2213 P LAZA D RIVE , R OCKLIN , CA 95 765
T EL : 916.25 0 .1590 ; WEB : WWW . RIDGELINEMUNI . COM
TECHNICAL MEMORANDUM
To: Ms. Angela Courter, City of Cotati
Mr. Damien O’Bid, City of Cotati
From: Dmitry Semenov, Ridgeline Municipal Strategies, LLC Date: March 6, 2024
Re: 2023 Pension Liability Review; Ridgeline #23035
INTRODUCTION
Per your request, Ridgeline Municipal Strategies, LLC (Ridgeline) has performed a review of the Unfunded Accrued Liability (UAL) that the City of Cotati (City) has outstanding with the California Public Employees' Retirement System (CalPERS). This technical memorandum documents the results of the review and suggested actions that the City could take to reduce its future UAL costs, which are:
• Elimination of negative amortization for the 2022 UAL (estimated to save the City approximately $790,000); and
• Elimination of negative amortization for the 2023 UAL (estimated to save the City approximately $70,000); and
• Additional discretionary payments to repay the 2023 UAL faster to generate additional savings on the UAL interest.
CITY’S PENSION PLANS AND UNFUNDED ACCRUED LIABILITY
City provides pension benefits to its employees and retirees through six pension plans with CalPERS. As of 06/30/2022 (the most recent official information available as of the date of this memorandum), the plans had a total actuarial accrued liability (the estimated amount necessary, as of the valuation date, to fund all earned pension benefits for current City of Cotati
2023 Pension Liability Review – 03/06/2024
employees, retirees, and beneficiaries) of approximately $43.2 million, held approximately $36.5 million in assets, and its plans were underfunded by approximately $6.8 million. The pension plans were 84.4% funded, as summarized in Table 1 below.
Source: CalPERS’ Actuarial Valuation Report as of June 30, 2022 All six pension plans are underfunded, but the Classic Miscellaneous Tier 1 and Classic Safety Tier 1 represent 90% of the underfunded amount.
In January 2021, the City issued a pension obligation refunding loan and a street improvements financing loan (UAL Refunding Loans) that allowed it to pay down the UAL by $6,000,000. After the UAL refunding, the City had to make relatively small UAL payments to CalPERS on the UAL that remained outstanding after the refunding at the time, as well as payments on the two loans. Since the loan interest rates are significantly lower than the interest rate charged by CalPERS, the refunding allowed the City to generate approximately $2.25 million in cash flow savings.
However, significant investment underperformance of CalPERS in FYE 2022 and FYE 2023 and the CalPERS’ demographic reconciliation adjustment for FYE 2022 resulted in additional UAL increases.
Graph 1 below shows the recent and future UAL and UAL refunding loan amortization schedule.
Pension Plan
Total
Accrued
Liability
Market
Value of
Assets
Unfunded
Accrued
Liability
%
Funded
Miscellaneous $20,866,492 $17,601,734 $3,264,758 84.4%
Safety $17,143,006 $14,320,714 $2,822,292 83.5%
Safety 2nd Tier $1,144,633 $1,010,579 $134,054 88.3%
Misc 2nd Tier $1,398,134 $1,220,879 $177,255 87.3%
PEPRA Safety $1,417,454 $1,223,616 $193,838 86.3%
PEPRA Misc $1,246,688 $1,088,227 $158,461 87.3%
TOTAL $43,216,407 $36,465,749 $6,750,658 84.4%
City of Cotati
Table 1
Pension Plans Summary
City of Cotati
2023 Pension Liability Review – 03/06/2024
Graph 1
City of Cotati
Current UAL and UAL Refunding Loan Amortization Schedule ($000s) Source: CalPERS’ Actuarial Valuation Report as of June 30, 2022 and UAL Refunding Loans Amortization Schedule City of Cotati
2023 Pension Liability Review – 03/06/2024
CALPERS INVESTMENT PERFORMANCE FOR FYE 2022 and FYE 2023 For FYE 2022, CalPERS incurred an investment loss of 7.5%. It was the fifth time in the last 30 years that CalPERS had an investment loss and the first investment loss incurred since FYE 2009.
