Agenda Item #15.3
For Council Meeting of: June 2,2026
CITY OF SANTA ROSA
CITY COUNCIL
TO: MAYOR AND CITY COUNCIL
FROM: SCOTT WAGNER, CHIEF FINANCIAL OFFICER, FINANCE DEPARTMENT SUBJECT: REPORT- AUTHORIZATION TO EXECUTE AN AMENDMENT WITH CALPERS TO BEGIN FRESH START PROGRAM FOR PAYOFF OF UNFUNDED LIABILITY AGENDA ACTION: RESOLUTION
RECOMMENDATION
The Finance Department recommends that the Council, by resolution: 1) authorize the City Manager to execute an amendment to the City’s contract with CalPERS to implement a “Fresh Start” re-amortization of the City’s Unfunded Accrued Liability (UAL); and 2) approve the strategic use of $26 million in restricted pension funds to support budget stability and long-term pension cost avoidance.
EXECUTIVE SUMMARY
The City of Santa Rosa faces a citywide $482 million Unfunded Accrued Liability (UAL) based on the most recent CalPERS valuation of the City’s pension plans. Without intervention, General Fund pension payments are projected to rise to $49 million by FY 2031. Following an evaluation by NHA Advisors, staff has identified a strategy that leverages $26 million in restricted pension funds to achieve $37 million in total cost avoidance, a more balanced amortization schedule and retire the existing UAL six years earlier than currently scheduled.
GOAL
This item relates to Council Goal #1 - Achieve and Maintain Budgeting Excellence and Fiscal Stability through proactively managing pension liabilities.
BACKGROUND/PRIOR COUNCIL REVIEW
Pension funding challenges have developed over several decades and are currently impacting the majority of agencies across California. The funded ratio of the City’s pension plans stands at 71.1% as of the most recent CalPERS actuarial report. Of the $482 million in citywide Unfunded Accrued Liability (UAL), $331 million is directly attributable to the General Fund.
This debt is highly fragmented through CalPERS amortization, consisting of 101 separate layers with repayment schedules ranging from 5 to 24 years. The composite result of these layers has created an amortization schedule that is imbalanced with costs projected to peak in 2031 and not decrease from current levels until 2039.
Over the past decade, CalPERS amortization payments have increased sharply. This upward trend in pension costs is driven by increasingly conservative actuarial assumptions, such as factoring in longer life expectancies and lowering the expected return rate of investments from a high of 8.75% in the 1990s to 6.8% today. These adjusted assumptions, combined with the legacy costs of past benefit enhancements and lingering investment losses from the Great Recession, have significantly compounded the overall unfunded liability.
While the Public Employees' Pension Reform Act (PEPRA) assists in managing long-term costs for newer employees, 99% of the City's current unfunded liability (UAL) is tied to 'Classic' plans that have been closed to new hires since January 1, 2013. Over the long term, however, overall pension costs are expected to significantly decrease as a result of PEPRA's reduced benefit structures and more conservative actuarial assumptions adopted by CalPERS.
The financial impact of these factors on the City's budget has compounded rapidly. The UAL portion of the City's General Fund CalPERS payment is rising the fastest, having roughly tripled from $11 million in FY 2018 to $31 million in FY 2026. If the current repayment schedule remains unchanged, the UAL payments for the General Fund are projected to peak at $35.7 million by FY 2031. This steep trajectory represents $52 million in additional cumulative costs above current FY 2026 levels by FY 2036.
Historical and Projected Cost increases:
To proactively mitigate these rising costs, the City has actively built up $26 million in restricted funding to provide pension stability. This total comprises two sources:
Section 115 Pension Stability Trust ($14.5 million): This trust was established with $10 million in PG&E settlement funds resulting from the 2017 Tubbs Fire. Through positive investment returns the balance has grown to approximately $14.5 million.
Savings from Pension Obligation Bond (POB) Retirement: When the City Council adopted the Section 115 Pension Stability Trust, ongoing funding was identified from the annual savings achieved by paying off previously issued POBs. These savings were directed into a Pension Internal Service Fund. While contributions to this fund were suspended during recent budget reductions, the fund accumulated a balance of $11.5 million prior to the pause.
ANALYSIS
City staff and our financial advisor, NHA Advisors (NHA), have analyzed current CalPERS amortization schedules and available resources. This analysis focused on five key objectives: providing stable budgeting that matches expense growth with revenue growth, decreasing total costs, accelerating the payoff of the unfunded liability (UAL), maintaining local control over funding sources, and maximizing near-term cost avoidance.
