Business Item 4a
STAFF REPORT
Council Business Item
DATE: December 1, 2025
TO: Honorable Mayor and Council Members
FROM: Aaron Felmlee, Finance Director
THROUGH: Amy Nilsen, City Manager
SUBJECT: Authorize City Manager to Execute a $1,500,000 Supplemental Budget Request for an Additional Discretionary Payment to the California Public Employee’s Retirement System (CalPERS) Pension Trust
STAFF RECOMMENDATION:
Authorize City Manager to execute a Supplemental Budget Request in the amount of $1,500,000 to be paid to the CalPERS Pension Trust to recognize interest payment savings and waive the 180 days of operating reserves policy for FY 25-26.
EXECUTIVE SUMMARY:
The City Council, as part of the Side Letter Negotiations with the FPEA, requested staff bring forward an item to Council to pay down the Cities liabilities with CalPERS to recognize annual interest payment savings. The goal was to have these annual interest payment savings go toward reducing the overall cost burden of the pay increases provided to sworn officers and sergeants.
BACKGROUND:
Unfunded long-term liabilities for employee pension plans continue to be one of the biggest fiscal issues facing local municipalities. In fiscal year 2018-19 staff identified and reviewed a number of potential strategies to address the unfunded pension liabilities including pros and cons of each strategy with the Council. It was determined that making additional discretionary payments when the City was able to, was the best strategy, and in Fiscal Years (FY) 2018-19, 2020-21, 2021-22, 2022-23, and 2024-25, the Council gave direction to staff to make additional discretionary payments to CalPERS to help “smooth” the future mandated unfunded liability payments. This report includes a recap of the pension plan and a discussion of the status and history of the unfunded liabilities.
New accounting standards dramatically impacted local government financial statements by requiring the net pension liability be reported as a liability on the City’s Statement of Net Position; thereby, reducing the City’s financial net position (assets in excess of liabilities). Prior to the change in accounting standards the long-term liability amounts referred to as unfunded accrued actuarial liability were not included on the City’s balance sheet. Annual payments for pension costs were paid on a “pay-as-you-go” basis, therefore no additional accrued actuarial expenses were added to City pension costs and there was no additional liability reported on the balance sheet. The addition of these unfunded long-term liabilities to the entity-wide financial statements Business Item 4a
brought these liabilities to the forefront amongst public officials and can have an effect on the City’s ability to secure future credit (loans, bonds etc.).
CITY PLANS:
City of Fortuna permanent full-time employees participate in the CalPERS retirement system.
Sworn employees are covered under the Safety Plan, while all other employees are covered in the Miscellaneous Plan, both of which are a part of the statewide pool. A pooled plan was required by California law for those agencies who had fewer than 100 active members. These assets and liabilities are pooled with all other safety and miscellaneous plans in the State with fewer than 100 active members to provide a large, risk sharing pool. This risk sharing dramatically reduces large fluctuations in an employer’s pension contribution rate caused by unexpected local demographic events.
Depending on an employee’s position and hire date, a City employee is included in one of the six possible plans in the table below:
Plan Miscellaneous Safety
Classic Members (Employees Hired Prior to
March 1, 2012) 2.7% @ 55 3.0% @ 50
Tier 2 Plan (Effective March 1, 2012) 2.0% @ 55 3.0% @ 55 PEPRA Plan (Effective Jan 1, 2013) 2.0% @ 62 2.7% @ 57
CALPERS FUNDING REVIEW:
The CalPERS retirement system is funded by three main categories: (1) CalPERS Investment Earnings, (2) employer contributions to CalPERS, (3) employee contributions to CalPERS.
CalPERS reports that over the past twenty years every dollar spent on public employee pensions has been sourced from the following as of June 30, 2024 • 55 cents – CalPERS Investment Earnings
• 34 cents – Employer Contributions to CalPERS
• 11 cents – Employee Contributions to CalPERS
As of Fiscal Year 2023-24, CalPERS announced the following average returns on its investment portfolio:
• 6.6% percent over the past five years
• 6.2% over the past ten years
• 6.7% over the past twenty years
PENSION FUND STABILITY INITIATIVES:
Over the past decade CalPERS has taken steps to stabilize and improve the system’s fiscal strength and lower future risk to the pension trust’s sustainability.
In November 2012, California voters passed the Public Employees’ Pension Reform Act (PEPRA) providing that new employees hired after January 1, 2013, are required to contribute more to their pensions and must also work longer before they can retire and begin to receive the benefits promised by their employers.
Business Item 4a
Effective during the 2014-15 fiscal year the expected rate of return on CalPERS pension fund’s investments referred to as the “discount rate” was reduced from 7.75% to 7.5%. In December 2016, CalPERS voted to lower its discount rate in steps beginning in FY 2018-19 from 7.5% to
7.0%. CalPERS again voted to lower the discount rate to 6.8% in July 2021. Lowering the discount rate impacts local governments because with lower expected returns over time, this will require contribution rates to increase to provide sufficient assets to pay pension benefits.
FORTUNA UNFUNDED LIABILITY STATUS:
As of June 30, 2024, the City of Fortuna’s proportionate share of the net pension liability for each plan is shown in the table below:
1% Decrease
(5.90%)
Current Discount
Rate (6.90%)
1% Increase
(7.90%)
Miscellaneous Plan $ 9,122,479 $ 5,271,996 $ 2,102,481
Safety Plan $ 7,818,018 $ 4,953,488 $ 2,610,706
Total $ 16,940,497 $ 10,225,484 $ 4,713,187
In FY 2017-18, the City of Fortuna was mandated by CalPERS to pay $427,958 towards the City’s proportionate share of the unfunded liability. For FY 2025-26 the mandated payment was $910,918. An overall increase of 113% in eight years.