CalPERS recently announced its FYE 2023 investment earnings estimate of 5.8%. While this is a significant improvement over the prior year, it falls below the return target of
6.8%, which results in an additional UAL increase. Graph 2 below shows the history of CalPERS’ annual investment returns.
Graph 2
City of Cotati
History of CalPERS’ Annual Investment Returns, FYE 1993-2023 Source: CalPERS
The average annual investment returns as reported by CalPERS are as follows:
• 5 years: 6.1%
• 10 years: 7.1%
• 20 years: 7.0%
• 30 years: 7.5%
City of Cotati
2023 Pension Liability Review – 03/06/2024
The average returns indicate that historically CalPERS has been able to achieve the long term investment target rate of 6.8% (the current discount rate). CalPERS has been lowering the target rate over the last decades. It appears that the current target rate favorably corresponds to the past performance. However, past performance is not a guarantee of future results.
SUMMARY OF FYE 2022 UAL INCREASES
For FYE 2022, CalPERS added two new actuarial bases to each of the City’s six pension plans:
• The Investment Loss base increased the UAL to account for the investment loss of
7.5%.
• The Non-Investment Loss base is the annual reconciliation to account for the differences between the actuarial assumptions and the actual plan experience for the year. This base increased the UAL reportedly due to the extraordinary high COLA and payroll increases within the plan pool.
Table 2 summarizes the impacts of these two bases on the City’s UAL.
Source: CalPERS
For the 2nd Tier and PEPRA plans, CalPERS netted out the previously overfunded plan balances to calculate the net Investment Loss amount.
Pension Plan Investment
Loss
NonInvestment
Loss
Total UAL
Increase
Miscellaneous $2,046,470 $293,255 $2,339,725
Safety $1,674,709 $255,243 $1,929,952
Safety 2nd Tier [1] $134,054 $0 $134,054
Misc 2nd Tier [1] $157,606 $19,649 $177,255
PEPRA Safety [1] $172,734 $21,104 $193,838
PEPRA Misc [1] $140,940 $17,521 $158,461
TOTAL $4,326,513 $606,772 $4,933,285
[1] Investment Loss is shown net of previously overfunded balance.
Table 2
City of Cotati
FYE 2022 UAL Increase Factors
City of Cotati
2023 Pension Liability Review – 03/06/2024
While prior experience indicates that investment market downturns similar to what took place in FYE 2022 are followed by market recoveries, CalPERS’ historical investment returns suggest that a quick elimination of the 2022 UAL is unlikely and the City may want to consider additional steps to reduce the long-term interest costs associated with the new UAL. Suggested pension cost reduction strategies are discussed below.
IMPACT OF FYE 2023 CALPERS’ INVESTMENT UNDERPERFORMANCE ON THE CITY
To assess the impact of CalPERS’ FYE 2023 investment underperformance on the funded status of pension plans, it is important to remember that to maintain an unchanged funded ratio, among other things, CalPERS needs to achieve an investment gain equal to the discount rate, which is currently 6.8%. Any time that the investment returns are below the discount rate, the funded level of the pension plans decreases and an additional UAL is created. Conversely, whenever the investment returns are above the discount rate, the funded level increases and the UAL amount is reduced.
With the 5.8% investment gain, the funding shortfall impact is 1% (the difference between the 6.8% discount rate and the 5.8% estimated investment return). This shortfall translates into approximately $364,000 of new UAL for the City.
Table 3 below shows the 2023 investment underperformance impact estimates for each of the City’s pension plans.
Source: Ridgeline
Pension Plan Estimated 2023
Add'l UAL
Miscellaneous $176,000
Safety $143,000
Safety 2nd Tier $10,000
Misc 2nd Tier $12,000
PEPRA Safety $12,000
PEPRA Misc $11,000
TOTAL $364,000
Table 3
City of Cotati
Estimated 2023 Investment Performance Impact
City of Cotati
2023 Pension Liability Review – 03/06/2024
The investment underperformance impact is estimated based on the FYE 2022 market value of assets within each pension plan multiplied by 1%. CalPERS may make additional adjustments and reconciliations to account for actual vs. projected plan experience and any methodology changes.
In order for this investment underperformance impact to be reversed in future years, CalPERS would need to earn investment returns above and beyond the 6.8% discount rate hurdle and then apply such excess returns to offset the UAL.
