2 2 1 3 P L A Z A D R I V E , R O C K L I N , C A 9 5 7 6 5 T E L : 9 1 6 . 2 5 0 . 1 5 9 0 ; W E B : W W W . R I D G E L I N E M U N I . C O M
TECHNICAL MEMORANDUM
To: Ms. Angela Courter, City of Cotati
Mr. Damien O’Bid, City of Cotati
From: Dmitry Semenov, Ridgeline Municipal Strategies, LLC Date: November 21, 2024
Re: 2024 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.
Recommended for Implementation:
• Elimination of negative amortization for the 2023 UAL (estimated to save the City approximately $77,000).
Recommended for Consideration Based on Overall Budget Outlook:
• Reamortize the remaining balance on the 2022 UAL from ramp-up to level payments (savings will vary depending on the selected option). • 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 of Cotati
2024 Pension Liability Review – 11/21/2024
City provides pension benefits to its employees and retirees through six pension plans with CalPERS. As of 06/30/2023 (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 employees, retirees, and beneficiaries) of approximately $45.5 million, held approximately $37.8 million in assets, and its plans were underfunded by approximately $7.7 million. The pension plans were 83.1% funded, as summarized in Table 1 below.
Source: CalPERS’ Actuarial Valuation Report as of June 30, 2023 All six pension plans are underfunded, but the Classic Miscellaneous Tier 1 and Classic Safety Tier 1 represent 89% 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.
Pension Plan
Total
Accrued
Liability
M arket
Value of
Assets
Unfunded
Accrued
Liability
%
Funded
M iscellaneous $21,890,933 $18,174,505 $3,716,428 83.0% Safety $17,385,012 $14,246,820 $3,138,192 81.9%
Safety 2nd Tier $1,158,739 $999,177 $159,562 86.2%
M isc 2nd Tier $1,568,922 $1,347,802 $221,120 85.9%
PEPRA Safety $1,825,557 $1,564,410 $261,147 85.7%
PEPRA M isc $1,688,177 $1,476,552 $211,625 87.5%
TOTAL $45,517,340 $37,809,266 $7,708,074 83.1%
City of Cotati
Table 1
Pension Plans Summary
City of Cotati
2024 Pension Liability Review – 11/21/2024
Subsequently, CalPERS’ investment underperformance and reconciliation adjustments in FYEs 2022 and 2023 resulted in new UAL increases.
Following the CalPERS investment loss of 2022, the City made two Additional Discretionary Payments (“ADP”) in March and July of 2024 in the combined amount of approximately $670,000 to reduce negative amortization on the 2022 actuarial bases.
City of Cotati
2024 Pension Liability Review – 11/21/2024
Graph 1 shows the recent and future UAL and UAL refunding loan amortization schedule. This schedule DOES NOT include the ADPs made by the City, as it illustrates the official CalPERS 2023 amortization schedule generated before the ADPs were made.
Graph 1
City of Cotati
Current UAL and UAL Refunding Loan Amortization Schedule ($000s) City of Cotati
2024 Pension Liability Review – 11/21/2024
Source: CalPERS’ Actuarial Valuation Report as of June 30, 2023 and UAL Refunding Loans Amortization Schedule City of Cotati
2024 Pension Liability Review – 11/21/2024
CALPERS INVESTMENT PERFORMANCE FOR FYE 2023 and FYE 2024 For FYE 2023, CalPERS generated an investment return of 5.8%, which fell below the target of 6.8%. This resulted in a small UAL increase.
CalPERS recently announced its FYE 2024 investment earnings estimate of 9.3%, which exceeds the 6.8% target. This will result in a welcomed UAL reduction. Graph 2 below shows the history of CalPERS’ annual investment returns.
