Attachment 6
UNFUNDED PENSION AND OPEB LIABILITY
FUNDING STRATEGY
This section of the report aims to provide a refresher and an overview of the City's strategy for managing Pension and Other Post Employment Benefit liabilities. As a best practice in government finance, it is prudent to develop a funding strategy for Pension and OPEB plans. Over the last few years the City has setup such a structure. The City has pension plans with the California Public Employees Retirement System (CalPERS) and a trust fund with the Public Agency Retirement Services (PARS). The City also participates in the CalPERS medical program known as Other Post-Employment Benefits (OPEB) Plan.
CalPERS Pension Plans:
Miscellaneous
CLASSIC Safety Police
PEPRA Safety Police
CLASIC Safety Fire
PEPRA Safety Fire
CalPERS OBEB
CalPERS OPEB medical program is an agent multiple employer defined benefit retiree healthcare plan.
PARS Pension Plan
The City has an Agent Multiple-Employer PARS Retirement Enhancement Plan (REP) that was implemented July 1, 2003, and is now closed to new participants hired after January 1, 2012.
There are 20 inactive employees or beneficiaries receiving benefits and zero active employees in the plan. The REP is administered by PARS.
All these plans accumulate assets that will be used to pay future benefits. An actuary prepares a report for each of these plans. They determine the market value of the assets and the accrued liability (present value of the amount needed to pay future benefits). The difference between the plan assets and the plan liability is the Unfunded Accrued Liability (UAL; also known as the Unfunded Actuarily Accrued Liability (UAAL). They determine the amount the City needs to pay each year, which has two components: 1) Normal Cost and 2) UAL. The Normal Cost rate is a rate to cover current member's future benefits. The UAL will fluctuate based on assumptions and market conditions each year. The following is a table of the CalPERS plans Assets, Liability, UAL, and other information taken from the most current actuarial reports.
Both Employee and employer contributions to this plan are required under state law. As mentioned, the required employer contributions are comprised of two components. The "normal Attachment 6
cost" represents the cost attributable to services earned during the current fiscal period and are expressed as a percentage of pensionable payroll. The second component is a flat dollar amount representing the "UAL Contribution" which is an amortization of outstanding individual UAL bases (layers). The method and maximum term of the UAL amortization is dictated by the CalPERS policy, but the repayment of the UAL can be accelerated and/or restructured at the employer's discretion. Together, the two employer components represent the total required employer contribution. The sum of the required employer and employee contributions is called the Actuarial Determined Contribution (ADC).
Due to the frequent volatility in the total required employer contribution rate, the City has opted to utilize an Internal Revenue Code (IRC) §115 trust as a buffer against future expected volatility investing in a manner consistent with the long-term nature of pension liabilities and the City's tolerance for investment risk.
How Can a 115 Trust Be Structured?
For FY 2026-27, an annual contribution of $236,000 to the City’s IRC §115 Pension Trust was calculated in accordance with the City’s Pension Funding Policy adopted in FY 2024–25. The goal of this policy is to accumulate an amount equal to 1.5% of the City's accrued pension liability over the next 20 years (1.5% x $282,463,392 = $4.2 million). This trust fund account will serve as a "rainy day fund" or buffer against future pension cost volatility. Given the frequent volatility in CalPERS employer contribution rates, the City can utilize the §115 Trust to help stabilize future costs. Trust assets are invested in a manner consistent with the long-term nature of pension liabilities and the City’s tolerance for investment risk.
Similarly, for FY 2026-27, a continuing contribution to the PARS trust is budgeted at $283,750 to fund OPEB unfunded liability, consistent with the City’s funding strategy approved in April 2022.
This allocation will provide additional contributions toward the Actuarial Determined Contribution (ADC) in addition to the pay-as-you-go payment strategy, which was historically the only budget mechanism of the unfunded liability prior to 2022. Because the City closed the OPEB pool to all new members, unlike pensions, the actuarial liability will gradually go away. By prefunding this liability through the §115 Trust, the City will be able to significantly reduce the Net OPEB liability reported annually in the Annual Comprehensive Financial Report (ACFR). The most current actuarial report shows the Net OPEB unfunded liability balance of $2,827,664 as of the June 30, 2025 report date.