CITY’S NORMAL COST RATES
In addition to the new UAL, the City should also be aware that its Normal Costs are increasing as follows:
• Classic Miscellaneous Tier 1 Plan: by 0.07% of salaries (from 15.95% to 16.02%) for the City, while remaining unchanged for the employees;
• Classic Miscellaneous Tier 2 Plan: by 0.05% of salaries (from 10.66% to 10.71%) for the City, while remaining unchanged for the employees;
• PEPRA Miscellaneous Plan: by 0.19% of salaries (from 7.68% to 7.87%) for the City, while remaining unchanged for the employees;
• Classic Safety Tier 1 Plan: by 0.21% of salaries (from 25.65% to 25.86%) for the City, while remaining unchanged for the employees;
• Classic Safety Tier 2 Plan: by 0.14% of salaries (from 19.95% to 20.09%) for the City, while remaining unchanged for the employees;
• PEPRA Safety Plan: by 0.22% of salaries (from 13.54% to 13.76%) for the City, while remaining unchanged for the employees.
The new rates become effective for the 2024-25 fiscal year.
CITY’S ESTIMATED FYE 2023 PENSION PLAN FUNDED LEVELS
CalPERS will publish the 06/30/2023 actuarial reports for the City in or around August 2024. The reports will reflect any changes that have taken place during the fiscal year, including the investment underperformance, the City’s and its employees’ contributions, benefit payments to plan beneficiaries, and any adjustments made by CalPERS to reconcile the actual vs. projected plan experience and to account for any actuarial methodology changes.
City of Cotati
2023 Pension Liability Review – 03/06/2024
While the reconciliation and methodology adjustments are unknown at this time, Ridgeline has developed an estimate of the other changes, which are summarized in Table 4 below.
Sources: CalPERS, Ridgeline
Due to the relatively small current UAL balances of the Tier 2 and PEPRA Plans, they have been omitted from the calculations.
It should be emphasized that the amounts calculated in Table 4 are estimates only and can only be finalized once CalPERS publishes the 06/30/2023 actuarial reports in August 2024.
The Normal Cost contributions, UAL payments, and benefit payments estimates were generated by CalPERS. The investment gain / loss and UAL interest estimates were generated by Ridgeline.
Description Misc Plan Safety Plan Total
Market Value of Assets
2022 Balance $17,602,000 $14,321,000 $31,923,000
Normal Cost Contribution $142,000 $67,000 $209,000
UAL Payment $219,000 $191,000 $410,000
UAL Refunding $0 $0 $0
Investment Gain / (Loss) $1,021,000 $831,000 $1,852,000 Benefit Payments ($1,210,000) ($1,010,000) ($2,220,000) Estimated 2023 Balance $17,774,000 $14,400,000 $32,174,000 Unfunded Accrued Liability
2022 Balance $3,265,000 $2,822,000 $6,087,000
UAL Payment ($219,000) ($191,000) ($410,000)
Interest $222,000 $192,000 $414,000
UAL Refunding $0 $0 $0
Investment (Gain) / Loss $176,000 $143,000 $319,000
Estimated 2023 Balance $3,444,000 $2,966,000 $6,410,000 Pension Plan 2023 Funded Level 83.8% 82.9% 83.4%
City of Cotati
2023 Pension Plan Funded Level Estimate
Rounded to '000s
Table 4
City of Cotati
2023 Pension Liability Review – 03/06/2024
It is estimated that the City’s Classic Miscellaneous and Safety Tier 1 plans were approximately 83% funded as of 06/30/2023, before any additional adjustments that could be made by CalPERS.
Concurrently with the issuance of the UAL Refunding Loans, the City adopted an Unfunded Accrued Liability Management Policy, which calls for the City to maintain a target pension plan funded level objective of 90%. The City is below this threshold.
AMORTIZATION OF NEW UAL
The new 2023 UAL will be amortized over a 20-year period with a 5-year ramp-up. The first payment will be due in FYE 2026 (July 2025). The only exception is the Safety 2nd Tier Plan, where the UAL will be amortized over a 15-year period without any ramp-up.
The amortization schedule is based on the estimated 2023 UAL base balances shown in Table 3 above. For the two Classic Tier 1 plans, it is estimated that the $319,000 of the new UAL will result in an additional $385,000 in interest cost for the City over the 20-year amortization period.