Graph 2
City of Cotati
History of CalPERS’ Annual Investment Returns, FYE 1993-2024 Source: CalPERS
The average annual investment returns as reported by CalPERS are as follows:
• 5 years: 6.6%
• 10 years: 6.2%
• 20 years: 6.7%
City of Cotati
2024 Pension Liability Review – 11/21/2024
• 30 years: 7.7%
The average returns indicate that historically CalPERS has been able to achieve the longterm 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 2023 UAL INCREASES
For FYE 2023, 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 underperformance of 1.0%, compared to the 6.8% discount rate. • 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 larger than expected salary increases and pension COLA increases within the pension pool.
Table 2 summarizes the impacts of these two bases on the City’s UAL.
Pension Plan
Investment
Loss
N onInvestment
Loss
Total UAL
Increase
M iscellaneous $118,075 $337,615 $455,690
Safety $93,413 $227,877 $321,290
Safety 2nd Tier [1] $30,677 $0 $30,677
M isc 2nd Tier $8,751 $24,197 $32,948
PEPRA Safety $10,250 $23,929 $34,179
PEPRA M isc $9,584 $26,036 $35,620
TOTAL $270,750 $639,654 $910,404
[1] Investment Loss includes total net UAL increase.
Table 2
City of Cotati
FYE 2023 UAL Increase Factors
City of Cotati
2024 Pension Liability Review – 11/21/2024
Source: CalPERS
While prior experience indicates that investment market downturns similar to what took place in FYE 2022 are followed by market recoveries, the FYE 2023 investment performance and the 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. Recommended pension cost reduction strategies are discussed below.
IMPACT OF FYE 2024 CALPERS’ INVESTMENT PERFORMANCE ON THE CITY To assess the impact of CalPERS’ FYE 2024 investment performance 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.
The 9.3% investment return translates into a 2.5% funding surplus (the difference between the 6.8% discount rate and the 9.3% estimated investment return). This surplus is estimated to reduce the City’s UAL by approximately $945,000.
Table 3 below shows the 2024 investment performance impact estimates for each of the City’s pension plans.
City of Cotati
2024 Pension Liability Review – 11/21/2024
Source: Ridgeline
The investment underperformance impact is estimated based on the FYE 2022 market value of assets within each pension plan multiplied by 2.5%. CalPERS may make additional adjustments and reconciliations to account for actual vs. projected plan experience and any methodology changes.
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 for the fiscal year 2025-26:
• Classic Miscellaneous Tier 1 Plan: by 0.07% of salaries (from 16.02% to 16.09%) for the City, while remaining unchanged for the employees;
• Classic Miscellaneous Tier 2 Plan: by 0.05% of salaries (from 10.71% to 10.76%) for the City, and by 0.01% of salaries (from 6.93% to 6.94%) for the employees; • PEPRA Miscellaneous Plan: by 0.09% of salaries (from 7.87% to 7.96%) for the City, while remaining unchanged for the employees;
• Classic Safety Tier 1 Plan: by 0.05% of salaries (from 25.86% to 25.91%) for the City, while remaining unchanged for the employees;
• Classic Safety Tier 2 Plan: by 0.06% of salaries (from 20.09% to 20.15%) for the City, while remaining unchanged for the employees;
Pension Plan
Estimated 2024
UAL Credit
M iscellaneous ($454,000)
Safety ($356,000)
Safety 2nd Tier ($25,000)
M isc 2nd Tier ($34,000)
PEPRA Safety ($39,000)
PEPRA M isc ($37,000)
TOTAL ($945,000)
Table 3
City of Cotati
Estimated 2024 Investment Performance Impact
City of Cotati
2024 Pension Liability Review – 11/21/2024
• PEPRA Safety Plan: by 0.23% of salaries (from 13.76% to 13.99%) for the City, while remaining unchanged for the employees.
CITY’S ESTIMATED FYE 2024 PENSION PLAN FUNDED LEVELS
CalPERS will publish the 06/30/2024 actuarial reports for the City in or around August 2025. The reports will reflect any changes that have taken place during the fiscal year, including the investment performance, the City’s and its employees’ contributions, including the ADPs made by the City to reduce negative amortization, 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.
While the reconciliation and methodology adjustments are unknown at this time, Ridgeline has developed an estimate of the other changes, including the FYE 2024 ADPs, which are summarized in Table 4 below.
