City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Administrative Services
Meeting Date: January 20, 2026
Report #:2511-5417
TITLE
Accept CalPERS Pension Annual Valuation Report as of June 30, 2024; CEQA Status – Not a project.
RECOMMENDATION
Accept CalPERS Pension Annual Valuation Report as of June 30, 2024
EXECUTIVE SUMMARY
The CalPERS Annual Valuation Report was reviewed with the Finance Committee on September 16, 2025, and the Committee unanimously recommended that the City Council accept the report.1 The June 30, 2024 CalPERS Annual Valuation report is used to inform the development of the upcoming FY 2027 Budget process and FY 2027 - 2036 Long Range Financial Forecast (LRFF).
This report estimates total employer costs of $71.1 million in FY 2027, an increase of $2.6 million or 3.8% from the total employer cost of $68.5 million in FY 2026. This increase is primarily due to CalPERS investment gain of 9.3% and 5.8% as compared to target levels of 6.8% for the period ending June 30, 2024 and June 30, 2023, respectively. This was preceded by significant volatile investment loss of -6.1% and gain of +21.3% for the period ending June 30, 2022 and June 30, 2021, respectively. This gain triggered the CalPERS Risk Mitigation Policy, which ultimately resulted in the reduction of the discount rate (target investment return) from
7.0% to 6.8%. Overall, the City’s combined funded status is projected to be 66.0% in FY 2027 as compared to 64.0% in FY 2026 and 63.8% in FY 2025.
1 Finance Committee, September 16, 2025; Agenda Item #1, https://portal.laserfiche.com/Portal/DocView.aspx?id=226273&repo=r-704298fc&searchid=c49daef3-0f29-4953- a8f5-d2340d77b346
The Unfunded Accrued Liability (UAL) is $566.4 million. This amount is reduced to $456.5 million or 72.6% funded status once adjusted for the City’s Pension Trust, which has $109.9 million of contributions/principal and net earnings. In total, planned contributions (principal) of $87.5 million to the Pension Trust have been made through FY 2025 ($56.5 million, or 64.6% of the total, is from the General Fund). Contributions to this Trust continue in alignment with the City’s goal to reach 90% funded by FY 2036.
BACKGROUND
The City of Palo Alto offers its employees and retirees a defined pension benefit plan which is managed and administered by CalPERS, a State of California Pension Trust Program. The CalPERS program maintains two pension plans for the City: one for safety employees (sworn fire and police personnel) and another for miscellaneous employees (all other non-safety personnel employed by the City, including field personnel, administrative support, and managers).
There are three tiers of benefits within the two plans described above. Table 1 below details the current pension plans and the different benefit levels in each tier. It takes City employees five (5) years of service to vest in any tier of the pension program. Attachment A outlines the number of employees in each tier by pension plan and employee group. As of the third quarter of calendar year 2025, the majority of the workforce in both plans are in Tier 3, or PEPRA. The employee ratios within the Miscellaneous Plans tier 1, tier 2 and tier 3 are 25.0%, 10.2%, and
64.8% respectively. The employee ratios within the Safety Plans tier 1, tier 2 and tier 3 are
34.5%, 6.4%, and 59.1% respectively for the same period.
Table 1: City of Palo Alto Pension Benefit Plans and Tiers Miscellaneous Safety: Fire Safety: Police
Tier 1 2.7%/service year worked;
eligibility starting at the age of 55
(2.7% @ 55)
3.0%/service year worked;
eligibility starting at the age of 50
(3.0% @ 50)
3.0%/service year worked;
eligibility starting at the age of 50
(3.0% @ 50)
Tier 2 Effective July 16, 2010:
2.0%/service year worked,
eligibility starting at age 60 (2.0%
@ 60)
Effective June 7, 2012:
3.0%/service year worked,
eligibility starting at age 55 (3.0%
@ 55)
Effective December 6, 2012:
3.0%/service year worked,
eligibility starting at age 55 (3.0%
@ 55)
Tier 3
“PEPRA”*
Effective January 1, 2013:
2.0%/service year worked;
eligibility starting at age 62 (2.0%
at 62)
Effective January 1, 2013:
2.7%/service year worked;
eligibility starting at age 57 (2.7%
at 57)
Effective January 1, 2013:
2.7%/service year worked;
eligibility starting at age 57 (2.7%
at 57)
* Under the California Public Employees’ Pension Reform Act (PEPRA), the benefit calculation is limited by a maximum salary of $186,096 in 2025 for both the Miscellaneous and Safety plans, therefore it is calculated based on service years but cannot exceed the maximum amount. The final salary calculation is based on the average of the highest three years.
