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Agenda Report
December 15, 2025
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TO: Honorable Mayor and City Council
THROUGH: Finance Committee (December 8, 2025)
FROM: Department of Finance
SUBJECT: APPROVE OPTIONS FOR UTILIZING THE SECTION 115 PENSION
TRUST AND INITIATING A FRESH START WITH CALPERS
RECOMMENDATION:
It is recommended that the City Council:
1. Find that the proposed action is not a project subject to the California Environmental Quality Act (CEQA) as defined in Section 21065 of CEQA and Section 15378 of the State CEQA Guidelines and, as such, no environmental document pursuant to CEQA is required for the project; and
2. Direct the City Manager or designee to execute the necessary documents with CalPERS and the City's Section 115 Trust to make an additional discretionary payment (ADP) of $7 million to CalPERS in order to pay down the Unfunded Accrued Liability (UAL) of the City's Safety plan and initiate a Fresh Start for the Safety Plan as outlined in the report.
EXECUTIVE SUMMARY:
The City established a Section 115 Trust (Trust) in 2017 with $10.5 million from the General Fund to assist with funding future pension obligations. The Trust has grown to approximately $14.9 million as of October 31, 2025, from investment earnings. There was an initial plan proposed in Fiscal Year (FY) 2020 to utilize these funds; however, that plan was placed on hold due to the economic uncertainty of the COVID pandemic.
The current Five-Year Forecast for the General Fund projects ongoing shortfalls, with annual pension obligations to CalPERS being a key contributor to rising expenditures.
The proposed action is to utilize the Trust to make an ADP towards the City's UAL and initiate a Fresh Start to shorten the repayment duration, reduce total interest payments, and smooth out annual payment volatility.
MFFTINP.nF 12/15/2025.AGENDA ITEM NO.11
Approve Options for Utilizing the Section 115 Pension Trust, Initiating Fresh Starts with CalPERS, and Reviewing the General Fund Forecast
December 15, 2025
BACKGROUND:
The City contracts with CalPERS to provide retirement benefits for eligible employees.
Each year, the CalPERS actuarial staff perform a valuation of the City's two pension plans (Safety and Miscellaneous (non-safety)) to review the funding status of the plans and establish future contribution requirements. The valuation generally focuses on two primary cost components: the unfunded accrued liability for benefits earned but not yet paid, and the normal cost of benefits being earned in the next year.
In June 2017, the City Council approved the establishment of a Trust to set aside funds to help offset future pension obligations. At that time, the City Council authorized a deposit of $10.0 million from the General Fund and later in 2017 authorized another contribution of about $500,000. As of December 31, 2019, the Trust balance had increased to $11.65 million through investment returns. The funds in the Trust can only be used to offset pension obligations and may be drawn down through City Council action, at anytime.
On February 10, 2020, the City Council's Finance Committee reviewed multiple options for utilization of the Trust towards current and future pension costs that were the most feasible and focus on the UAL of the City's pension obligations. The focus was and still is on the UAL, because that balance accrues interest, at that time it was at a rate of seven percent, so prepayment of this debt provides the greatest cost benefit. Based upon the valuations for the year ended June 30, 2018, the combined UAL of the Safety and Miscellaneous plans was $51 1 million.
The Finance Committee directed staff, to provide to the City Council, an option to utilize the Trust to buy down the Safety UAL through ADPs over the course of several years.
This action would accelerate the payoff of the Safety UAL from 24 to 19-years, along with smoothing out future payment increases. The City Council was set to act on this in March 2020, but the plan was put on hold due to COVID and the economic uncertainty that it brought. Since that time, the Trust has remained invested and has grown to approximately $14.9 million. Due to market volatility and plan losses since 2020 in the two CalPERS pension plans, the combined UAL has increased to $595 million, despite the City continuing to make annual payments.
) While the UAL is referenced as a lump sum value when presented to the City Council; the UAL is comprised of dozens of individual outstanding amounts related to gains, losses, and assumption changes accumulated over a period of up to 30-years. The Miscellaneous UAL is comprised of 38 individual amounts while the Safety UAL is comprised of 36 individual amounts. These individual amounts are important to understand collectively and individually when evaluating options for utilizing the Trust.
Additionally, since the General Fund provides about 31 percent of the funding for the Miscellaneous Plan, the recommended use of the Trust is for the Safety Plan, where the General Fund supports more than 90 percent of the funding.
