PISMO BEACH CITY COUNCIL STAF REPORT
Agenda Item #12.B
Meetin Date: October 20, 2026
TITLE:
California Public Employees’ Retirement System (CalPERS) Pension Funding and Unfunded Accrued Liability Status
RECOMMENDATION:
No action recommended; for information only.
DISCUSSION:
The City has taken a prudent, long-term approach to managing its CalPERS pension obligations. Since 2015, the City has made $6.0 million in additional discretionary payments (ADPs) above its required contributions. These payments reduced the City’s unfunded accrued liability (UAL) and future required payments and are estimated to have avoided approximately $6.1 million in cumulative interest costs through Fiscal Year 2042.
In addition to making ADPs when financially appropriate, the City negotiated new lower- cost retirement tiers, implemented the benefit formulas required by the California Public Employees’ Pension Reform Act of 2013 (PEPRA), increased employee contributions toward pension costs, fully funded its annual CalPERS obligations, and incorporated projected pension costs into its long-term financial planning.
Together, these actions demonstrate the Council’s commitment to fiscal responsibility, intergenerational equity, and the long-term sustainability of both employee retirement benefits and essential City services.
Background
CalPERS retirement benefits are funded from three principal sources: employer contributions, employee contributions, and earnings generated by CalPERS investments.
Chart 1 illustrates the percentages, or cents per dollar, of contributions for each dollar of public employee pension costs.
Chart 1: CalPERS Funding Sources for Each Dollar of Pension Costs
Council Agenda 10-20-2026 12.B-1
Each year, CalPERS completes an actuarial valuation of the City’s pension plans and determines the contributions required from the City. The City’s required employer contribution generally consists of two components:
Normal cost: the actuarially determined cost of pension benefits earned by active employees during the current year, expressed as a percentage of payroll. Normal cost rates vary by retirement tier because each tier provides a different benefit formula.
Unfunded accrued liability (UAL) payment: the annual amount required to pay down the difference between the actuarial value of benefits already earned and the assets available to fund those benefits. CalPERS amortizes this liability over established periods and applies its actuarial interest rate to the outstanding balance.
The UAL can increase or decrease for reasons that are not fully within the City’s control, including CalPERS investment performance, changes in actuarial assumptions or the discount rate, employee and retiree demographic experience, and differences between projected and actual payroll. Accordingly, the UAL should be evaluated as a long-term obligation rather than solely as a measure of current-year financial performance.
Impact of the Normal Cost and UAL cost on Annual Budgets In FY 2026, normal pension costs paid by the City and employees totaled approximately $1.20 million, and the City’s required UAL payment was approximately $1.93 million.
These amounts represented approximately 1.9% and 3.1%, respectively, of the City’s all- funds operating budget. Table 1 shows these normal costs, unfunded liability payments, all funds operating budget, and the percentage of the pension costs compared to the operating budget.
Table 1: FY 2021 to FY 2026 Pension Costs Compared to Operating Budgets
Based on the June 30, 2024 CalPERS actuarial valuation, required UAL payments are projected to peak in FY 2032 and then decline. The decline reflects the payoff of existing amortization bases and, in part, the growing share of employees covered by lower-cost PEPRA formulas. These projections assume no additional benefit enhancements.
Fiscal
Year
Normal
(current)
Pension
Costs
Unfunded
Liability
Payment
(Principal and
Interest)
All Funds
Operating
Budget
Normal
Pension
as % of
Operating
Budget
CalPERS
Unfunded
Liability as
% of
Operating
Budget
FY 2021 823,816$ 1,288,444$ 34,816,106$ 2.4% 3.7% FY 2022 845,851 1,481,671 41,030,496 2.1% 3.6% FY 2023 925,642 1,603,821 42,008,617 2.2% 3.8% FY 2024 1,019,691 1,429,749 51,646,934 2.0% 2.8% FY 2025 1,091,172 1,669,693 50,717,338 2.2% 3.3% FY 2026 1,198,778 1,934,524 61,866,757 1.9% 3.1% Council Agenda 10-20-2026 12.B-2
Chart 2 illustrates the City’s UAL payments projected from FY 2027 to FY 2044 based on the June 30, 2024 CalPERS actuarial valuation.
Additional Discretionary Payments to Reduce Interest Costs Recognizing that the UAL accrues interest at the CalPERS actuarial discount rate (currently 6.8%), the City has used prior fiscal years’ personnel cost savings, to reduce the principal balance when doing so was financially advantageous and consistent with other City priorities. Since 2015, the City has made the following ADPs as illustrated in Table 2.
Table 2: City Additional Discretionary Payments to CalPERS to Reduce UAL
Fiscal Year Additional Discretionar Pa ment
2015 $1,000,000
2018 $2,000,000
2022 $1,000,000
2024 $1,000,000
2026 $1,000,000
Total $6,000,000
These payments were made in addition to the City’s required employer contributions.