CalPERS Annual Valuations
The CalPERS Annual Valuation reports are included in Attachments B and C and provide an actuarial analysis of the City of Palo Alto pension trust plans based on member and financial data as of June 30, 2024. The purpose of these reports is to provide an update on the assets and accrued liabilities of plans, determine minimum employer contributions for the coming fiscal year, and communicate significant changes in actuarial assumptions or policies. The valuation reports included for review as part of this memo were used to inform the FY 2027 – FY 2036 Long Range Financial Forecast (LRFF) presented to the Finance Committee on December 2, 20253, and will be used to inform the FY 2027 budget development process. The calculations for annual employer contributions are based on a set of actuarial assumptions for demographic (e.g., mortality, retirement, termination, and disability rates) and economic factors (e.g., investment returns, inflations, salary growth). These assumptions reflect CalPERS’ best estimate for future experience of the plans and are long term in nature. Valuation results will vary from one year to the next due to assumption or method changes, changes in plan provisions, and actuarial experience that is different than anticipated such as investment returns that do not meet the CalPERS 6.8% target.
2025 CalPERS Asset Liability Management (ALM) Study
In addition to the valuation reports issued annually, CalPERS completes a comprehensive review of plans every four years. In November 2025, CalPERS completed an Asset Liability Management (ALM) process to review the capital market assumptions and the strategic asset allocation to ascertain whether a change in the discount rate and other economic assumptions was warranted.
As part of this process, the Actuarial Office also completed an Experience Study to review pension demographics for potential modification. The 2021 ALM resulted in a reduction in the discount rate from 7.0% to 6.8%. Notable outcomes of the 2025 ALM process included but were not limited to the following:
Maintaining the discount rate at 6.8%;
New actuarial assumptions, including an increase for price inflation from 2.3% to 2.5% and total wage inflation from 2.8% to 3.0%; and
Adoption of a new investment governance model.
While not impacting the June 30, 2024 CalPERS Annual Valuation reports, it should be noted that the CalPERS investment gain for the period ending June 30, 2025 is estimated to be 11.6% compared to target levels of 6.8%. On April 16, 2024, the CalPERS board suspended the CalPERS Risk Mitigation Policy which automatically reduced expected investment return when actual investment returns outperform the expected investment return by at least two percentage points, replacing it with the CalPERS board decision whether the pension fund’s expected 3 Finance Committee, December 2, 2025; Agenda Item #3,
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=16340&compileOutputType =1
investment return should be adjusted and its asset allocation changed in line with the new expected rate of return.
The most recent CalPERS ALM concluded in November 2025. This kicks off preparations for the City’s internal comprehensive review of the Retiree Benefit Policy. In alignment with City policy, the Retiree Benefit Policy review will be brought forward in fall 2026. This will include collaboration with an outside actuary, transmittal of pertinent results from the CalPERS ALM, and any proposed amendments to the policy. The City’s Retiree Benefit Policy and impacts of the preliminary ALM were used to inform recommended budget balancing strategies presented to the Finance Committee on November 18, 2025 5 including a recommendation that funds in the Section 115 Pension Trust Fund (Pension Trust) held by Public Agency Retirement Services (PARS) be transmitted to CalPERS. Continued implementation of this policy has been incorporated into the development of the FY 2027-2036 LRFF presented to the Finance Committee on December 2, 2025 and tentatively agendized for the City Council on January 20, 2026.