Approve Options for Utilizing the Section 115 Pension Trust, Initiating Fresh Starts with CalPERS, and Reviewing the General Fund Forecast
December 15, 2025
As the City Council is aware, while the General Fund Operating Budget has been balanced each year, it has been challenging, with many projects unfunded or under- funded, and the near-term horizon of the five-year forecast continues to show expenditure growth outpacing revenue growth. Personnel and pension costs are the largest portions of the General Fund and play a significant role in expenditure growth until FY 2031 due to increasing UAL payments. Staff have been reviewing ways to help maintain a balanced General Fund Operating Budget for the long-term and the prudent use of the Trust to provide stability, long-term savings, and minimize the need for reductions.
Fresh Start and ADP
The annual CalPERS valuations provided each year serve as the basis for calculating an ADP or Fresh Start. However, since the data in these valuations are 12-24 months outdated, additional financial modeling is needed to project the future impact of an ADP or Fresh Start on future payments. The modeling and forecasts in these recommendations has been done in coordination with CalPERS actuarial staff to ensure that it was done as accurately as possible.
CalPERS provides a refinance option called a "Fresh Start" where the current individual UAL amounts can be refinanced into one lump sum amount over a duration of time that yields a net savings. This option is similar to consolidating various outstanding debts into one loan with a fixed interest rate and repayment term. A Fresh Start by itself generally comes at a higher annual cost due to the reduced payoff period; however, when combined with an ADP from the Trust, can yield lower overall annual payments as well as a shorter duration and long-term savings. The proposed action includes implementing a Fresh Start for the Safety plan and using the Trust for an ADP to buy down overall future payments. For the Safety Plan, a 16-year Fresh Start with an ADP of $7 million in FY 2026 and utilizing the remainder of the Trust, $7.5 million, from FY 2027 through 2029 towards UAL payments reduces the payoff by 2-years. Through utilizing these two methods, the City would realize a total General Fund savings of $10.4 million over the repayment period. More importantly, over the five-year forecast, the restructuring plan will reduce total City General Fund payments by $14.8 million.
Targeting FY 2029 is critical as that is the peak of future UAL payments under the current repayment schedule.
Approve Options for Utilizing the Section 115 Pension Trust, Initiating Fresh Starts with CalPERS, and Reviewing the General Fund Forecast
December 15, 2025
The chart below is a representation of total UAL payments on an annual basis. The green bars represent the current funding requirements, and the brown bars represent the proposed restructuring.
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
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B
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All Funds UAL
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The following chart covers the same period but is focused on the General Fund. For the General Fund, the current year payment is $30.9 million, and the goal is minimizing annual increases or reduce that payment over time. In the proposed scenario, the FY 2027 to 2037 payments will peak at approximately $32.3 million instead of $37.0 million.
Attachment B provides the detailed amounts.
General Fund UAL
$40,000,000
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
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December 15, 2025
Impact on the General Fund Forecast
As previously shared with the City Council, the General Fund Five-Year Forecast, projects challenging years ahead with traditional tax revenue growth having slowed significantly in the past two-years and expenditures continuing to increase. The table below represents the current forecast, which includes what has been approved by the City Council since the original FY 2026 Operating Budget adoption in June 2025. This forecast reflects a projected shortfall of $7.6 million for FY 2027 and a deficit each year after.
General Fund Five-Year Forecast
FY 2024FY 2026FY 2026FY 2027FY 2028FY 2029
FinalDraft Final Revised Budget ForecastForecast
FY 2030
Forecast Forecast
Beginning Amount Available for Appropriations 18,086,07516,216,7122,501,993313,526 (7,324,506) (13,895,334) (23,170,072) Revenues
Tax Re\enues
Other Rewnues
Contributions/Sw. From Other Funds
Total Revenues
262,958,941
66,399,883
20,140,438
270,710,303 274,625,007
63,166,719 58,070,513
30,272.305 30,640,438
283,775,540 294,851,749 305,997,986 317,615.437
58,953,162 60,387,510 61,858.374 63,366,702
34,601,061 37,043,365 39,617,879 42,325,266
349,499,262 364,149,327 363,335,958 377,329,764 392,282,624 407,474,239 423,307,405 Expenses
Personnel
Debt Senice
Contributions To Other Funds
Other Expenses
Total Expenses
Operating Income/fLoss)
Ending Amount Available for Appropriations
206.097,494 232,834,943 233,456,605 249,170,618
11,619,669 12,315,758 12,323,128 12,317,139
25.269,239 16,618,230 14,780,375 15,483,983
112,156,731 109,049,693 104.964,317 107,996,056
355,143,133
(5,643,871)
12,442,204
260,514,602 274,716,716 286,135,287
11,290,184 11,288.643 11,287,860
15,793,662 16,109,535 16.431.726
111,255,004 114,634,082 118,138,441
370,818,624 365,524,425 384,967,795 398,853,452 416,748,977 431,993,314 (6,669,297) (2,188,467)
9,546,416 313,526
(7,638,032) (6,570,828) (9,274,738) (8,685,910)
(7,324,506) (13,895,334) (23,170,072) (31,855,982)
The following table represents the forecast with the use of the Trust to implement the Fresh Start and ADP strategy.