Graph 3 illustrates how these amortization payments will impact the City’s UAL repayment structure for the two Classic Tier 1 plans.
City of Cotati
2023 Pension Liability Review – 03/06/2024
Graph 3
City of Cotati
UAL Repayment with 2023 Projected Base Amortization ($000s) Source: CalPERS’ Actuarial Valuation Report as of June 30, 2022, UAL Refunding Loans Amortization Schedule, Ridgeline City of Cotati
2023 Pension Liability Review – 03/06/2024
Table 5 provides the annual detailed estimate of the existing UAL amortization, the UAL Refunding Loans repayments, and the new UAL amortization schedule.
Source: UAL Refunding Loans Amortization Schedule, Ridgeline POB Street Loan Existing
UAL 2023 UAL POB Street Loan Existing
UAL 2023 UAL Total Debt Service UAL Total
2023 $197,540 $73,354 $218,709 $0 $489,603 $150,855 $56,018 $190,922 $0 $397,796 $477,768 $409,631 $887,399 2024 $197,539 $73,354 $192,898 $0 $463,791 $150,855 $56,018 $170,871 $0 $377,744 $477,766 $363,769 $841,535 2025 $197,541 $73,354 $235,892 $0 $506,787 $150,856 $56,018 $207,336 $0 $414,210 $477,769 $443,228 $920,997 2026 $197,542 $73,354 $248,807 $4,315 $524,019 $150,857 $56,018 $217,623 $3,506 $428,004 $477,772 $474,251 $952,023 2027 $197,540 $73,354 $261,719 $8,630 $541,243 $150,855 $56,018 $227,908 $7,012 $441,793 $477,767 $505,269 $983,036 2028 $197,539 $73,354 $274,634 $12,945 $558,472 $150,854 $56,018 $238,194 $10,518 $455,585 $477,766 $536,291 $1,014,057 2029 $197,541 $73,354 $324,808 $17,260 $612,963 $150,856 $56,018 $279,254 $14,024 $500,152 $477,769 $635,346 $1,113,115 2030 $197,540 $73,354 $324,808 $21,575 $617,278 $150,855 $56,018 $279,254 $17,530 $503,658 $477,768 $643,167 $1,120,935 2031 $197,543 $73,354 $324,808 $21,575 $617,280 $150,857 $56,018 $279,254 $17,530 $503,659 $477,772 $643,167 $1,120,940 2032 $197,537 $73,354 $324,808 $21,575 $617,275 $150,853 $56,018 $279,254 $17,530 $503,655 $477,763 $643,167 $1,120,930 2033 $197,541 $73,354 $324,808 $21,575 $617,279 $150,856 $56,018 $279,253 $17,530 $503,657 $477,769 $643,166 $1,120,936 2034 $197,542 $73,354 $324,809 $21,575 $617,280 $150,856 $56,018 $279,255 $17,530 $503,660 $477,771 $643,169 $1,120,940 2035 $197,539 $73,354 $324,808 $21,575 $617,277 $150,855 $56,018 $279,255 $17,530 $503,658 $477,766 $643,168 $1,120,935 2036 $197,539 $73,354 $324,809 $21,575 $617,277 $150,854 $56,018 $279,255 $17,530 $503,657 $477,765 $643,169 $1,120,934 2037 $197,540 $73,354 $324,810 $21,575 $617,280 $150,855 $56,018 $279,254 $17,530 $503,658 $477,768 $643,169 $1,120,937 2038 $0 $73,354 $324,809 $21,575 $419,738 $0 $56,018 $279,256 $17,530 $352,804 $129,372 $643,170 $772,543 2039 $0 $73,354 $324,807 $21,575 $419,736 $0 $56,018 $279,256 $17,530 $352,804 $129,372 $643,168 $772,541 2040 $0 $73,354 $324,807 $21,575 $419,736 $0 $56,018 $279,254 $17,530 $352,802 $129,372 $643,166 $772,539 2041 $0 $73,354 $324,808 $21,575 $419,737 $0 $56,018 $279,258 $17,530 $352,806 $129,372 $643,171 $772,544 2042 $0 $73,354 $324,809 $21,575 $419,738 $0 $56,018 $279,255 $17,530 $352,803 $129,372 $643,169 $772,542 2043 $0 $0 $93,475 $21,575 $115,050 $0 $0 $80,843 $17,530 $98,373 $0 $213,423 $213,423 2044 $0 $0 $280,949 $21,575 $302,524 $0 $0 $231,478 $17,530 $249,008 $0 $551,532 $551,532 2045 $0 $0 $0 $21,575 $21,575 $0 $0 $0 $17,530 $17,530 $0 $39,105 $39,105 TOTAL $2,963,105 $1,467,082 $6,354,399 $388,356 $11,172,942 $2,262,830 $1,120,365 $5,474,742 $315,539 $9,173,475 $7,813,381 $12,533,036 $20,346,417 Debt Service UAL
Table 5
City of Cotati
Estimated UAL Amortization Schedule - CalPERS
FYE
Miscellaneous Plan Safety Plan Total
Debt Service UAL
Total
City of Cotati
2023 Pension Liability Review – 03/06/2024
The debt service allocation to the Miscellaneous and Safety plans is made based on the UAL balances that were paid down through the issuance of the UAL Refunding Loans (see Table 6 below).