Long-term Financial Planning
The City has taken several proactive steps to address rising pension costs and long-term liabilities, including cost-sharing in labor agreements, establishing an irrevocable Section 115 Pension Trust “Pension Trust” (CMR 75536), and adopting a Retiree Benefit Funding Policy that guides financial planning of retirement benefits. The City initially contributed to the Pension Trust in FY 2017 on an ad-hoc basis, using one-time savings or excess revenues. Beginning in FY 2019, the City Council directed staff to use a more conservative discount rate as compared to CalPERS for the Normal Cost (NC) portion of the payment, and transferring the additional “supplemental” funding beyond CalPERS required employer contributions to the Pension Trust (CMR 97407). This practice was reinforced in the development of a funding policy, as adopted by the City Council in FY 2021 (CMR 11722 8) and modified in FY 2023 (CMR 2212-0513 9). In FY 2024 this rate is 5.3% as compared to the CalPERS discount rate of 6.8%. Additionally, one-time contributions continue to be made each year if excess revenues or unspent savings are available, subject to City Council approval. As part of policy goals, the City seeks to reach a 90% funded status by FY 2036.
Every four years, in alignment with the timing of the CalPERS ALM study, the policy requires that staff consult with an actuary to inform the City Council of progress the City has made towards 5 Finance Committee, November 18, 2025; Agenda Item #2, https://portal.laserfiche.com/Portal/DocView.aspx?id=237463&repo=r-704298fc&searchid=e8a12ee4-fd4b-477f- a76b-35a8552565c2
6 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2017/7553.pdf
7 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2018/9740.pdf
8 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2020-2/id-11722.pdf
9 https://portal.laserfiche.com/Portal/DocView.aspx?id=61647&repo=r-704298fc&searchid=45f12baf-af0c-4c97- a077-fd70ec5cb60a
achieving a 90% funded status goal and assess and respond to changes impacting the City’s retiree benefit plans. The previous comprehensive review of the policy by Council was completed in FY 2023 and resulted in several policy revisions, most notably reducing the discount rate used to calculate supplemental contributions from 6.2% to 5.3% and extending actuary reporting from three to four years to align with the CalPERS ALM Study. Additionally, the title of the policy was revised from the Pension Policy to the Retiree Benefit Policy to recognize actions approved by the City Council to proactively plan for retiree healthcare plans in a similar manner to pensions (CMR 2212-0513 15). The most recent City pension actuary analysis encompassing the CalPERS assets/liabilities and the Pension Trust conducted in 2022 projects that the City will meet a 90% funded goal by FY 2034 (Miscellaneous plan) and FY 2036-37 (Safety plan). The City’s practice of transmitting excess one-time savings will help reach goals sooner.
It is important to note that this policy, and the funding elements within it, are subject to modification at any time by the City Council. Consistent with prior years, any changes to the budget or financial planning of retiree benefits in interim years will be implemented at the timing of City Council approval and formalized in the policy document in the next comprehensive reporting period.
ANALYSIS
CalPERS has two components designated in the annual billing for employer contributions:
1. The Normal Cost (NC) or “pay-go”
This cost reflects the employer contribution for the plan retirement benefits provided to current employees based on the current set of assumptions and is billed as a percentage of payroll.
2. The Unfunded Accrued Liability (UAL) or “catch-up”
This cost represents the employer amortization of unfunded accrued liability and is billed as a flat dollar rate. The CalPERS’s annual payment is calculated to pay down the City’s unfunded accrued pension liability over the amortization timeline. If all actuarial assumptions were realized through the amortization timeline, the City would eliminate its unfunded pension liability after making these annual payments.
The Actuarial Determined Contribution (ADC) or “blended rate” reflects the combined cost of NC and UAL to approximate total employer cost.
Current and Projected Employer Contributions
15 https://portal.laserfiche.com/Portal/DocView.aspx?id=61647&repo=r-704298fc&searchid=69e227dc-060b-4c7d- b9bd-4f761d8e2018
Table 2 summarizes the projected employer contributions required for each plan to fund the ADC and the NC and UAL that make up this rate. Over the next six years, CALPERS estimates that future ADCs will adjust from 43.7% of payroll or $43.7 million in FY 2026 to 34.6% of payroll or $46.5 million by FY 2032 for the Miscellaneous plan. Over the same six-year span, CalPERS estimates that the ADC will adjust from 81.7% of payroll or $24.8 million in FY 2026 to
77.5% of payroll or $29.1 million in 2032 for Safety. As projected in the table below, the cost fluctuations in the outyears are primarily due to investment returns of +21.3% as of June 30, 2021 (used to develop FY 2024), -6.1% as of June 30, 2022 (used to develop FY 2025), +5.8% as of June 30, 2023 (used to develop FY 2026) where investment gains and losses are subject to a five-year ramp-up period. The full impact from these returns will be realized in FY 2028, FY 2029 and FY 2030, respectively.