FUTURE PROJECTED UNFUNDED LIABILITY PAYMENTS:
Fiscal Year Payment Fiscal Year Payment
25-26 $ 941,380 35-36 $ 1,130,493
26-27 $ 1,061,606 36-37 $ 883,709
27-28 $ 1,105,824 37-38 $ 703,078
28-29 $ 1,230,523 38-39 $ 625,912
29-30 $ 1,233,215 39-40 $ 563,426
30-31 $ 1,230,877 40-41 $ 520,517
31-32 $ 1,252,724 41-42 $ 438,884
32-33 $ 1,238,067 42-43 $ 358,228
33-34 $ 1,221,969 43-44 $ 519,574
34-35 $ 1,187,602
The chart above shows that the mandated liability payment is projected to increase by over $300,000 by fiscal year 2031-32.
ANALYSIS OF UNFUNDED LIABILITY STRATEGY:
The strategy to make Additional Discretionary Payments (ADP) offers the following benefits:
• The City’s additional payments are discretionary as to time and amount of payment, providing flexibility if future circumstances allow for higher, lower or perhaps no payments for that particular fiscal year.
• The City would be initially credited with the CalPERS’ assumed ROR. For FY 2025-26 the rate is set at 6.8%. Under CalPERS practices, additional contributions would be applied evenly over a period of time (can be chosen by the City).
Business Item 4a
• Functions like a homeowner making additional mortgage principal payments, this strategy provides flexibility and if the City commits to a funding strategy with regular pay-downs, the unfunded liability could be retired ahead of the scheduled amortization period by a number of years.
• Greater average return (6.2% average return last 10 years) than can be achieved through City’s investment policy and practices (1.81% average return for LAIF).
This approach offers the following risks:
• The primary drawbacks to making additional contributions directly to CalPERS are that the City would have less flexibility, as the City would not control the timing of when funds would be applied.
• CalPERS has stated that once monies are paid into the pension trust, they are never returned back to the City. Future assets in excess of liabilities, should they occur, will not be refunded back to the City.
• City receives interest on additional discretionary payments in tandem with what CalPERS earns, which can be volatile. Below is a list of the last ten years earnings rate:
Year Rate Year Rate
2024 9.3% 2019 6.70%
2023 5.8% 2018 8.60%
2022 - 6.1% 2017 11.20%
2021 21.3% 2016 0.60%
2020 4.70% 2015 2.40%
Given the magnitude of the projected increases, the long-term fiscal sustainability of the City depends upon taking prudent, meaningful, and swift actions to address the City’s pension obligations.
FINANCIAL IMPACT:
The $1,500,000 would be required to be taken from General Fund reserves. General Fund reserves would be approximately $5,000,000 with $1,000,000 of that anticipated to be needed for the coming General Plan Update which would leave $4,000,000 available. The City’s adopted reserve policy states keeping 180 days of operating expenditures on hand, which equates to $4,200,000.
The $4,000,000 available will be below this amount by $200,000. Council will need to waive the stated 180 days of operating reserve policy for FY 25-26 in order to make the payment.
The table below shows future mandated payments if the recommended Additional Discretionary Payment is made to CalPERS.
Business Item 4a
The $1,500,000 ADP will result in an estimated $1,247,313 in interest payment savings. The annual amount saved will start at approximately $130,000 beginning in FY 26-27.
RECOMMENDED COUNCIL ACTION:
1. Receive staff presentation and review Council questions with staff;
2. Open public comment;
3. Close public comment;
4. Motion to Authorize City Manager to execute a Supplemental Budget Request, make an additional Discretionary Payment in the amount of $1,500,000 to be paid to the CalPERS Pension Trust, and waive the 180 days of operating reserve policy for FY 25-
26. Voice vote.
Fiscal Year Total Mandated
Payment wo/ADP
Total Payment
w/ADP
Difference
(Negative amount
represents
savings)
26-27 $ 1,061,606 $ 930,119 $ (131,487)
27-28 $ 1,105,824 $ 971,289 $ (134,535)
28-29 $ 1,230,523 $ 1,092,848 $ (137,675)
29-30 $ 1,233,215 $ 1,092,318 $ (140,897)
30-31 $ 1,230,877 $ 1,086,667 $ (144,210)
31-32 $ 1,252,724 $ 1,105,110 $ (147,614)
32-33 $ 1,238,067 $ 1,086,948 $ (151,119)
33-34 $ 1,221,962 $ 1,067,242 $ (154,720)
34-35 $ 1,187,602 $ 1,036,522 $ (151,080)
35-36 $ 1,130,493 $ 983,356 $ (147,137)
36-37 $ 883,709 $ 740,833 $ (142,876)
37-38 $ 703,078 $ 564,807 $ (138,271)
38-39 $ 625,912 $ 492,593 $ (133,319)
39-40 $ 563,426 $ 427,005 $ (136,421)
40-41 $ 520,517 $ 357,094 $ (163,423)
41-42 $ 438,884 $ 215,483 $ (223,401)
42-43 $ 358,228 $ 185,761 $ (172,467)
43-44 $ 519,574 $ 322,912 $ (196,662)
Total $ 16,506,221 $ 13,758,908 $ (2,747,313)