DATE: March 23, 2026
TO:
Mayor and Members of the City Council
President and Members of the Estero Municipal Improvement District (EMID) Board of Directors
VIA: Stefan Chatwin, City/District Manager
FROM: Nate Cruz, Finance Director
SUBJECT: INTERNAL SERVICE FUNDS - ADMINISTRATIVE
RECOMMENDATION
City staff seeks reaffirmation of the City Council’s policy on reserve levels and funding methodologies for its Internal Service Funds (ISFs) in the preparation of its FY 2026-27 and FY 2027-28 budget.
EXECUTIVE SUMMARY
The City’s five Internal Service Funds for administrative functions are performing as designed, maintaining appropriate reserves for each risk or obligation including:
1. Self-Insurance
2. Longevity Recognition Benefits
3. PEMHCA Benefits
4. Compensated Absences
5. Workers Compensation
For FY 2026-27 and FY 2027-28, the funds above show sufficient reserves to meet the required levels. For two Internal Service Funds, the Longevity Benefits and PEMHCA ISFs, staff is recommending a funding holiday due to high reserve levels.
BACKGROUND AND ANALYSIS
Internal Service Funds are the mechanism by which the City accumulates funding over time in preparation for known future large purchases and/or other future liabilities. Internal Service funding is a conservative budgeting strategy that has helped Foster City proactively fund necessary expenditures.
The City of Foster City has established six Internal Service Funds for asset replacement (which are the subject of separate staff reports) and the five funds below for administrative purposes:
1. Self-Insurance Fund (503) – For the costs associated with the Insurance and Risk Management program (excluding workers compensation).
2. Longevity Recognition Benefits Fund (507) – For the payment of Longevity Recognition Benefits post-employment benefits to qualified individuals.
3. PEMHCA Benefits Fund (508) – For the payment of Public Employees Medical and Hospital Care Act post-employment benefits to qualified individuals.
4. Compensated Absences (509) – For payouts of accrued leave upon termination of employment based upon provisions of various employee Memoranda of Understanding (MOUs) and the City’s Compensation and Benefits Plan.
5. Workers Compensation (510) – For the cost to self-insure workers compensation claims, including administrative costs.
1. Self-Insurance Fund
Expenditures in this fund represent the Pooled Liability Assurance Network Joint Power’s Authority (PLAN JPA) premium and an allowance for expenses that may be incurred below the $100,000 liability self-insured retention (SIR) and $5,000 property and vehicle damage deductibles.
For FY 2026-2027, the amount budgeted for premiums includes an increase of approximately 13% above the previous year which reflects the public entity liability market which continues to face sustained, complex pressures driven by legal system abuse, adverse loss trends, and evolving judicial and legislative environments. While capacity has stabilized compared to the peak of the hard market, underwriting discipline remains firm. Carriers continue to exhibit heightened selectivity for high- severity segments such as law enforcement liability, street and road design, juvenile detention, foster care exposure, and SAM (sexual abuse and molestation). PLAN JPA currently uses a third-party claims administrator, Carl Warren & Company, to assist with claims administration. PLAN JPA continues to analyze whether to increase the confidence level for the liability and property programs. The confidence level remained the same as last year which is 60% for liability and 85% for the property program.
Higher premiums would be necessary to increase the confidence levels but the Plan JPA Board did not approve the action at this time. The PLAN JPA Board reviewed the preliminary budget at the Special Board meeting on March 11, 2026.
The actual PLAN JPA liability, property, and cyber premiums will not be finalized until summer of 2026, so the figures may be adjusted, if needed, in the final FY 2026-2027 budget prior to adoption. Expenditures within the City’s SIR are estimated to be at or under $144,000, based on a review of the past three years of claims experience.