Sources: CalPERS, Ridgeline
Description M isc Plan Safety Plan Total
M arket Value of Assets
2023 Balance $18,175,000 $14,247,000 $32,422,000
Normal Cost Contribution $139,000 $81,000 $220,000
UAL Payment $193,000 $171,000 $364,000
ADP $159,000 $131,000 $290,000
Investment Gain / (Loss) $1,690,000 $1,325,000 $3,015,000 Benefit Payments ($1,310,000) ($1,050,000) ($2,360,000) Estimated 2024 Balance $19,046,000 $14,905,000 $33,951,000 Unfunded Accrued Liability
2023 Balance $3,716,000 $3,138,000 $6,854,000
UAL Payment ($193,000) ($171,000) ($364,000)
Interest $253,000 $213,000 $466,000
ADP ($159,000) ($131,000) ($290,000)
Investment (Gain) / Loss ($454,000) ($356,000) ($810,000) Estimated 2024 Balance $3,163,000 $2,693,000 $5,856,000 Pension Plan 2024 Funded Level 85.8% 84.7% 85.3%
City of Cotati
2024 Pension Plan Funded Level Estimate
Rounded to '000s
Table 4
City of Cotati
2024 Pension Liability Review – 11/21/2024
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 06/30/2024 actuarial reports in August 2025.
The Normal Cost contributions, UAL payments (including the ADPs), and benefit payments estimates were generated by CalPERS. The investment gain / loss and UAL interest estimates were generated by Ridgeline.
It is estimated that the City’s Classic Miscellaneous and Safety Tier 1 plans were approximately 85% funded as of 06/30/2024, 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 UAL CREDIT
The 2024 UAL credit will be amortized over a 20-year period with a 5-year ramp-up. The first application of the credit will take place in FYE 2027 (July 2026).
The amortization schedule is based on the estimated 2024 UAL base balances shown in Table 3 above.
Graph 3 illustrates how the UAL credit will impact the City’s UAL repayment structure for the two Classic Tier 1 plans.
City of Cotati
2024 Pension Liability Review – 11/21/2024
Graph 3
City of Cotati
UAL Repayment with 2024 Projected Base Amortization ($000s) Source: CalPERS’ Actuarial Valuation Report as of June 30, 2023, UAL Refunding Loans Amortization Schedule, Ridgeline City of Cotati
2024 Pension Liability Review – 11/21/2024
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
2024 UAL POB Street Loan Existing
UAL
2024 UAL Total D ebt
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 $278,121 $0 $549,018 $150,857 $56,018 $236,464 ($8,728) $434,611 $477,772 $505,857 $983,628 2027 $197,540 $73,354 $290,822 ($11,131) $550,585 $150,855 $56,018 $246,497 ($17,456) $435,914 $477,767 $508,732 $986,499 2028 $197,539 $73,354 $303,525 ($22,262) $552,156 $150,854 $56,018 $256,532 ($26,185) $437,220 $477,766 $511,611 $989,376 2029 $197,541 $73,354 $353,487 ($33,393) $590,989 $150,856 $56,018 $297,340 ($34,913) $469,301 $477,769 $582,522 $1,060,291 2030 $197,540 $73,354 $356,383 ($44,524) $582,754 $150,855 $56,018 $299,630 ($43,641) $462,863 $477,768 $567,848 $1,045,616 2031 $197,543 $73,354 $356,383 ($55,654) $571,625 $150,857 $56,018 $299,630 ($43,641) $462,864 $477,772 $556,718 $1,034,490 2032 $197,537 $73,354 $356,382 ($55,654) $571,619 $150,853 $56,018 $299,630 ($43,641) $462,860 $477,763 $556,717 $1,034,480 2033 $197,541 $73,354 $356,383 ($55,654) $571,624 $150,856 $56,018 $299,628 ($43,641) $462,861 $477,769 $556,716 $1,034,485 2034 $197,542 $73,354 $356,382 ($55,654) $571,623 $150,856 $56,018 $299,632 ($43,641) $462,866 $477,771 $556,719 $1,034,489 2035 $197,539 $73,354 $356,381 ($55,654) $571,620 $150,855 $56,018 $299,631 ($43,641) $462,863 $477,766 $556,717 $1,034,483 2036 $197,539 $73,354 $356,384 ($55,654) $571,622 $150,854 $56,018 $299,630 ($43,641) $462,861 $477,765 $556,719 $1,034,484 