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TECHNICAL MEMORANDUM
To: Ms. Angela Courter, City of Cotati
Mr. Damien O’Bid, City of Cotati
From: Dmitry Semenov, Ridgeline Municipal Strategies, LLC Date: August 24, 2026
Re: 2026 Pension Liability Review; Ridgeline #23035
INTRODUCTION
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) as of FYE 2025. This technical memorandum documents the review results and outlines recommended actions the City could take to reduce future UAL costs.
Recommended for Implementation:
• No policy-mandated ADPs or actuarial base modifications are necessary for FYE 2026.
Recommended for Consideration Based on Overall Budget Outlook:
• Contributions to the Pension Rate Stabilization Fund.
CITY’S PENSION PLANS AND UNFUNDED ACCRUED LIABILITY
The City provides pension benefits to its employees and retirees through six pension plans with CalPERS. Beginning with FYE 2024, CalPERS consolidated its reporting and now provides two reports: one report for all Safety (Police) plans and one report for all Miscellaneous plans.
City of Cotati
2026 Pension Liability Review – 08/24/2026
As of 06/30/2025 (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 $49.3 million, held approximately $44.1 million in assets, and were underfunded by approximately $5.2 million. The pension plans were 89.5% funded, as summarized in Table 1 below.
Source: CalPERS’ Actuarial Valuation Reports as of June 30, 2025 In January 2022, 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. Since then, the City has been making reduced UAL payments to CalPERS on the remaining UAL, 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 total cash flow savings at the time of the refunding.
Subsequently, CalPERS’ investment performance and reconciliation adjustments resulted in additional UAL changes.
In FYEs 2024 and 2025, the City has made several Additional Discretionary Payments (ADPs) to offset the effects of negative amortization on new UAL balances, as well as requested CalPERS to convert some of the actuarial bases to level amortization.
Figure 1 shows the recent and future UAL and UAL Refunding Loans amortization schedule. This schedule reflects the official CalPERS 2025 amortization schedule and DOES NOT include the ADPs made by the City. However, it does incorporate the impact of these ADPs on future UAL payments.
Pension Plan Total Accrued
Liability
Market Value
of Assets
Unfunded
Accrued
Liability
%
Funded
Safety - Police $21,669,029 $19,241,357 $2,427,672 88.8% Miscellaneous $27,642,706 $24,907,534 $2,735,172 90.1%
TOTAL $49,311,735 $44,148,891 $5,162,844 89.5%
City of Cotati
Table 1
Pension Plans Summary - 06/30/2025
City of Cotati
2026 Pension Liability Review – 08/24/2026
Figure 1
City of Cotati
Current UAL and UAL Refunding Loan Amortization Schedule (in $ thousands) Source: CalPERS’ Actuarial Valuation Reports as of June 30, 2025 and UAL Refunding Loans Amortization Schedules City of Cotati
2026 Pension Liability Review – 08/24/2026
CALPERS INVESTMENT PERFORMANCE FOR FYE 2025 and FYE 2026 For FYE 2025, CalPERS generated an investment return of 12.1%, which exceeded CalPERS’ performance target of 6.8%. This resulted in a UAL decrease, some of which was offset by certain actuarial reconciliation adjustments.
CalPERS recently announced an estimated FYE 2026 investment return of 14.8%, exceeding the 6.8% target. This will result in an additional UAL reduction. However, other actuarial reconciliation adjustments for FYE 2026 are not yet known. Figure 2 below shows the history of CalPERS’ annual investment returns.
Figure 2
City of Cotati
History of CalPERS’ Annual Investment Returns, FYE 1997-2026 Source: CalPERS
The average annual investment returns as reported by CalPERS are as follows:
• 5 years: 6.8%
• 10 years: 8.6%
• 20 years: 6.8%
City of Cotati
2026 Pension Liability Review – 08/24/2026
The average returns indicate that historically CalPERS has been able to achieve the current long-term investment target rate of 6.8% (the current discount rate). CalPERS has gradually lowered its target rate over recent decades. It appears that the current target rate corresponds favorably with the past performance. However, past performance is not a guarantee of future results.