Each ADP reduced the City’s outstanding pension liability and the balance on which future interest would otherwise accrue. As a result, the payments reduced future UAL payment requirements and generated significant long-term savings. $-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Chart 2: CalPERS Unfunded Accrued Liability Payments
Public Safety Miscellenous Fire Safety
Council Agenda 10-20-2026 12.B-3
Based on the projected interest savings at the time the payments were reviewed, the City’s $6.0 million in ADPs are estimated to have avoided approximately $6.1 million in cumulative interest costs and reduced future required contributions through FY 2042.
Actual savings depend on CalPERS’ actuarial experience and future assumptions.
Negotiate and Implement Lower-Cost Retirement Tiers
The City has also addressed pension costs prospectively through changes to retirement benefits. The City negotiated new retirement tiers (tier 2) with lower-cost benefit formulas for both Safety Police (for sworn police officers) and Miscellaneous (all employees except sworn police officers) plans. Beginning January 1, 2013, eligible new employees became subject to PEPRA retirement formulas (tier 3), which generally provide a lower benefit formula, a higher retirement age, and pensionable compensation limits compared with many legacy formulas.
These changes preserved benefits already earned by existing employees while reducing the cost of benefits earned by future employees. As workforce composition gradually shifts toward the newer tiers, these changes support lower long-term normal costs and reduce the City’s exposure to future pension liabilities.
CalPERS retirement plans provide a defined benefit to each retired employee based on a set percentage of an employee’s salary multiplied by the number of years that the employee contributed to the CalPERS system, starting at the stated retirement age of each Plan tier. The City has three main retirement plans, each with two or three benefit tiers, as illustrated in Chart 3:
Chart 3: City’s CalPERS Retirement Plans
Each tier within each plan calls for a different benefit formula and normal cost, with the 1st tier costing the most and the 3rd tier (PEPRA) costing the least to the employer.
Beginning with the June 30, 2024 valuation, CalPERS combined the tiers within each pooled plan for UAL reporting. This change did not alter employee benefits; normal cost rates remain separate by tier.
Miscellaneous Plan (All
Employees except
Sworn Police Officers)
• First tier provides a
benefit of 2.5% at age
55 • Second tier provides a
benefit of 2.0% at age
60 • Third tier provides a
benefit of 2.0% at age
62 Safety Police Plan (for
Sworn Police Officers)
• First tier provides a
benefit of 3.0% at age
50 • Second tier provides a
benefit of 3.0% at age
55 • Third tier provides a
benefit of 2.7% at age
57 Safety Fire Plan
• First tier provides a
benefit of 2.0% at age
50 • Third tier provides a
benefit of 2.7% at age
57 Council Agenda 10-20-2026 12.B-4
Increased Employee Contributions
Through collective bargaining and employment agreements, employees have assumed a greater share of pension costs. In addition to required member contributions, employees contribute toward the City’s normal cost, where applicable. These negotiated cost-sharing arrangements reduce the City’s pension costs and reflect a shared commitment to maintaining sustainable retirement benefits. Table 3 summarizes the City’s normal cost rate, the employee cost-sharing contribution, the resulting net City rate, and the employee contribution rate.
Table 3: Employee Contributions Toward City’s Normal Cost Rate
A B C = A - B D
Plan
City
Normal
Cost Rate
Employee
Pick-up City Rate
Employee
Rate
Miscellaneous - T1 14.16% 0.00% 14.16% 8.00%
Miscellaneous - T2 10.18% 1.00% 9.18% 8.00%
Miscellaneous - T3 (PEPRA) 7.93% 1.75% 6.18% 9.50%
Police - T1 27.42% 3.00% 24.42% 12.00%
Police - T2 23.09% 3.00% 20.09% 12.00%
Police - T3 (PEPRA) 13.91% 0.50% 13.41% 14.25%
Annual Funding and Long-Term Planning
The City has consistently budgeted and paid all required CalPERS contributions. Staff reviews annual actuarial valuation reports and CalPERS projections and incorporates anticipated normal-cost rates and UAL payments into the City’s two-year budget and long- term financial forecasts. This allows the City to plan for pension costs alongside available fund balances, infrastructure, service delivery, and other community priorities.
The City evaluates potential ADPs when prior year personnel costs savings are available.
Before recommending an additional payment, staff considers cash flow, competing capital and operational needs, the estimated avoided interest cost, and fund balances. This measured approach has allowed the City to reduce pension debt without compromising essential services or other long-term obligations.
FY 2025 and FY 2026 Investment Return Expected to Improve Funded Status CalPERS has reported investment returns of 11.6% in FY 2025 and a preliminary 14.8% for FY 2026, both above its 6.8% actuarial assumed rate of return. These results should improve plan assets and funded status relative to actuarial expectations. The reported returns would be reflected in the FY 2025 and FY 2026 actuarial valuation reports and will affect required employer contributions beginning in FY 2028 and FY 2029, respectively. The FY 2025 actuarial valuation reports are expected to be published in November 2026. Final impacts will also depend on the plans’ complete actuarial Council Agenda 10-20-2026 12.B-5
experience, including demographic gains or losses and any changes in assumptions or methods.
