City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: October 19, 2026
Report #:2512-5724
TITLE
California Public Employees’ Retirement System (CalPERS) Pension Annual Valuation Reports as of June 30, 2025; CEQA Status—Not a Project.
RECOMMENDATION
No action is requested, this transmits the California Public Employees’ Retirement System (CalPERS) Pension Annual Valuation Reports as of June 30, 2025 for the Miscellaneous and Safety Plans, reviewed by the Finance Committee September 15, 2026.
EXECUTIVE SUMMARY
The CalPERS Annual Valuation Report was reviewed with the Finance Committee on September 15, 2026, and the Committee recommended that the City Council accept the report.1 The June 30, 2025 CalPERS Annual Valuation report is used to inform the development of the upcoming FY 2028 Budget process and FY 2028 – 2037 Long Range Financial Forecast (LRFF).
This report estimates total employer contribution costs of $71.3 million in FY 2028, an increase of $0.2 million or 0.3% from estimated employer contribution cost of $71.1 million in FY 2027.
Despite CalPERS investment gains of 11.6% (FY 2025) and 9.3% (FY 2024), this was preceded by significant market volatility that triggered the CalPERS Risk Mitigation Policy. As a result the discount rate was reduced from 7.0% to 6.8%. Overall, the City’s combined funded status (not adjusted for the City’s Pension Trust) is projected to be 70.8% in FY 2028 as compared to 66.0% in FY 2027 and 64.0% in FY 2026.
The Unfunded Accrued Liability (UAL) is $504.5 million. This amount is reduced to $373.5 million or 78.4% funded status once adjusted for the City’s Pension Trust, which has $131.0 million of contributions/principal and net earnings as of June 30, 2026. Put another way, the City Council’s proactive work to address unfunded liabilities a little over a decade ago has 1 Finance Committee, September 15, 2026; Agenda Item #1, https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=f3b819b3-2dc4-47e1-809c-413a8fbca45e improved the funded ration by 7.6%. In total, planned contributions (principal) of $101.8 million to the Pension Trust have been made through FY 2026 ($65.5 million, or 64.4% 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.
In comparing the CalPERS current and projected rates in the June 30, 2025 valuation with the prior year’s valuation, which was used to inform the FY 2027-2036 long-range financial forecast, the estimated reduction in Actuarial Determined Contribution (ADC) for FY 2028 is $1.7 million for all plans citywide, which is subject to more refined budget development.
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 2026, 68% 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 21.0%, 10.1%, and
68.9% respectively. The employee ratios within the Safety Plans tier 1, tier 2 and tier 3 are
30.3%, 5.1%, and 64.6% 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 $191,679 in 2026 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, 2025. 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 will be used to inform the FY 2028 – FY 2037 Long Range Financial Forecast (LRFF) and the FY 2028 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 November 2021 ALM held the discount rate at 6.8% after it was lowered from 7.0% in July 2021 due to the Funding Risk Mitigation Policy. 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
Increased portfolio risk with the adoption of a Total Portfolio Approach and a 75%/25% equity-to-bond reference portfolio (Previously, it was Strategic Asset Allocation Approach and 72% equities and 28% bonds as of November 2025).
While not impacting the June 30, 2025 CalPERS Annual Valuation reports, it should be noted that the preliminary CalPERS investment gain for the period ending June 30, 2026 is 14.8% 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 2 percentage points replacing it with the CalPERS board decision whether the pension fund’s expected investment return should be adjusted and its asset allocation changed in line with the new expected rate of return. As of the date of this report, the CalPERS discount rate remains at 6.8% With the CalPERS ALM concluding in November 2025, this kicks off preparation for the City’s internal comprehensive review of the Retiree Benefit Policy3. In alignment with City policy, the Retiree Benefit Policy review presented to the Finance Committee in November 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 including a recommendation that funds in the Section 115 Pension Trust Fund (Pension Trust) held by the Public Agency Retirement Services (PARS) be transmitted to CalPERS. Continued implementation of this policy was incorporated into the development of the FY 2027-2036 LRFF and the FY 2027 Adopted Operating Budget.