Source: UAL Refunding Loans Amortization Schedule
The 2023 UAL amortization is estimated based on the net UAL balance for each plan.
PENSION COST OPTIMIZATION STRATEGIES
Concurrently with the issuance of the UAL Refunding Loans, the City adopted the UAL Management Policy, which provides guidance on how the City should approach managing future UAL.
In addition to following the historical practice of prepaying the UAL payments by July 31 of each year, there are two pension cost optimization strategies that the City may want to implement to lower its future UAL-related costs pertaining to the 2023 UAL increase:
- Strategy A: Eliminate negative amortization
- Strategy B: Make additional discretionary contributions Strategy A: Eliminate Negative Amortization
One of the key factors that contributed to the historical growth of UAL and associated pension costs for agencies covered by CalPERS was the negative amortization within pension plans.
The standard CalPERS practice does not require agencies to make any payments on new UAL for the first two years. After that the new UAL is amortized over a 20-year term with a 5-year ramp-up period to the full payment amount.
Description UAL
Paydown %
Miscellaneous Plan UAL Payoff $3,402,000 56.70%
Safety Plan UAL Payoff $2,598,000 43.30%
Total $6,000,000 100.00%
Table 6
City of Cotati
Debt Service Allocation
City of Cotati
2023 Pension Liability Review – 03/06/2024
During the ramp-up period, the payments increase by 20% of the full payment amount each year. In other words, the first year’s payment amount is only 20% of the full payment, the second year’s payment amount is 40% of the full payment, etc.
However, the new UAL starts accruing interest at 6.8% (the discount rate) as soon as it is added to the plan.
Thus, the CalPERS standard UAL amortization practice results in negative amortization for each pension plan that does not take proactive steps.
Negative amortization occurs whenever the debt payment for any period is less than the interest charged over that period so that the outstanding balance of the debt increases.
In each year when the City’s UAL payments on any given actuarial UAL base are less than the interest accrued on that base, the base’s balance increases. In the following year, the interest is accrued on the higher balance.
Under the current CalPERS amortization rules, each agency finds itself in the negative amortization situation for the first four years after new UAL is incurred. In year 5, the required payment amount is just slightly higher than the interest amount for the year, which translates into essentially an interest-only payment. It is only in year 6 that the UAL starts being paid down.
This leads to significantly higher interest costs for the CalPERS member agencies.
Elimination of negative amortization is a recommended practice. It is achieved in two steps.
1. Additional discretionary payments (ADPs) in the two years following the creation of new UAL to cover accrued interest.
The ADP amount is calculated by multiplying the new UAL amount by 6.8%.
These payments can be made as early as in the 13th and 25th months following the end of the fiscal year in which the new UAL was created. For the 2022 actuarial UAL base, such ADPs can be made as early as in July 2023 and July 2024. For the 2023 actuarial UAL base, such ADPs can be made as early as in July 2024 and July 2025.