2. Longevity Recognition Benefits
This benefit plan, negotiated under memoranda of understanding with the City’s externally represented bargaining groups and the compensation and benefits plan for Management Employees, provides monthly benefit payments based upon an employee’s length of service with the City at the time of their retirement from the City and in recognition that the City does not otherwise provide for post-employment medical benefits other than the minimum amounts required under PEMHCA (see below). In FY 2007-08, all AFSCME and non-public safety management employees employed with the City voluntarily eliminated the Longevity Recognition plan from their employee agreements. Current FCPOA, legacy IAFF, and public safety management employees will continue to participate in the program, but new employees in those groups hired after January 1, 2012, are no longer eligible to participate in the program.
As of June 30, 2025, the City’s Longevity Benefit Plan liability was $2.82 million compared to the Internal Service Fund balance of $3.0 million. Accounting standards do FY 2025-26 FY 2026-27 FY 202728
Starting Fund Balance 1,460,834 $ 1,081,328 $ 1,005,003 $ Revenues:
City GF 646,493 885,405 961,798
Vehicle 191,010 261,597 284,168
Water 308,554 422,580 459,040
Wastewater 308,554 422,580 459,040
Workforce Housing 18,999 20,123 21,860
Interest Earnings 25,000 25,000 20,000
Expenses:
SIR - New Claims 120,000 95,000 95,000
SIR - Existing Claims 15,000 49,000 49,000
Liability/Property/Vehicle Premium 1,692,000 1,911,960 2,007,558 All Risk & Bond 50,116 56,650 58,350
Supplies and Services 1,000 1,000 1,000
Ending Fund Balance 1,081,328 $ 1,005,003 $ 1,000,001 $ not allow Internal Service Fund assets to be used as offsets against our Longevity liabilities. Therefore, the City’s Balance Sheet includes the “full” obligations.
3. Public Employee Medical and Hospital Care Act
City employees participate in a medical benefits plan provided through CalPERS under the PEMHCA medical benefit plan. In accordance with the provisions of the state law, employers must contribute a minimum fixed monthly amount towards the medical benefits costs for current and retired employees participating in the plan. Effective January 1, 2026, the minimum monthly employer contribution is $162 for each retiree, an increase of $4 from calendar year 2025. The contribution amount is subject to cost of living increases as determined by the State Legislature.
As of June 30, 2025, the City’s PEMHCA OPEB liability was $6.23 million (net of approximately $303,000 in the Section 115 irrevocable trust) compared to the Internal Service Fund balance of $6.73 million.
Additionally, the City has set up an IRC Section 115 Trust, which is funded every year and is anticipated to eventually be able to reimburse the City for the yearly future costs.
Therefore, Staff recommends an assessment holiday in FY 2026-27 and FY 2027-28 for PEHMCA Benefit Internal Service Fund.
Projected
FY 2025-26
Proposed
FY 2026-27
Increase
(Decrease)
Proposed
FY 2027-28
Increase
(Decrease)
A B (B - A) C (C - B)
Fund Balance, Beginning of Year 2,958,737 $ 3,033,737 $ 3,114,737 $ Assessments charged for benefits earned 221,820 237,720 15,900 237,720 - Investment Income 85,000 91,000 6,000 93,000 2,000
Benefits payments (221,820) (237,720) 15,900 (237,720) - Actuarial valuation (10,000) (10,000) - (10,000) -
Projected Fund Balance, End of Year 3,033,737 $ 3,114,737 $ 3,197,737 $ Longevity Benefits Plan Comparison - Fund 507
Projected
FY 2025-26
Proposed
FY 2026-27
Increase
(Decrease)
Proposed
FY 2027-28
Increase
(Decrease)
A B (B - A) C (C - B)
Fund Balance, Beginning of Year 6,731,005 $ 1,820,691 $ 1,355,940 $ Assessments charged for benefits earned - - - - - $
Investment Income 156,000 55,000 (101,000) 49,000 (6,000) $ Benefits payments (253,439) (267,613) 14,174 (274,344) (6,731) $ Contributions to IRS Sec. 115 Trust (4,802,875) (242,138) (4,560,737) (271,664) (29,526) $ Actuarial valuation (10,000) (10,000) - (10,000) - $
Projected Fund Balance, End of Year 1,820,691 $ 1,355,940 $ 848,932 $ Public Employees' Medical and Hospital Care Act (PEMHCA) Benefits Plan Comparison - Fund 508
4. Compensated Absences
The City provides vacation and sick leave benefits to current employees based upon the two (2) memoranda of understanding (MOU) with AFSCME and FCPOA, and the Compensation and Benefits Plan (C&B Plan) for Management Employees. These benefits are collectively referred to as “compensated absences.” When an employee separates from employment with the City, either through termination, resignation, or retirement, the City is required to pay the final compensated absences balances to the employee based on the provisions within the MOUs or C&B Plan applicable to the employee. For some employees, this payout may be less than $2,000, but for long-term or highly compensated employees, these payouts can be over $50,000.