2037 $197,540 $73,354 $356,383 ($55,654) $571,623 $150,855 $56,018 $299,630 ($43,641) $462,863 $477,768 $556,718 $1,034,486 2038 $0 $73,354 $356,381 ($55,654) $374,081 $0 $56,018 $299,631 ($43,641) $312,008 $129,372 $556,717 $686,089 2039 $0 $73,354 $356,383 ($55,654) $374,083 $0 $56,018 $299,632 ($43,641) $312,009 $129,372 $556,720 $686,092 2040 $0 $73,354 $356,380 ($55,654) $374,080 $0 $56,018 $299,628 ($43,641) $312,005 $129,372 $556,713 $686,085 2041 $0 $73,354 $356,381 ($55,654) $374,081 $0 $56,018 $299,633 ($43,641) $312,010 $129,372 $556,719 $686,091 2042 $0 $73,354 $356,382 ($55,654) $374,082 $0 $56,018 $299,629 ($43,641) $312,006 $129,372 $556,716 $686,088 2043 $0 $0 $125,050 ($55,654) $69,396 $0 $0 $101,217 ($43,641) $57,576 $0 $126,972 $126,972 2044 $0 $0 $361,627 ($166,963) $194,664 $0 $0 $286,680 ($130,923) $155,757 $0 $350,421 $350,421 TOTAL $2,963,105 $1,467,082 $6,993,099 ($1,001,781) $10,421,505 $2,262,830 $1,120,365 $5,889,053 ($829,178) $8,443,069 $7,813,381 $11,051,193 $18,864,574 D ebt Service UAL
Table 5
City of Cotati
Estimated UAL Amortization Schedule - CalPERS
FYE
M iscellaneous Plan Safety Plan Total
D ebt Service UAL
Total
City of Cotati
2024 Pension Liability Review – 11/21/2024
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 2024 UAL credit 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, in FYEs 2024 and 2025, the City made ADPs to address negative amortization.
If the City wants to accelerate achieving the target funded level stated in the UAL Management Policy, it may want to consider the following additional actions:
• Strategy A: Eliminate negative amortization on the 2023 actuarial bases. • Strategy B: Convert the 2022 actuarial bases from ramp-up to level repayment structure.
• Strategy C: Make additional discretionary contributions in excess of those necessary to cover the negative amortization.
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
2024 Pension Liability Review – 11/21/2024
Since the 2024 investment performance resulted in a UAL credit, no ADP is necessary for the investment performance base. Once the 2024 actuarial report is published in August of 2025, the City may want to consider an ADP if there are UAL increases due to other adjustments made by CalPERS.
Strategy A: Eliminate Negative Amortization on 2023 Bases 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.
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.
City of Cotati
2024 Pension Liability Review – 11/21/2024
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 2023 actuarial UAL bases, such ADPs can be made as early as 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 2023 Investment Loss base and to instruct the actuary to apply the ADP to the 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, 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 2023 UAL additions of approximately $456,000 for the Miscellaneous Plan and $321,000 for the Safety Plan, the ADPs are estimated to be as following:
o Miscellaneous Plan: $31,000 in each FYE 2025 and 2026 o Safety Plan: $22,000 in each FYE 2025 and 2026
2. Convert new UAL bases from ramp-up to level amortization schedule.
This request should be made to the City’s CalPERS actuary after the negative amortization ADPs have been made. 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 2026 (July 2025) for the 2023 bases.
City of Cotati
2024 Pension Liability Review – 11/21/2024
Table 7 illustrates the implementation of this strategy. The estimated savings from the elimination of the negative amortization on the 2023 actuarial bases is approximately $77,000.