To make these payments, you have to contact your CalPERS actuary 2-3 weeks prior to making the payments. You need to inform the actuary that you would like to make an ADP to cover the interest on the 2022 and/or 2023 Investment Loss City of Cotati
2023 Pension Liability Review – 03/06/2024
base and to instruct the actuary to apply the ADP to the 2022 and/or 2023 Investment Loss base.
The actuary will then set up a receivable in the system that will allow you to make the payment through the City’s MyCalPERS portal.
These actions should be taken after July 1, 2023 (for the 2022 UAL bases) and July 1, 2024 (for the 2023 UAL bases), after the fiscal year is closed, and need to be repeated the next year as well.
With the City’s 2022 UAL additions of approximately $2.3 million for the Miscellaneous Plan and $1.9 million for the Safety Plan, the ADPs are estimated to be as following:
o Miscellaneous Plan: $159,000 in July of 2024 and 2025 o Safety Plan: $131,000 in July of 2024 and 2025
With the City’s 2023 estimated new UAL additions of approximately $176,000 for the Miscellaneous Plan and $143,000 for the Safety Plan, the ADPs are estimated to be as following:
o Miscellaneous Plan: $12,000 in July of 2024 and 2025
o Safety Plan: $10,000 in July of 2024 and 2025
It should be noted that the payment calculations for the elimination of the negative amortization on the 2023 bases are based on the estimated investment performance of
5.8%. The actual amount will be confirmed once the FYE 2023 Actuarial Reports are published by CalPERS in or around August 2024.
2. Convert new UAL bases from ramp-up to level amortization schedule.
This request should be made to the City’s CalPERS actuary as soon as the new actuarial report becomes available (tentatively, in August of 2023 for the 2022 bases and in August of 2024 for the 2023 bases). As a result of the request, the City’s UAL payments will be recalculated from the ramp-up to level repayment schedule. The first payment will still be due in FYE 2025 (July 2024) for the 2022 bases and FYE 2026 (July 2025) for the 2023 bases.
The implementation of this strategy is projected to save the City approximately $790,000 over the 20-year UAL repayment period of the 2022 bases, as was discussed in the last year’s UAL update memorandum.
City of Cotati
2023 Pension Liability Review – 03/06/2024
The implementation of this strategy is projected to save the City approximately $70,000 over the 20-year UAL repayment period of the 2023 bases, as shown in Table 7 below.
The combined cash flow savings amount is estimated at approximately $860,000.
It should be noted that the discussion above only covers the elimination of negative amortization for the FYE 2023 bases within the Classic Tier 1 plans. The estimated savings from the elimination of negative amortization for the FYE 2022 bases were covered in the last year’s report. The combined ADPs to cover the first two years of the new UAL interest for all plans are shown in the Conclusion section of this report.
City of Cotati
2023 Pension Liability Review – 03/06/2024
Source: Ridgeline
Misc Safety Total Misc Safety Total Misc Safety Total
2024 $0 $0 $0 $11,968 $9,724 $21,692 ($11,968) ($9,724) ($21,692) 2025 $0 $0 $0 $11,968 $9,724 $21,692 ($11,968) ($9,724) ($21,692) 2026 $4,315 $3,506 $7,821 $16,356 $13,289 $29,645 ($12,041) ($9,783) ($21,824) 2027 $8,630 $7,012 $15,642 $16,356 $13,289 $29,645 ($7,726) ($6,277) ($14,003) 2028 $12,945 $10,518 $23,463 $16,356 $13,289 $29,645 ($3,411) ($2,771) ($6,182) 2029 $17,260 $14,024 $31,284 $16,356 $13,289 $29,645 $904 $735 $1,639 2030 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2031 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2032 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2033 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2034 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2035 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2036 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2037 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2038 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2039 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2040 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2041 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2042 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2043 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2044 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 2045 $21,575 $17,530 $39,105 $16,356 $13,289 $29,645 $5,220 $4,241 $9,460 TOTAL $388,356 $315,539 $703,895 $351,052 $285,230 $636,282 $37,304 $30,309 $67,613 Table 7
City of Cotati
Negative Amortization Elimination Detail
FYE Standard CalPERS Amortization Revised Amortization Schedule Difference City of Cotati
2023 Pension Liability Review – 03/06/2024
Graph 4 illustrates how the elimination of the negative amortization impacts the UAL repayment schedule.