TABLE 2: CalPERS Current and Projected Employer Contributions* Miscellaneous FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 NC (%)** 11.3% 10.9% 10.5% 10.2% 9.9% 9.7% 9.5% 9.3%
UAL (%) 36.1% 32.8% 27.2% 27.4% 29.1% 28.6% 28.0% 25.3% Total ADC
(% payroll)
47.4% 43.7% 37.6% 37.6% 39.0% 38.3% 37.5% 34.6%
NC ($) 10.1 10.9 12.3 12.3 12.3 12.3 12.4 12.5
UAL ($)** 32.2 32.8 31.8 33.0 35.9 36.4 36.7 34.0
Total ADC ($M) $42.3 $43.7 $44.1 $45.3 $48.2 $48.7 $49.1 $46.5 Safety FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 NC (%)** 22.2% 20.6% 19.6% 19.0% 18.3% 17.7% 17.1% 16.5% UAL (%) 60.9% 61.1% 62.8% 63.2% 66.0% 65.1% 64.0% 61.0% Total ADC
(% payroll)
83.1% 81.7% 82.4% 82.2% 84.3% 82.8% 81.1% 77.5%
NC ($) 6.0 6.3 6.4 6.4 6.3 6.3 6.3 6.2
UAL ($)** 16.6 18.5 20.5 21.3 22.8 23.1 23.4 22.9
Total ADC ($M) $22.6 $24.8 $27.0 $27.7 $29.1 $29.4 $29.7 $29.1 * This table does not include cost savings for prepayment of the UAL, which confers 3.2% or $1.7 million in savings, or provisions in labor agreements for employees to pay a portion of employer normal costs; Miscellaneous groups pay 1-2% and Safety groups pay 3-4%. These savings will continue to be included in budget development. ** The City makes payments to CalPERS for NC as a percentage of payroll and for UAL as a flat dollar rate. For illustrative purposes, this table uses CalPERS estimates to restate the total ADC (NC and UAL) in respective terms.
TABLE 3: CalPERS Investment Returns
Returns as of 6/30/22 6/30/23 6/30/24 6/30/25 6/30/26 6/30/27 6/30/28 6/30/29 Used to develop FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 Actual (%) -6.1 5.8 9.3 11.6* - - - -
Target (%) 6.8 6.8 6.8 6.8 6.8 6.8 6.8 6.8
*This CalPERS report does not consider the preliminary 11.6% return on investments for the period ending June 30, 2025 (6.8 percent target)[5]. The estimated impact from this return will be included in long-term financial planning.
TABLE 4: FY 2026 - 2025 Long-Range Financial Forecast – Pension Rates by Plan * Plan Type FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Miscellaneous 43.7% 40.6% 41.0% 43.1% 42.7% 42.2%
Safety 81.7% 82.8% 83.3% 86.3% 85.4% 84.4%
*Total ADC as % of payroll as of the June 30, 2023 valuation In comparing the CalPERS current and projected rates (Table #2) in the June 30, 2024 valuation with the prior year’s valuation, which was used to inform the previous FY 2026-2035 long-range financial forecast (Table #4), these new pension projected rates align and are favorable compared to the prior long-range projections within 0.4% to 4% between FY 2027 and FY 2031. Note that only the next fiscal year (FY 2027) are definite rates, while the next years are projections, subject to change with annual actuarial reports especially future investment returns.
Pension Plan’s Funded Status
The funded status is a measure of how well funded, or how “on track” a plan is with respect to assets versus accrued liabilities. As of June 30, 2024, the funded status of the overall Public Employee’s Retirement Fund (PERF) increased from 71.4% to projected levels of 75.0%[6]. This rate is higher than the City’s funded status of 68.7% for Miscellaneous and 61.1% for Safety.
Table 5 details the City’s June 30, 2024 funded status for the Miscellaneous and Safety plans.
The total unfunded pension liability decreased from $573.5 million as of June 30, 2023 to $566.4 million as of June 30, 2024. This represents a decrease of $7.1 million, or 1.2% compared to the prior year. This change was predominantly due to investment returns. When investment returns come in lower than anticipated, this increases the City’s unfunded liability.