The Compensated Absences Internal Service Fund reserve balance significantly exceeds the amount needed to fund costs in biennial budget period; therefore staff recommends an assessment holiday in FY 2026-27 and FY 2027-28.
5. Workers Compensation
On August 1, 2025, workers compensation claim administration was transferred from Cities Group Joint Powers Authority (Cities Group) to the City as a self-insured employer.
Once the claims were transferred out of Cities Group, a thorough review showed some unanticipated expenses that were addressed in FY 2025-26. Although the amount was significant, it should be a one-time cost due to the transition, unless an unknown claim or issue arises. The proposed budget for FY 2026-27 and FY 2027-28 are projecting more stable and cost- effective administration. Projected expenses are shown in the table below.
Projected
FY 2025-26
Proposed
FY 2026-27
Increase
(Decrease)
Proposed
FY 2027-28
Increase
(Decrease)
A B (B - A) C (C - B)
Fund Balance, Beginning of Year 4,084,741 3,734,712 3,046,790 Assessments charged - - - - -
Interest Income 143,000 117,000 (26,000) 95,000 (26,000) Benefit payments (493,029) (804,922) (311,893) (829,070) 311,893 Projected Fund Balance, End of Year 3,734,712 3,046,790 2,312,720 Compensated Absences Internal Service Fund - Fund 509
The annual funding goal of the Workers Compensation fund is $1.5 million, the annual amount paid to Cities Group. This amount is charged to each department as a percentage of payroll, such that actual funding varies based on vacancies. The annual funding goal remains $1.5 million for FY 2026-27 and FY 2027-28, which exceeds the expense budgets provided above. The excess amounts are intended to build fund balance until an actuarial analysis of our self-insured claims history (planned in FY 2027-28) will allow us to establish appropriate reserve minimums and evaluate annual funding amounts.
FISCAL IMPACT
City staff seeks reaffirmation of the City Council’s policy on reserve levels and funding methodologies for its Internal Service Funds (ISFs). The final fiscal impact will be included in the preliminary budget presented to Council in May.
CITY COUNCIL STRATEGIC PRIORITY
Staff Empowerment and Operational Excellence
ATTACHMENTS:
Attachment 1a: Self Insurance Fund FY 2026-27
Attachment 1b: Self Insurance Fund FY 2027-28
Attachment 2: Longevity Assessment Charges
Attachment 3: PEMHCA Assessment Charges
Attachment 4: Compensated Absences Assessment Charges
P rojected
Object Name / DescriptionF Y 25-26 F Y 26-27 F Y 27-28
T OT A L E X P E NS E S1,855,100 $ 1,214,100 $ 1,241,100 $ Copy E xpense100 $ 100 $ 100 $ Contract, P rofessional, S pecial S ervices100,000 $ 124,000 $ 146,000 $ A ctuary S ervices 20,000 $
T hird P arty A dministration 90,000 $ 84,000 $ 86,000 $ S tate of California (B enefits T rust) 35,000 $ 35,000 $ W orkers Compensation T raining 10,000 $ 5,000 $ 5,000 $ Insurance & Other Costs1,755,000 $ 1,090,000 $ 1,095,000 $ E xcess W orkers Comp Insurance P remium 110,000 $ 115,000 $ 120,000 $ S ettlements 675,000 $
W C Claims Costs (Legal, Medical, B enefits) 970,000 $ 975,000 $ 975,000 $