City of Cotati
2024 Pension Liability Review – 11/21/2024
Original
Ramp-Up
Level Original
Ramp-Up
Level Original
Ramp-Up
Level Original
Ramp-Up
Level
2023 $0 $6,400 $0 $15,500 $0 $8,000 $0 $23,000
2024 $0 $6,400 $0 $15,500 $0 $8,000 $0 $23,000
2025 $2,290 $8,672 $23,373 $21,176 $2,895 $10,978 $34,629 $31,367 2026 $4,580 $8,672 $23,373 $21,176 $5,790 $10,978 $34,629 $31,367 2027 $6,870 $8,672 $23,373 $21,176 $8,685 $10,978 $34,629 $31,367 2028 $9,160 $8,672 $23,373 $21,176 $11,580 $10,978 $34,629 $31,367 2029 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2030 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2031 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2032 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2033 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2034 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2035 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2036 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2037 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2038 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2039 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2040 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2041 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2042 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2043 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 2044 $11,450 $8,672 $23,373 $21,176 $14,475 $10,978 $34,629 $31,367 Total Pmts $206,100 $186,234 $467,460 $454,518 $260,550 $235,568 $692,580 $673,334 Interest $112,687 $92,821 $349,385 $336,443 $142,475 $117,493 $574,505 $555,259 Savings $19,866 $12,942 $24,982 $19,246 $77,036
Source: CalPERSand Ridgeline
Total
Savings
Table 7
City of Cotati
2023 Negative Amortization Elimination Analysis
FYE
Safety Tier 1 Investment
Loss Base
M iscellaneous Tier 1 NonInvestment Loss BaseSafety Tier 1 NonInvestment Loss BaseM iscellaneous Tier 1 Investment Loss Base
City of Cotati
2024 Pension Liability Review – 11/21/2024
City of Cotati
2024 Pension Liability Review – 11/21/2024
Strategy B: Convert 2022 Bases from Ramp-up to Level Repayment The City can ask CalPERS to convert the 2022 Investment Loss actuarial bases from the ramp-up to a level repayment schedule.
There are two scenarios that the City can request:
a. No Negative Amortization – Under this scenario, the City can request to make lower payments in FYEs 2026, 2027, and 2028, before converting to a level payment. The lower payments in the first three years are sufficient to cover the interest amount accrued during the year and also contribute some funds for the repayment of the principal amount. CalPERS usually does not allow revised payments that are below the original amortization schedule.
Under this scenario, the City will be able to save approximately $285,000 for the Safety Tier 1 plan and $347,000 for the Miscellaneous Tier 1 plan over the 20- year repayment period of the bases, compared to the original amortization schedule.
b. Level Payment – Under this scenario, the City can request to make the same payment throughout the remaining term of the amortization schedule.
Under this scenario, the City will be able to save approximately $354,000 for the Safety Tier 1 plan and $433,000 for the Miscellaneous Tier 1 plan over the 20- year repayment period of the bases, compared to the original amortization schedule.
Table 8 compares the payment amounts under the original amortization schedule, the current amortization schedule after factoring in the ADPs and the FYE 2025 UAL payments that have already been made, and the two scenarios described above.