Conversely, when investment returns come in higher than anticipated this favorably impacts the City’s plans.
TABLE 5: CalPERS Projected Unfunded Accrued Liability
As of
June 30, 2020
As of
June 30, 2021
As of
June 30, 2022
As of
June 30, 2023
As of
June 30, 2024
Miscellaneous 317,116,346 236,033,956 340,518,738 349,828,105 339,818,201 Misc. Funded Status 65.1% 75.3% 65.8% 66.3% 68.7%
Safety 193,301,713 155,885,841 212,812,272 223,707,130 226,573,506 Safety Funded Status 60.3% 69.4% 60.0% 59.7% 61.1%
TOTAL UNFUNDED
PENSION LIABILITY
$510,418,059 $391,919,797 $553,331,510 $573,535,235 $566,391,707 % Change from Prior Yr $ 7.0% -23.2% 41.2% 3.7% -1.2%
TOTAL FUNDED STATUS % 63.5% 73.3% 63.8% 64.0% 66.0%
Pension Trust Status
In total, planned contributions (principal) of $87.5 million to the Pension Trust will have been made since inception in FY 2017 through FY 2025 ($56.5 million, or 64.6% of the total, is from the General Fund). The Pension Trust is invested in a Balanced portfolio, earning 12.5%, 11.5%, and
6.7% for the years ending June 30, 2025, 2024, and 2023 respectively. The annualized five-year return as of July 2025 is 6.1%. The total balance of $109.9 million as of June 30, 2025 includes contributions of $87.5 million and net earnings since inception of $22.4 million. The Pension Trust is not factored into the CalPERS reports funded status; however, when included the City’s combined funded status is 72.6%.
The Retirement Benefit Policy indicates that the City make Additional Discretionary Payments (ADPs) from the Pension Trust to CalPERS for amounts that exceed the one-year minimum employer contribution. CalPERS allows agencies to make ADPs at any time and in any amount at the agency’s discretion. These optional payments serve to reduce the UAL and future required contributions.
FISCAL/RESOURCE IMPACT
This report and feedback from the City Council will be used to inform the development of the FY 2027–2036 Long Range Financial Forecast (LRFF), the FY 2027 Budget, and other long-term financial planning. Staff will continue to update the City Council and incorporate information as it becomes available. Below is a timeline for anticipated reporting:
December/January: FY 2027 to FY 2036 Long Range Financial Forecast (LRFF) Annually, staff brings forward a LRFF that projects the City’s financial outlook over the next 10 years based on current City Council approved service levels and several alternative scenarios.
Staff presented the FY 2027-2036 LRFF to the Finance Committee on December 2, 2025 and is scheduled to present to City Council on January 20, 2026. The financial implications of these reports and input from the Finance Committee are used to inform the development of the annual budget. Staff incorporates estimates in the base budget as part of the annual budget development process.
May/June: FY 2027 Budget Deliberations and City Council Adoption Consistent with current practice, staff will include the actuarially determined contributions as calculated by CalPERS in the June 30, 2024 valuation reports and the additional contributions per the pension funding policy including use of a lower 5.3% discount rate as part of the development of the FY 2027 budget for contributions to the pension trust fund.
Fall 2026: Four Year Palo Alto Retiree Benefit Policy Review The most recent CalPERS ALM concluded in November 2025. This kicks off preparations for the City’s internal comprehensive review of the Retiree Benefit Policy. In alignment with City policy, the Retiree Benefit Policy review will be brought forward in fall 2026. This will include collaboration with an outside actuary, transmittal of pertinent results from the CalPERS ALM, and any recommended policy adjustments.
STAKEHOLDER ENGAGEMENT
The Administrative Service Department staff worked primarily with the City Manager’s Office on this informational report.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by the California Environmental Quality Act (CEQA) because accepting the CalPERS pension annual valuation report is an organizational or administrative activity that will not result in direct or indirect physical changes in the environment. CEQA Guidelines section 15378(b)(5.
ATTACHMENTS
Attachment A: Pension Plan Benefit Levels Enrollment by Plan and Employee Group Attachment B: CalPERS Miscellaneous Valuation as of June 30, 2024 Attachment C: CalPERS Safety Valuation as of June 30, 2024 APPROVED BY:
Lauren Lai, Administrative Services Director