Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: 2026 PRESENTATION ON THE PENSION UNFUNDED
ACCRUED LIABILITY, POLICY COMPLIANCE, AND
FUNDED STATUS
Date: September 8, 2026
Written by: Angela Courter, Director of Administrative Services Recommendation
It is recommended that the City Council receive and file the 2026 Pension Liability Review prepared by Ridgeline Municipal Strategies, LLC. No action will be taken.
Background
The City provides retirement benefits to its employees through the California Public Employees' Retirement System (CalPERS). Like many public agencies, the City has an unfunded pension liability, which represents the difference between the estimated cost of future pension benefits earned by employees and the assets currently available to pay those benefits.
In January 2022, the City took significant action to reduce its unfunded pension liability by issuing refinancing loans that allowed the City to pay down approximately $6 million of its CalPERS Unfunded Accrued Liability (UAL). The refinancing also resulted in approximately $2.25 million in estimated cash flow savings at the time of the refinancing.
At the time the loans were issued, the City also adopted an Unfunded Accrued Liability Management Policy establishing a target pension plan funded level of 90 percent.
In FY 2023/24 and FY 2024/25, the City made additional discretionary payments toward its UAL to help address negative amortization on new UAL balances. The City also requested that certain actuarial payment schedules be converted to level amortization. These actions, combined with favorable CalPERS investment performance, have significantly improved the City's pension funding position.
Analysis/Discussion
Pension Funding Position
As of June 30, 2025, the City's pension plans were approximately 89.5 percent funded, with an unfunded liability of approximately $5.2 million. Since that time, the City's pension position has improved significantly, primarily due to strong investment performance by CalPERS.
CalPERS earned a 12.1 percent investment return in FY 2024/25, compared with its long-term investment target of 6.8 percent. This period's investment performance reduced the City's UAL by approximately $2.1 million. After accounting for changes in actuarial assumptions and other factors that increased the liability, the City's total UAL decreased by approximately $1.48 million during FY 2024/25.
For FY 2025/26 CalPERS has also estimated a 14.8 percent investment return, earning a strong return on the historically low interest $6 million loan. Strong investment returns increase the assets available to pay future pension benefits and reduce the City's unfunded liability. With these estimates, CalPERS' investment performance could reduce the City's UAL by an additional $3.53 million, although the final amount will depend on additional actuarial adjustments that will not be known until CalPERS completes its official actuarial valuation around August 2027.
However, based on the FY 2025/26 investment performance and other available information, the estimated City's pension plans were approximately 97.2% funded as of June 30, 2026, with an estimated remaining unfunded liability of approximately $1.4 million. This represents a substantial improvement from the approximately $5.2 million unfunded liability reported as of June 30, 2025 and approaching 100% funded.
FY 2024/25 Estimated
FY 2025/26
Estimated Funded Level 89.5% 97.2%
Unfunded Accrued Liability (UAL) $ 5.16 Million $1.41 Million The City's estimated funded level is now estimated to be significantly above the 90 percent target established by the City's UAL Management Policy.
Future Pension-Related Debt Payments
The City's remaining UAL payments are projected to be substantially reduced due to the improved funding position. Using the information, as it is right now, the City's separate UAL payments will decline from approximately $609,000 in FY 2026/27 to approximately $263,000 in FY 2028/29. Beginning in FY 2029/30, the City is projected to have no separate UAL payment. (See Table 5 in Report.) This projection assumes there are no significant additional FY 2025/26 actuarial adjustments and that CalPERS continues to achieve at least its 6.8 percent investment return target.
The elimination of the separate UAL payment does not mean that all pension-related debt payments will end. The City will continue making payments on the UAL Refunding Loans issued in 2022. The UAL Refunding Loans will continue to require annual debt service after the separate UAL payments are eliminated. The current amortization schedule shows the following estimated payments:
Fiscal Year
UAL
Payments Loan Debt Service Total
FY 2026/27 $ 609,000 $ 478,000 $1.09 million
FY 2027/28 $ 627,000 $ 478,000 $1.1 million
FY 2028/29 $ 263,000 $ 478,000 $ 741,000
FY 2029/30 $ 0 $ 478,000 $ 478,000
FY 2030/31–FY 2036/37 $ 0 ~$478,000/year ~$478,000/year FY 2037/38–FY 2041/42 $ 0 ~$129,000/year ~$129,000/year These amounts are estimates based on the current actuarial report, and amounts will be affected by future CalPERS investment performance and actuarial adjustments.
Additional Discretionary Payments
In prior years, the City made additional payments toward its unfunded pension liability to help reduce future costs and address negative amortization. The City did not make an additional discretionary payment during FY 2025/26. Based on the City's current estimated funding position, we have concluded that no policy-mandated Additional Discretionary Payment is necessary for FY 2026/27 and we do not anticipate that a policy-mandated payment will be necessary in FY 2027/28, assuming there are no significant changes resulting from the FY 2025/26 actuarial valuation which will be completed next August 2027.
The City's Pension Rate Stabilization Fund (Section 115 Trust) is an option for consideration based on the City's overall budget outlook. A future contribution to this fund could provide the City with additional resources to help manage pension costs and potential changes in future employer contribution rates. Staff will continue to evaluate this option as we build our next twoyear budget for Fiscal Years 2027/28 & 2028/29.
Ongoing Pension Costs
Although the City's unfunded liability has improved significantly, the City will continue to have ongoing pension costs for current employees. These costs, known as "Normal Costs," are the regular annual costs associated with benefits being earned by current employees. Staff anticipates increases in several employer Normal Cost rates beginning in FY 2027/28. The increases vary by employee group and pension tier, with the largest increase applying to the City's Classic Safety Tier 2 employees. These ongoing costs are separate from the City's unfunded liability payments and will continue to be incorporated into the City's annual operating budgets.
Important Consideration
The FY 2025/26 funded levels included in the report are estimates. CalPERS is expected to issue its official June 30, 2026, actuarial valuation reports in approximately August 2027. Those reports will incorporate the actual investment results, City and employee contributions, benefit payments, and any additional actuarial adjustments.
While the City's current pension position is very favorable, future investment performance, actuarial changes, or legislative changes (such as AB 1383) can affect the City's liability. For this reason, staff will continue to monitor the City's pension position and provide updates as official CalPERS information becomes available.
Financial Considerations
The City's pension position has improved considerably over the past year. The estimated unfunded liability has decreased from approximately $5.2 million to $1.4 million, and the estimated funded level has increased from 89.5% to 97.2%. This improved funding position is expected to significantly reduce the City's future UAL payments. Based on current estimates, the remaining UAL could be eliminated through the existing payment structure by approximately FY 2029/30.
The City will continue to budget for its required annual pension costs, including both its ongoing Normal Cost and remaining UAL payments and Debt Service payments. Any additional discretionary payments undertaken by the City in future years would require separate Council consideration and appropriation.
There is no immediate fiscal impact associated with receiving this report except for the staff time utilized to generate the report.
Environmental Issues
Where it can be determined with certainty that there is no possibility that receiving a report on the City’s Pension Liability may have a significant effect on the environment; the activity is not subject to CEQA review. This general rule can be applied to activities which could be subject to the CEQA process, but which logic dictates should not be subject to CEQA review. Therefore, based on the information provided above, the proposed agenda item is exempt from CEQA pursuant to Section 14.03.021 of the CEQA Guidelines in that there is no possibility that the activity may have a significant impact on the environment.