CalPERS provides limited options for agencies to alter required contributions for unfunded liabilities. The CalPERS "Fresh Start" program is an actuarial tool that allows the City to re-amortize its UAL, essentially resetting the debt schedule to stabilize required employer contributions.
Re-amortizing Debt: It combines multiple, separate UAL bases (debt layers from different years) into a single new base. This replaces a highly variable payment structure—which was projected to peak between 2027 and 2038—with a fixed payment schedule over a set period.
Stabilizing Payments: This process smooths out escalating contribution requirements, preventing the steep spikes in annual payments projected over the next eight years.
Process & Implementation: A Fresh Start requires the new amortization base to demonstrate overall savings, meaning the schedule length can vary. Based on analysis by the CalPERS actuarial office, the City qualifies for an expected 16-year schedule.
Future Flexibility: Choosing the Fresh Start commits the City to this amortization methodology for the existing UAL bases. However, it preserves the City's ability to issue Pension Obligation Bonds (POBs) in the future for additional re-amortization if needed.
Future Adjustments: Opting into a Fresh Start only addresses current amortization bases. Future actuarial gains, losses, or assumption changes by CalPERS will be treated under the standard amortization process and will independently add to, or subtract from, future obligations.
NHA evaluated and presented three primary strategies. The City Council unanimously supported Option 1: Fresh Start with CalPERS and Payment Smoothing as the preferred approach.
This option executes a CalPERS Fresh Start amortization (16 years for the Safety plan and 15 years for the Miscellaneous plan), combined with a gradual drawdown of the Section 115 Trust over a nine-year period (2027–2035). This strategy provides several key advantages:
Cost Avoidance: Yields the highest overall savings among the three options, generating an estimated $36.6 million in total cost avoidance.
Near-Term Impact: Delivers $28.2 million in cost avoidance over the first five years alone.
Budget Predictability: Caps current UAL amortization payment growth at $32.6 million, avoiding the scheduled $35.7 million peak. When combined with the Section 115 Trust drawdown, it establishes a predictable, linear 2% annual growth in total expenses. While this level payment structure will result in higher payments than currently projected for the years 2036 through 2041, the City ultimately benefits from a flattened schedule that aligns reliably with predictable revenue growth over time.
Debt Retirement: Accelerates the retirement of the UAL debt by six years, fully paying off the existing UAL by 2042 instead of 2048.
Local Control of Funds: Retains local investment control, liquidity, and budgetary flexibility, as funds remain in the City's Section 115 Trust rather than being remitted directly to CalPERS upfront.
Projected Payment Schedule (current payments shown in bars and projected payments shown as a dotted line):
FISCAL IMPACT
Implementation of the Fresh Start and smoothing of payments with available funding has been incorporated in the City Manager’s proposed budget for Fiscal Year 2026-27 and results in $3.8 million in savings. Total savings over the next five years will be $28.2 million and $36.6 million over the 16-year life of the strategy. The proposed strategy accelerates repayment of the City’s existing citywide UAL, which is projected to be fully retired by 2042.
ENVIRONMENTAL IMPACT
Pursuant to CEQA Guidelines Section 15378, the recommended action is not a “project” subject to the California Environmental Quality Act (CEQA) because it does not have a potential for resulting in either a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment. In the alternative, the recommended action is exempt from CEQA pursuant to CEQA Guidelines section 15061(b)(3) because it can be seen with certainty that there is no possibility that the recommended action may have a significant effect on the environment.
BOARD/COMMISSION/COMMITTEE REVIEW AND RECOMMENDATIONS
This strategy was previously reviewed by the Long-Term Financial Planning and Audit Subcommittee on April 9, 2026.
City Council conducted a Study Session on April 21, 2026, that reviewed UAL and available options and unanimously directed staff to return with implementing Option 1 – Fresh Start with usage of restricted pension funds.
NOTIFICATION
Not applicable.
ATTACHMENTS
Attachment 1 -CalPERS Proposal - Fire Plan
Attachment 2 -CalPERS Proposal – Miscellaneous Plan
Attachment 3 -CalPERS Proposal – Police Plan
Resolution
PRESENTER(S)
Scott Wagner, Chief Financial Officer, Finance Department
REPORT- AUTHORIZATION TO EXECUTE AN AMENDMENT WITH CALPERS TO BEGIN FRESH START PROGRAM FOR PAYOFF OF UNFUNDED LIABILITY PAGE 3 OF 3