City of Cotati
2024 Pension Liability Review – 11/21/2024
Original
Ramp-Up
Revised
Ramp-Up
No Negative
Am
Level Original
Ramp-Up
Revised
Ramp-Up
No Negative
Am
Level
2023 $0 $0 $0 $0 $0 $0 $0 $0
2024 $0 $113,880 $113,880 $113,880 $0 $139,160 $139,160 $139,160 2025 $41,059 $154,939 $154,939 $154,939 $50,174 $189,334 $189,334 $189,334 2026 $82,118 $72,240 $116,000 $161,700 $100,348 $88,280 $141,000 $197,600 2027 $123,177 $108,360 $124,000 $161,700 $150,522 $132,420 $151,000 $197,600 2028 $164,236 $144,480 $165,000 $161,700 $200,696 $176,560 $201,000 $197,600 2029 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2030 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2031 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2032 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2033 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2034 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2035 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2036 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2037 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2038 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2039 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2040 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2041 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2042 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2043 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 2044 $205,295 $180,600 $171,000 $161,700 $250,870 $220,700 $209,200 $197,600 Total Pmts $3,695,310 $3,483,499 $3,409,819 $3,341,119 $4,515,660 $4,256,954 $4,168,694 $4,082,894 Interest $2,020,601 $1,808,790 $1,735,110 $1,666,410 $2,469,190 $2,210,484 $2,122,224 $2,036,424 Savings $211,811 $285,491 $354,191 $258,706 $346,966 $432,766 Source: CalPERSand Ridgeline
Table 8
City of Cotati
2022 Investment Loss Base Reamortization Scenarios
Safety Tier 1 Repayment Scenarios M iscellaneous Tier 1 Repayment Scenarios FYE
City of Cotati
2024 Pension Liability Review – 11/21/2024
City of Cotati
2024 Pension Liability Review – 11/21/2024
Strategy C: Additional Discretionary Contributions
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 $1.6 million (after the FYE 2025 ADP that has already been made). Given the recent investment market volatility and the prior history of market recoveries that follow market downturns, the City may want to postpone making additional ADPs to see if market gains transpire to further offset a portion of the 2022 UAL.
Source: Ridgeline
CONCLUSION and RECOMMENDATIONS
Proactive pension liability management practices are essential for keeping the City’s future UAL balances and the associated interest costs under control.
Recommended for Implementation: Strategy A
Description Amount Comments
Estimated 2024 MVA $33,951,000 See Table 4
Estimated 2024 UAL $5,856,000 See Table 4
Estimated 2024 Total Accrued Liability $39,807,000
Estimated 2023 Funded Level 85.3% See Table 4
90% Funded Level Amount $35,826,000
ADP Required to Achieve 90% Funded Level $1,875,000
Less: FYE 2025 ADPs Already M ade ($290,000)
Remaining ADP to Achieve 90% Funded Level $1,585,000
Table 9
City of Cotati
Funded Ratio Target Estimate
City of Cotati
2024 Pension Liability Review – 11/21/2024
Strategy A is a low-hanging fruit and does not a require a significant investment of City funds. It is recommended that it is implemented to achieve long-term cash flow savings.
To cover the interest on the FYE 2023 actuarial bases, the following ADPs are recommended:
Source: Ridgeline
To make these ADPs, the City should request the following receivables to be set up by CalPERS:
Pension Plan
FYE 2024
Interest
FYE 2025
Interest
FYE 2026
Interest
M iscellaneous $31,000 $31,000 $0
Safety $21,900 $21,900 $0
Safety 2nd Tier $2,100 $2,100 $0
M isc 2nd Tier $2,200 $2,200 $0
PEPRA Safety $2,300 $2,300 $0
PEPRA M isc $2,500 $2,500 $0
TOTAL $62,000 $62,000 $0
Table 10
City of Cotati
Summary of Current Interest ADPs
City of Cotati
2024 Pension Liability Review – 11/21/2024
Recommended for Consideration Based on Overall Budget Outlook Strategies B and C require a much larger commitment of the City’s funds. It is recommended that these strategies be considered in the context of the overall budget outlook to balance the goal of achieving long-term cash flow savings with the on-going fiscal resiliency of the City’s reserves.
If you have any questions about this technical memorandum or suggested strategies, do not hesitate to contact us.
Pension Plan
2023
Investment
Loss Base
2023 N onInvestment
Loss Base
Total
M iscellaneous $8,000 $23,000 $31,000
Safety $6,400 $15,500 $21,900
Safety 2nd Tier $2,100 n/ a $2,100
M isc 2nd Tier $600 $1,600 $2,200
PEPRA Safety $700 $1,600 $2,300
PEPRA M isc $700 $1,800 $2,500
TOTAL $18,500 $43,500 $62,000
City of Cotati
FYE 2025 CalPERS AD P Receivables