Graph 4
City of Cotati
UAL Repayment with Elimination of Negative Amortization ($000s) Source: CalPERS’ Actuarial Valuation Report as of June 30, 2021, UAL Refunding Loans Amortization Schedule, Ridgeline City of Cotati
2023 Pension Liability Review – 03/06/2024
Table 8 provides the annual detailed estimate of the existing UAL payments, the UAL Refunding Loans payments and the new UAL amortization schedule factoring in the elimination of the negative amortization.
Source: UAL Refunding Loans Amortization Schedule, Ridgeline POB Street Loan Existing
UAL 2023 UAL POB Street Loan Existing
UAL 2023 UAL Total Debt Service UAL Total
2023 $197,540 $73,354 $218,709 $0 $489,603 $150,855 $56,018 $190,922 $0 $397,796 $477,768 $409,631 $887,399 2024 $197,539 $73,354 $192,898 $11,968 $475,759 $150,855 $56,018 $170,871 $9,724 $387,468 $477,766 $385,461 $863,227 2025 $197,541 $73,354 $235,892 $11,968 $518,755 $150,856 $56,018 $207,336 $9,724 $423,934 $477,769 $464,920 $942,689 2026 $197,542 $73,354 $248,807 $16,356 $536,059 $150,857 $56,018 $217,623 $13,289 $437,787 $477,772 $496,075 $973,847 2027 $197,540 $73,354 $261,719 $16,356 $548,969 $150,855 $56,018 $227,908 $13,289 $448,070 $477,767 $519,272 $997,039 2028 $197,539 $73,354 $274,634 $16,356 $561,883 $150,854 $56,018 $238,194 $13,289 $458,356 $477,766 $542,473 $1,020,239 2029 $197,541 $73,354 $324,808 $16,356 $612,059 $150,856 $56,018 $279,254 $13,289 $499,417 $477,769 $633,707 $1,111,476 2030 $197,540 $73,354 $324,808 $16,356 $612,058 $150,855 $56,018 $279,254 $13,289 $499,417 $477,768 $633,707 $1,111,475 2031 $197,543 $73,354 $324,808 $16,356 $612,061 $150,857 $56,018 $279,254 $13,289 $499,419 $477,772 $633,707 $1,111,479 2032 $197,537 $73,354 $324,808 $16,356 $612,055 $150,853 $56,018 $279,254 $13,289 $499,414 $477,763 $633,707 $1,111,470 2033 $197,541 $73,354 $324,808 $16,356 $612,059 $150,856 $56,018 $279,253 $13,289 $499,416 $477,769 $633,706 $1,111,475 2034 $197,542 $73,354 $324,809 $16,356 $612,061 $150,856 $56,018 $279,255 $13,289 $499,419 $477,771 $633,709 $1,111,480 2035 $197,539 $73,354 $324,808 $16,356 $612,057 $150,855 $56,018 $279,255 $13,289 $499,417 $477,766 $633,708 $1,111,474 2036 $197,539 $73,354 $324,809 $16,356 $612,058 $150,854 $56,018 $279,255 $13,289 $499,416 $477,765 $633,709 $1,111,474 2037 $197,540 $73,354 $324,810 $16,356 $612,060 $150,855 $56,018 $279,254 $13,289 $499,417 $477,768 $633,709 $1,111,477 2038 $0 $73,354 $324,809 $16,356 $414,519 $0 $56,018 $279,256 $13,289 $348,563 $129,372 $633,710 $763,082 2039 $0 $73,354 $324,807 $16,356 $414,517 $0 $56,018 $279,256 $13,289 $348,563 $129,372 $633,708 $763,080 2040 $0 $73,354 $324,807 $16,356 $414,517 $0 $56,018 $279,254 $13,289 $348,561 $129,372 $633,706 $763,078 2041 $0 $73,354 $324,808 $16,356 $414,518 $0 $56,018 $279,258 $13,289 $348,565 $129,372 $633,711 $763,083 2042 $0 $73,354 $324,809 $16,356 $414,519 $0 $56,018 $279,255 $13,289 $348,562 $129,372 $633,709 $763,081 2043 $0 $0 $93,475 $16,356 $109,831 $0 $0 $80,843 $13,289 $94,132 $0 $203,963 $203,963 2044 $0 $0 $280,949 $16,356 $297,305 $0 $0 $231,478 $13,289 $244,767 $0 $542,072 $542,072 2045 $0 $0 $0 $16,356 $16,356 $0 $0 $0 $13,289 $13,289 $0 $29,645 $29,645 TOTAL $2,963,105 $1,467,082 $6,354,399 $351,052 $11,135,638 $2,262,830 $1,120,365 $5,474,742 $285,230 $9,143,166 $7,813,381 $12,465,423 $20,278,804 Debt Service UAL
Table 8
City of Cotati
Estimated UAL Amortization Schedule - Elimination of Negative Amortization FYE
Miscellaneous Plan Safety Plan Total
Debt Service UAL
Total
City of Cotati
2023 Pension Liability Review – 03/06/2024
Strategy B: Additional Discretionary Contributions
After eliminating the negative amortization, the new 2023 UAL would still have an associated interest cost of approximately $317,000, which will be incurred over the 20- year amortization term.