General Fund Five-Year Forecast with Fresh Start and ADP FY 2024FY 2025FY 2026FY 2027FY 2028FY 2029
FinalDraft Final Revised Budget ForecastForecast
FY 2030
Forecast Forecast
Beginning Amount Available for Appropriations 18,086,075 16,215,7121,490,347(698,120) (5,817,763) (11,094,972) (17,710,711) Revenues
Tax Rewnues
Other Rewnues
Contributions/Svs. From Other Funds
Total Revenues
262,958.941 270,710,303 274,625,007
66,399,883 63,166,719 58,070.513
20,140,438 30,272,305 30,640,438
283,775,540 294,851,749 305,997,986 317,615,437
58,953,162 60,387.510 61,858,374 63,366,702
34,601,061 37,043,365 39,617,879 42,325,266
349,499,262 364,149,327 363,335,958 377,329,764 392,282,624 407,474,239 423,307,405 Expenses
Personnel
Debt Service
Contributions To Other Funds
Other Expenses
Total Expenses
Operating lncome/(Loss)
Ending Amount Available for Appropriations
206,097,494 232,834,943 233,456,605 246,652,229 259,220,983 272.057,717 284,345,448 11,619,669 12,315,758 12,323,128 12,317,139 11,290,184 11,288.643 11,287,860 25,269,239 16,618,230 14,780,375 15,483,983 15,793,662 16,109,535 16,431,726 112,156,731 109,049.693 104,964,317 107,996,056 111,255,004 114,634.082 118,138,441 355,143,133 370,818,624 365,524,425 382,449,406 397,559,833 414,089,978 430,203,475 (5,643,871)
12,442,204
(6,669,297) (2,188,467)(5,119,643)
9,546,415(698,120) (5,817,763)
(5,277,209) (6,615,739) (6,896,071)
(11,094,972) (17,710,711) (24,606,782)
Approve Options for Utilizing the Section 115 Pension Trust, Initiating Fresh Starts with CalPERS, and Reviewing the General Fund Forecast
December 15, 2025
Utilization of the funding strategy reduces the projected shortfall to $5.1 million in FY 2027 and the out-year forecast to shortfalls of less than $6.9 million annually. While this funding strategy does not solve for the total challenge, it reduced the projected cumulative shortfall through FY 2030 by $7.75 million. Additionally, each fiscal year the total UAL and corresponding annual payment is impacted by the actual results from investment and non-investment factors. If CalPERS were to earn more than its 6.8 percent target investment return, the UAL would be reduced further and conversely, if CalPERS earns less than the 6.8 percent target, the UAL will increase. The General Fund Five-Year forecast is developed considering CalPERS' initially reported 11.6 percent investment return as of June 30, 2025, and future earnings of the assumed rate of 6.8 percent.
While there is no single remedy for the future budget challenges in the General Fund, the City has maximized internal means for fund transfers and support and has worked diligently over the last few years to ensure revenue collection is maximized. One example, is the increase in billing and collections for Emergency Medical Services, where revenue has increased from $6.6 million in FY 2020 to a projected $12.3 million in FY 2026. Staff will continue work on long-term strategies to stabilize and balance the budget.
COUNCIL POLICY CONSIDERATION:
The City Council's strategic planning goal of maintaining fiscal responsibility and stability will be advanced by the commitment of utilizing the Section 115 Trust funds to pay down pension obligations on a reduced repayment timeline and realizing long-term savings.
Approve Options for Utilizing the Section 115 Pension Trust, Initiating Fresh Starts with CalPERS, and Reviewing the General Fund Forecast
December 15, 2025
FISCAL IMPACT:
The Trust was established to assist the City with future pension obligations, and the proposed plan will reduce the General Fund's estimated cumulative budget deficit from FY 2027 to FY 2030 by $8.26 million. Utilizing the Trust to pay down the UAL over an accelerated period, will provide the greatest amount of financial savings through reduced interest expenses. With the City facing shortfalls in the General Fund Five-Year Forecast, the use of the Trust to stabilize and reduce the shortfalls, will reduce the amount needed to balance the Operating Budget and provide long-term benefits.
Respectfully submitted,
^3
MATTHEW E.NAWKESWORTH
Assistant City Manager
Concurred by:
<A- 'Uu^
K^rin Schnaider
Director of Finance
Approved by:
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J(<</MIGUEL MARQUE,
City Manager
Attachments:
A - Fresh Start with ADP for All Funds
B - Fresh start with ADP for the General Fund