SUMMARY OF FYE 2025 UAL CHANGES
For FYE 2025, CalPERS added three new actuarial bases to each of the City’s pension plans:
• The Investment Gain base decreased the UAL to account for the investment overperformance of 5.3%, compared to the 6.8% discount rate. • The Assumption Change base is a one-time adjustment that includes various pension formula revisions adopted by CalPERS as a part of the 2025 Experience Study and Review of Actuarial Assumptions process, primarily related to increasing the price inflation assumption from 2.3% to 2.5% and increasing the wage inflation assumption from 2.8% to 3.0%. This base increased the UAL. • 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.
Table 2 summarizes the impacts of these three bases on the City’s UAL.
Source: CalPERS’ Actuarial Valuation Reports as of June 30, 2025 The combined impact of these three bases reduced the City’s total UAL by approximately $1.5 million, significantly improving the City’s funding position and future UAL payments profile.
Pension Plan Investment
Returns
Assumption
Change Other Factors Total UAL Change
Safety - Police (924,111) 118,892 185,034 (620,185)
Miscellaneous (1,186,643) 61,862 269,095 (855,686)
TOTAL (2,110,754) 180,754 454,129 (1,475,871)
Table 2
City of Cotati
FYE 2025 UAL Change Factors
City of Cotati
2026 Pension Liability Review – 08/24/2026
IMPACT OF FYE 2026 CALPERS’ INVESTMENT PERFORMANCE ON THE CITY To assess the impact of CalPERS’ FYE 2026 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%. Whenever investment returns fall 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 14.8% investment return translates into an 8.0% funding surplus (the difference between the 6.8% discount rate and the 14.8% estimated investment return). This surplus is projected to reduce the City’s UAL by approximately $3.5 million, subject to future actuarial adjustments.
Table 3 shows the 2026 investment performance impact estimates for the City’s plans.
Source: Ridgeline
The investment overperformance impact is estimated based on the FYE 2025 market value of assets within each pension plan multiplied by 8.0%. However, CalPERS may make additional adjustments to account for actual vs. projected plan experience and methodology changes, similarly to what was done in FYE 2025.
CITY’S NORMAL COST RATES
In addition to the UAL changes, the City should be aware that its Normal Costs are changing as follows for FYE 2028:
• Classic Miscellaneous Tier 1 Plan: increased by 0.46% of salaries (from 16.07% to
16.53%) for the City, while remaining unchanged for the employees; Pension Plan Estimated 2026
UAL Change
Safety - Police ($1,539,000)
Miscellaneous ($1,993,000)
TOTAL ($3,532,000)
Table 3
City of Cotati
Estimated 2026 Investment Return Impact
City of Cotati
2026 Pension Liability Review – 08/24/2026
• Classic Miscellaneous Tier 2 Plan: increased by 0.27% of salaries (from 10.75% to
11.02%) for the City, while remaining unchanged for the employees; • PEPRA Miscellaneous Plan: increased by 0.12% of salaries (from 7.93% to 8.05%) for the City, while remaining unchanged for the employees;
• Classic Safety Tier 1 Plan: appears to have been eliminated (no active employees); • Classic Safety Tier 2 Plan: increased by 1.35% of salaries (from 20.17% to 21.52%) for the City, while remaining essentially unchanged for the employees1 (a minor decrease from 8.97% to 8.96%);
• PEPRA Safety Plan: increased by 0.46% of salaries (from 13.91% to 14.37%) for the City, while remaining unchanged for the employees.
CITY’S ESTIMATED FYE 2026 PENSION PLAN FUNDED LEVELS
CalPERS will publish the 06/30/2026 actuarial reports in or around August 2027. The reports will reflect any changes that have taken place during the fiscal year, including the investment performance, City’s and employees’ contributions, including ADPs (none were made), benefit payments to plan beneficiaries, and CalPERS’ adjustments to reconcile the actual vs. projected plan experience and to account for actuarial methodology changes.
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.
1 The 2025 Actuarial Report for the Safety Plans shows no remaining Classic Safety employees.
City of Cotati
2026 Pension Liability Review – 08/24/2026
Sources: CalPERS, Ridgeline
The amounts calculated in Table 4 are estimates only and can only be finalized once CalPERS publishes the 06/30/2026 actuarial reports in August 2027.
The UAL payments and benefit payments estimates were generated by CalPERS. ADP amounts are $0, as the City did not make any ADPs during the year. The Normal Cost contributions, investment gain / loss, and UAL interest estimates were generated by Ridgeline.