To further lower the UAL interest costs, the City may want to consider making additional ADPs to reduce its UAL balances. This decision should be made in light of the overall City’s fiscal situation, including reserve balances, capital improvement projects, cash flow management, City Council’s vision and direction, etc.
The additional ADPs would also allow the City to quicker achieve its target 90% pension plan funded ratio, as documented in the UAL Management Policy. Table 8 shows that to achieve the target funded ratio, the City would need to make an ADP of approximately $2.4 million. Given the recent investment market volatility and the prior history of market recoveries that follow market downturns, the City may want to postpone making the additional ADPs to see if market gains transpire to offset a portion of the 2022 UAL.
Source: Ridgeline
It should be noted that the ADP required to achieve the 90% funded level estimated above includes the current interest ADPs discussed in this report.
CONCLUSION
Proactive pension liability management practices are essential for keeping the City’s future UAL balances and the associated interest costs under control.
To cover the interest on the FYE 2022 and anticipated FYE 2023 actuarial bases, the following ADPs are recommended:
Description Amount Comments
Estimated 2023 MVA $32,174,000 See Table 4
Estimated 2023 UAL $6,410,000 See Table 4
Estimated 2023 Total Accrued Liability $38,584,000
Estimated 2023 Funded Level 83.4% See Table 4
90% Funded Level Amount $34,726,000
ADP Required to Achieve 90% Funded Level $2,552,000
Table 9
City of Cotati
Funded Ratio Target Estimate
City of Cotati
2023 Pension Liability Review – 03/06/2024
Source: Ridgeline
To eliminate the negative amortization on the FYE 2022 and anticipated FYE 2023 actuarial bases, the following ADPs (including amounts in Table 10) are recommended:
Source: Ridgeline
If you have any questions about this technical memorandum or suggested strategies, do not hesitate to contact us.
Pension Plan FYE 2023
Interest
FYE 2024
Interest
FYE 2025
Interest
Miscellaneous $159,101 $171,069 $11,968
Safety $131,237 $140,961 $9,724
Safety 2nd Tier $9,116 $9,796 $680
Misc 2nd Tier $12,053 $12,869 $816
PEPRA Safety $13,181 $13,997 $816
PEPRA Misc $10,775 $11,523 $748
TOTAL $335,463 $360,215 $24,752
Table 10
City of Cotati
Summary of Current Interest ADPs
Description FYE 2024 FYE 2025 FYE 2026 [3]
Min Requirement Payments
Pension Refunding Loans $477,766 $477,769 $477,772
Required UAL [1] $363,769 $476,789 $519,954
Subtotal: Required Payments $841,535 $954,558 $997,726
Additional Discretionary Payments
2022 UAL Interest $335,463 $335,463 $0
2022 UAL Reamortization $0 $254,579 $163,346
2023 UAL Interest [2] $0 $24,752 $24,752
2023 UAL Reamortization [2] $0 $0 $21,824
Subtotal: ADPs $335,463 $614,794 $188,098
Total UAL Payments $1,176,999 $1,569,352 $1,185,824
[1] Includes all six pension plans.
[2] Payments related to 2023 UAL are estimates.
[3] FYE 2026 payments will be impacted by 2024 CalPERS performance.
Recommended UAL ADPs
Table 11
City of Cotati