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 a Pension Trust4, 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 Trust5. This practice was reinforced in the development of a funding policy, as adopted by the City Council in FY 20216 and modified in FY 2023 (CMR 2212-05137). Most notably, these modifications included reducing the discount rate used to calculate supplemental contributions from 6.2% to 5.3% (compared to the CalPERS discount rate of 6.8%) 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. Additionally, one-time contributions continue to be made each year if excess revenues or unspent savings are available, subject to 3 City Council, February 6, 2023; SR #2212-0513,
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82218&dbid=0&repo=PaloAlto&searchid=ca2b5a16 -b6c5-4fc0-84ec-8affafd4c45d
4 City Council, January 23, 2017; SR #7553, https://www.cityofpaloalto.org/files/assets/public/v/1/agendasminutes-reports/reports/city-manager-reports-cmrs/year-archive/2017/7553.pdf 5 City Council, October 29, 2018; SR #9740, https://www.cityofpaloalto.org/files/assets/public/v/1/agendasminutes-reports/reports/city-manager-reports-cmrs/year-archive/2018/9740.pdf 6 City Council, November 30, 2020; SR #11722, https://www.cityofpaloalto.org/files/assets/public/v/1/agendasminutes-reports/reports/city-manager-reports-cmrs/year-archive/2020-2/id-11722.pdf 7 City Council, February 6, 2023; SR #2212-0513,
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82218&dbid=0&repo=PaloAlto&searchid=ca2b5a16 -b6c5-4fc0-84ec-8affafd4c45d
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 achieving a 90% funded status goal and assess and respond to changes impacting the City’s retiree benefit plans. The most recent City pension actuary analysis encompassing the CalPERS assets/liabilities and the Pension Trust conducted in 2025 projects that the City will meet a 90% funded goal for all plans by FY 2032-33 (not adjusted for the Pension Trust) or by FY 2031-32 (adjusted for the Pension Trust)13.
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 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
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 for the Miscellaneous Plan, CALPERS estimates that future ADCs will adjust from 37.6% of payroll or $44.1 million in FY 2027 to 29.7% of payroll or $42.2 million by FY 2033. Over the same six-year span for the Safety Plans, CalPERS estimates that the ADC will adjust from 82.4% of payroll or $27.0 million 13 Finance Committee, November 18, 2025; SR #2511-5392, https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=f496f38a-e4f0-4e74-aa7d-f3ffec5e308d in FY 2027 to 66.3% of payroll or $27.9 million in FY 2033. As projected in the table below, the cost fluctuations in the outyears are primarily due to investment returns of -6.1% as of June 30, 2022 (used to develop FY 2025), +5.8% as of June 30, 2023 (used to develop FY 2026), and +9.3% as of June 30, 2024 (used to develop FY 2027) where investment gains and losses are subject to a five-year ramp-up period. The full impact from these returns will be realized in FY 2029, FY 2030 and FY 2031, respectively. Based upon the returns and amortizations, the ADC peaks in FY 2029 and then declines.
TABLE 2: CalPERS Current and Projected Employer Contributions* Miscellaneous FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 NC (%)** 10.9% 10.5% 10.4% 10.1% 9.9% 9.6% 9.4% 9.2%
UAL (%) 32.8% 27.2% 25.3% 26.1% 24.8% 23.7% 21.4% 20.5% Total ADC
(% payroll)
43.7% 37.6% 35.7% 36.2% 34.7% 33.3% 30.8% 29.7%
NC ($) $10.9 12.3 12.7 12.8 12.9 12.9 13.0 13.1
UAL ($)** $32.8 31.8 31.1 33 32.4 31.7 29.6 29.1
Total ADC ($M) $43.7 $44.1 $43.8 $45.8 $45.3 $44.6 $42.6 $42.2 Safety FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 NC (%)** 20.6% 19.6% 19.7% 19.0% 18.4% 17.8% 17.2% 16.7% UAL (%) 61.1% 62.8% 55.8% 57.1% 54.9% 52.8% 51.3% 49.6% Total ADC
(% payroll)
81.7% 82.4% 75.5% 76.1% 73.3% 70.6% 68.5% 66.3%
NC ($) $6.3 6.4 7.1 7.1 7.1 7.1 7.0 7.0
UAL ($)** $18.5 20.5 20.3 21.4 21.2 21.0 21.0 20.9
Total ADC ($M) $24.8 $27.0 $27.4 $28.5 $28.3 $28.1 $28.0 $27.9 Total (Misc. &
Safety)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 NC ($) $17.1 18.7 19.9 19.9 20.0 20.0 20.0 20.1
UAL ($)** $51.3 52.3 51.4 54.4 53.6 52.7 50.6 50.0
Total ADC ($M) $68.5 71.1 71.3 74.3 73.6 72.7 70.6 70.1 * 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 6/30/17 6/30/18 6/30/19 6/30/20 6/30/21 6/30/22 6/30/23 6/30/24 6/30/25 6/30/26 Used to
develop
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Actual (%) 11.2 8.6 6.7 4.7 21.3 (6.1) 5.8 9.3 11.6 14.8* Target (%) 7.25 7.0 7.0 7.0 6.8 6.8 6.8 6.8 6.8 6.8
*This CalPERS report does not consider the preliminary 14.8% return on investments for the period ending June 30, 2026 (6.8 percent target)[5]. The estimated impact from this return will be included in long-term financial planning.