It is estimated that the City’s Miscellaneous and Safety plans were approximately 97% funded as of 06/30/2026, 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 has surpassed that target funded level.
Description Misc Plans Safety Plans Total
Market Value of Assets
2025 Balance $24,908,000 $19,241,000 $44,149,000
Normal Cost Contribution $555,000 $376,000 $931,000
UAL Payment $301,000 $267,000 $568,000
ADP $0 $0 $0
Investment Gain / (Loss) $3,686,000 $2,848,000 $6,534,000 Benefit Payments ($1,380,000) ($1,114,000) ($2,494,000) Estimated 2026 Balance $28,070,000 $21,618,000 $49,688,000 Unfunded Accrued Liability
2025 Balance $2,735,000 $2,428,000 $5,163,000
UAL Payment ($301,000) ($267,000) ($568,000)
Interest $186,000 $165,000 $351,000
ADP $0 $0 $0
Investment (Gain) / Loss ($1,993,000) ($1,539,000) ($3,532,000) Estimated 2026 Balance $627,000 $787,000 $1,414,000
Pension Plan 2026 Funded Level 97.8% 96.5% 97.2%
City of Cotati
2026 Pension Plan Funded Level Estimate
Rounded to '000s
Table 4
City of Cotati
2026 Pension Liability Review – 08/24/2026
AMORTIZATION OF THE UAL CREDIT
The 2026 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 2029 (July 2028).
However, with the scheduled UAL payments over the next two years, the 2026 UAL credit is expected to completely offset the remaining UAL balance by 2030, resulting in the elimination of the remaining UAL payments. This assumes that there will be no other significant FYE 2026 UAL adjustments by CalPERS and that CalPERS continues to earn at least 6.8% investment return going forward.
Figure 3 illustrates how the UAL credit will impact the City’s UAL repayment structure for the combined plans. Starting with FYE 2030, under the assumptions stated above, there will be no more UAL payments and the City would only need to make the debt service payments on the UAL Refunding Loans.
City of Cotati
2026 Pension Liability Review – 08/24/2026
Figure 3
City of Cotati
UAL Repayment with Projected 2026 UAL Investment Gain Credit (in $ thousands) Source: CalPERS’ Actuarial Valuation Reports as of June 30, 2025, UAL Refunding Loans Amortization Schedules, Ridgeline City of Cotati
2026 Pension Liability Review – 08/24/2026
Table 5 provides the annual detailed estimate of the existing UAL amortization, the UAL Refunding Loans repayments, and the projected 2026 UAL amortization schedule.
Source: CalPERS’ Actuarial Valuation Reports as of June 30, 2025, UAL Refunding Loans Amortization Schedules, Ridgeline POB Street Loan Existing UAL 2026 UAL POB Street Loan Existing UAL 2026 UAL Total Debt Service UAL Total 2023 $197,540 $73,354 $218,709 - $489,603 $150,855 $56,018 $190,922 - $397,796 $477,768 $409,631 $887,399 2024 $197,539 $73,354 $192,898 - $463,791 $150,855 $56,018 $170,871 - $377,744 $477,766 $363,769 $841,535 2025 $197,541 $73,354 $247,153 - $518,048 $150,856 $56,018 $229,636 - $436,510 $477,769 $476,789 $954,558 2026 $197,542 $73,354 $301,275 - $572,172 $150,857 $56,018 $267,121 - $473,996 $477,772 $568,396 $1,046,168 2027 $197,540 $73,354 $326,930 - $597,824 $150,855 $56,018 $281,859 - $488,732 $477,767 $608,789 $1,086,556 2028 $197,539 $73,354 $334,936 - $605,829 $150,854 $56,018 $291,659 - $498,532 $477,766 $626,595 $1,104,361 2029 $197,541 $73,354 $346,254 ($346,254) $270,895 $150,856 $56,018 $301,058 ($37,732) $470,200 $477,769 $263,326 $741,095 2030 $197,540 $73,354 $303,509 ($303,509) $270,894 $150,855 $56,018 $267,509 ($267,509) $206,874 $477,768 - $477,768 2031 $197,543 $73,354 $260,763 ($260,763) $270,897 $150,857 $56,018 $233,959 ($233,959) $206,875 $477,772 - $477,772 2032 $197,537 $73,354 $231,670 ($231,670) $270,892 $150,853 $56,018 $211,303 ($211,303) $206,871 $477,763 - $477,763 2033 $197,541 $73,354 $231,670 ($231,670) $270,895 $150,856 $56,018 $211,299 ($211,299) $206,874 $477,769 - $477,769 2034 $197,542 $73,354 $231,669 ($231,669) $270,896 $150,856 $56,018 $211,301 ($211,301) $206,875 $477,771 - $477,771 2035 $197,539 $73,354 $231,671 ($231,671) $270,894 $150,855 $56,018 $211,302 ($211,302) $206,873 $477,766 - $477,766 2036 $197,539 $73,354 $231,670 ($231,670) $270,893 $150,854 $56,018 $211,301 ($211,301) $206,872 $477,765 - $477,765 2037 $197,540 $73,354 $231,670 ($231,670) $270,895 $150,855 $56,018 $211,302 ($211,302) $206,874 $477,768 - $477,768 2038 - $73,354 $231,670 ($231,670) $73,354 - $56,018 $211,302 ($211,302) $56,018 $129,372 - $129,372 2039 - $73,354 $231,669 ($231,669) $73,354 - $56,018 $211,305 ($211,305) $56,018 $129,372 - $129,372 2040 - $73,354 $231,666 ($231,666) $73,354 - $56,018 $195,679 ($195,679) $56,018 $129,372 - $129,372 2041 - $73,354 $231,671 ($231,671) $73,354 - $56,018 $195,683 ($195,683) $56,018 $129,372 - $129,372 2042 - $73,354 $110,236 ($110,236) $73,354 - $56,018 $100,269 ($100,269) $56,018 $129,372 - $129,372 2043 - - - - - - - - - - - - -
2044 - - - - - - - - - - - - -
TOTAL $2,963,105 $1,467,082 $4,959,359 ($3,337,458) $6,052,088 $2,262,830 $1,120,365 $4,416,640 ($2,721,246) $5,078,588 $7,813,381 $3,317,295 $11,130,676 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
2026 Pension Liability Review – 08/24/2026
The debt service allocation to the Miscellaneous and Safety plans is made based on the UAL balances paid down with the UAL Refunding Loans (see Table 6 below).
Source: UAL Refunding Loans Amortization Schedules
The 2026 UAL credit amortization calculation is estimated based on the Market Value of Assets for each plan.
PENSION COST OPTIMIZATION STRATEGIES ASSESSMENT
When the UAL Refunding Loans were issued, the City adopted a UAL Management Policy to guide future pension liability management.
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. The combination of these ADPs and the three years of favorable market returns have allowed the City to exceed the 90% funded level target within the plans, as shown in Table 7.
Source: Ridgeline
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
Description Amount Comments
Estimated 2026 MVA $49,688,000 See Table 4
Estimated 2026 UAL $1,414,000 See Table 4
Estimated 2026 Total Accrued Liability $51,102,000
Estimated 2026 Funded Level 97.2% See Table 4
90% Funded Level Amount $45,992,000
ADP Required to Achieve 90% Funded Level ($3,696,000) Funded Target Met Table 7
City of Cotati
FYE 2026 Funded Ratio Target Estimate
City of Cotati
2026 Pension Liability Review – 08/24/2026
The Investment Gain bases added to the City’s plans for FYE 2025 and expected to be added for FYE 2026 have the negative amortization dynamic working in the City’s favor:
• The ramp-up structure of Investment Gain bases helps maximize the interest cost offset benefit.
• The level amortization for Non-Investment Loss and Assumption Change bases ensures that their amortization starts with the first payments. • The accrued interest during the first two “no payment” years for the NonInvestment Loss and Assumption Change bases is offset by the accrued interest on the Investment Gain bases.
The FYE 2023 bases have been converted from ramp-up to level repayment, and no further action is required for them.
CONCLUSION and RECOMMENDATIONS
Given the estimated funded level of the plans, the prior actions taken by the City, and the FYE 2026 actuarial bases dynamic, no policy-mandated ADPs are needed in FYE 2027.
Additionally, unless CalPERS makes significant adjustments to the plans for FYE 2026, at this time we do not expect that policy-mandated ADPs will be needed in FYE 2028.
Based on the overall budget outlook, the City could consider making discretionary contributions into its Pension Rate Stabilization Fund.