); (4) the projected remaining trust balance; (5) the remaining balance expressed as a percentage of FY 2025/26 pension costs (including UAL and normal cost); and (6) the final fiscal year in which pension trust funds are used for smoothing. Please refer to slides 22–27 for additional detail. All the options attempt to smooth out the “mountain peak” in payments for enhanced budgetary savings and predictability. If the Council wishes to use pension trust funds to help balance the budget, Option 4 is recommended. This option provides for an estimated $4.4 million of average annual cost reductions (use of pension trust funds) over the next 12 fiscal years and is projected to leave approximately $44.3 million in the trust at the end of the withdrawal period—about 150.0 percent of the City’s FY 2025/26 annual pension costs. This recommendation is also consistent with the City’s actuary’s guidance provided to the Council in March 2025 regarding minimum use of pension trust funds. Maintaining an adequate balance in the trust will help the Page 191 of 242