TABLE 4: FY 2027 - 2036 Long-Range Financial Forecast – Pension Rates by Plan * Plan Type FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 Miscellaneous 37.6% 37.6% 39.0% 38.3% 37.5% 34.6%
Safety 82.4% 75.5% 76.1% 73.3% 70.6% 68.5%
*Total ADC as % of payroll as of the June 30, 2024 valuation In comparing the CalPERS current and projected rates (Table #2) in the June 30, 2025 valuation with the prior year’s valuation, which was used to inform the previous FY 2027-2036 LRFF (Table #4), these new pension projected rates align and are favorable compared to the prior long-range projections within 2% to 4% for the Miscellaneous Plan and within 6% to 10% for the Safety Plan between FY 2027 and FY 2032. Note that only the next fiscal year (FY 2028) are definite rates, while the next years are projections, subject to change with annual actuarial reports especially future investment returns. The estimated reduction in ADC for fiscal year FY 2028 is $1.7 million for all plans citywide, which is subject to more refined budget development.
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, 2025, the funded status of the overall Public Employee’s Retirement Fund (PERF) increased from 75.0% to projected levels of 79.0%[6]. This rate is higher than the City’s funded status of 73.8% for Miscellaneous and 65.2% for Safety.
Table 5 details the City’s June 30, 2025 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, 2021
As of
June 30, 2022
As of
June 30, 2023
As of
June 30, 2024
As of
June 30, 2025
Miscellaneous $236,033,956 340,518,738 349,828,105 339,818,201 294,630,629 Misc. Funded Status 75.3% 65.8 66.3 68.7 73.8
Safety $155,885,841 212,812,772 223,707,130 226,573,506 209,856,279 Safety Funded Status 69.4% 60.0% 59.7% 61.1% 65.2%
TOTAL UNFUNDED
PENSION LIABILITY
$391,919,797 $553,331,510 $573,535,235 $566,391,707 $504,486,908 % Change from Prior Yr $ -23.2% 41.2% 3.7% -1.2% -10.9% TOTAL FUNDED STATUS %
(CalPERS only)
73.3% 63.8% 64.0% 66.0% 70.8%
Section 115 Trust (PARS) 2.7% 3.8% 5.3% 6.6% 7.6%
TOTAL FUNDED STATUS %
(including Trust)
75.9% 67.6% 69.3% 72.6% 78.4%
Pension Trust Status
In total, planned contributions (principal) of $101.8 million to the Pension Trust will have been made since inception in FY 2017 through FY 2026 ($65.5 million, or 64.4% of the total, is from the General Fund). The Pension Trust is invested in a Balanced portfolio, earning 15.5%, 12.6%, and 11.5% for the years ending June 30, 2026, 2025, and 2024 respectively. The annualized fiveyear return as of July 2026 is 6.85%. The total balance of $131.0 million as of June 30, 2026 includes contributions of $101.8 million and net earnings since inception of $29.2 million. The Pension Trust is not factored into the CalPERS reports funded status; however, when included the City’s combined funded status is 78.4%.
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 2028–2037 LRFF, the FY 2028 Budget, and other long-term financial planning. As previously noted, the estimated reduction in ADC for fiscal year FY 2028 is $1.7 million for all plans citywide, which is subject to more refined budget development. Staff will continue to update the City Council and incorporate information as it becomes available. Below is a timeline for anticipated reporting:
November: 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 November 2026. This will include collaboration with an outside actuary, transmittal of pertinent results from the CalPERS ALM, and any recommended policy adjustments.
December/January: FY 2028 to FY 2037 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.
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 2028 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, 2025 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 2028 budget for contributions to the pension trust fund. Staff has also been monitoring the potential impact of AB 1383, which was vetoed by Governor Newsom on September 20, 2026. If enacted, the bill would have increased the PEPRA compensation cap by resetting the calculation based on the 2027 federal wage base (current PEPRA uses the 2013 federal wage base). In addition, AB 1383 would have created new PEPRA safety formulas based on age 55 rather than age 57 for future service and allows for higher safety formulas to be negotiated through collective bargaining.
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, 2025 Attachment C: CalPERS Safety Valuation as of June 30, 2025 APPROVED BY:
Lauren Lai, Administrative Services Director