The strong preliminary return is encouraging, however, the City’s long-term strategy remains focused on disciplined funding rather than any single year of investment performance. The City’s prior ADPs provide a lasting benefit because they permanently reduced the outstanding principal on which future UAL costs are calculated.
Funded Status and Total Unfunded Accrued Liability
The funded status of the City’s retirement plans are determined by comparing the assets it needs to cover all its long-term obligations using various actuarial assumptions compared to the market value of its existing assets. Although the funded status is a moving target depending on the amount of contributions into CalPERS and the market value of CalPERS investments, an 85% to 90% funded rate would allow CalPERS to support current and future retirement benefits, while a 50% funded rate would mean that the pension system would likely not be able to earn sufficient amounts to deliver promised benefits. Since the City is currently at approximately 76.8% funding as of the June 30, 2024 valuation, and CalPERS earnings for FY 2025 and FY 2026 were 11.6% and a preliminary 14.8%, respectively, the City’s funded status should improve in the next two valuations.
Funded Status as of June 30, 2024 Valuation: 76.8%
As of the most recent June 30, 2024 CalPERS actuarial valuation, the City’s retirement plans have a combined funded status of 76.8%, representing the weighted average across the Miscellaneous, Safety Police, and Safety Fire plans. Beginning with this valuation, CalPERS consolidated the benefit tiers within each pooled plan for UAL reporting. Previously, funded percentages were reported separately by benefit tier, with the City’s PEPRA plans funded at approximately 89% to 90%. The combined funded status of 76.8% therefore reflects both the more highly funded PEPRA tiers and the less highly funded Classic tiers.
The unfunded portion of the City’s retirement plans, or the UAL, as of June 30, 2024 for all funds is $22.36 million, including $11.59 million for the Miscellaneous Plan, $9.26 million for the Safety Police Plan, and $1.50 million for the Safety Fire Plan, which covers former fire employees). Table 4 illustrates the funded status and UAL of the three retirement plans, along with the combined totals.
Table 4: Funded Status of Each Retirement Plan and Combined Total
Plan
Funded
Status %
as of
6/30/24
Unfunded
Accrued
Liability (UAL)
as of 6/30/24
% of
total
UAL
%
funded
all plans
Miscellaneous 76.50% $ 11,592,279 52% 39.7%
Police 77.60% 9,262,337 41% 32.1%
Fire 74.00% 1,503,935 7% 5.0%
Total All Plans $ 22,358,551 76.8%
Council Agenda 10-20-2026 12.B-6
Proposed Changes to PEPRA and Impacts to Pension Costs
Assembly Bill 1383 proposed significant changes to PEPRA benefits for public safety employees, including reducing the age for the maximum safety benefit factor from 57 to 55, increasing the pensionable-compensation limit, and authorizing employers and employee organizations to negotiate a new retirement formula of up to 3.0% at age 55.
The proposed changes generally would have applied to future service rather than benefits previously earned.
After passing the Legislature, AB 1383 was vetoed by Governor Newsom on September 20, 2026. The Governor cited the potential for significantly increased state and local government costs and expressed concern that partially reversing PEPRA’s reforms could create pressure for additional benefit enhancements and increase risks to public retirement systems. Accordingly, the proposed changes will not take effect.
Although AB 1383 was vetoed, similar proposals may be introduced in the future. If enacted, such changes could increase the City’s normal cost, employee contributions, and long-term pension liabilities. Any locally optional benefit enhancement would also require actuarial analysis, collective bargaining, Council approval, and a CalPERS contract amendment. Staff will continue monitoring pension legislation and incorporate any enacted changes into the City’s long-term financial forecasts.
Conclusion
The City has taken a disciplined, multi-faceted approach to managing its pension obligations. By paying every required contribution, contributing an additional $6.0 million toward the UAL, negotiating more sustainable retirement tiers, increasing employee contributions, and incorporating pension costs into long-term planning, the City has reduced future costs while maintaining its commitments to employees and the community.
CalPERS’ preliminary 14.8% investment return for fiscal year FY 2026 is a favorable development that is expected to benefit plan funding when it is incorporated into future valuations. Nevertheless, pension costs will continue to be affected by long-term investment performance, actuarial assumptions, and demographic experience. The City’s proactive decisions have reduced its financial exposure and strengthened its long-term fiscal position regardless of year-to-year market fluctuations.
FISCAL IMPACT:
No fiscal impact from the report itself—information only.
ATTACHMENTS:
None
Submitted by: Nadia Feeser, Administrative Services Director City Manager Approval:
Council Agenda 10-20-2026 12.B-7