CITY OF SEBASTOPOL CITY COUNCIL
AGENDA ITEM REPORT FOR MEETING OF: June 2, 2026
=========================================================================================== To: Honorable Mayor and City Councilmembers
From: Ana Kwong – Administrative Services Director
Responsible Department: Administrative Services
Subject: Pension Update and Long Term Funding Considerations =========================================================================================== RECOMMENDATION:
It is recommended that the City Council receive and consider NHA’s pension funding analysis and provide direction to proceed with planning based on Scenarios 2 and 3, which reflect a more balanced and sustainable use of the Section 115 Pension Trust. These scenarios provide meaningful General Fund relief by smoothing Unfunded Accrued Liability (UAL) payments while preserving a significant trust balance to maintain flexibility for future uncertainties. Council direction should include guidance on the preferred level and timing of trust withdrawals, the balance between near-term General Fund relief and long-term flexibility, and whether updates to the City’s Pension Funding Policy should be developed and returned to Council as part of future budget development.
PROCESS OF AGENDA ITEM:
a. Presentation of the agenda item by the Administrative Services Director b. Introduction of Consultant
c. Questions and Discussion from Councilmembers
d. Public Comment Period
e. Council Deliberation and Motion
EXECUTIVE SUMMARY:
This staff report provides a high-level overview of the City of Sebastopol’s pension obligations, recent actuarial trends, and existing pension prefunding tools, including the City’s Section 115 Pension Stabilization Trust. The intent of this item is to provide context and information to support policy discussion and future budget deliberations, rather than to request immediate Council action.
The City participates in CalPERS for both safety and miscellaneous employees. Like many California public agencies, Sebastopol has experienced increasing employer contribution requirements over the past decade due to changes in actuarial assumptions, investment return volatility, and the amortization of unfunded accrued liabilities (UAL). These trends have ongoing budgetary implications for the City’s General Fund and enterprise operations.
In response, the City has previously taken steps to manage pension cost volatility, including the establishment of a Section 115 Trust to prefund a portion of future pension obligations. At the same time, the City continues to face a structural budget imbalance and competing long-term priorities, including infrastructure reinvestment and service sustainability. This report outlines the current pension landscape and summarizes key considerations that may inform future policy direction related to pension funding.
BACKGROUND:
The City of Sebastopol contracts with the California Public Employees’ Retirement System (CalPERS) to provide defined benefit retirement plans for its employees. Employer contribution rates are determined annually based on actuarial valuations prepared by CalPERS and approved by the CalPERS Board of Administration.
Employer contributions consist of two primary components:
• Normal Cost: The cost of benefits earned by employees in the current year. • Amortization of Unfunded Accrued Liability (UAL): Payments to reduce the difference between plan assets and actuarially determined liabilities.
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
Over time, CalPERS has lowered its assumed rate of return and modified amortization policies, which has generally resulted in higher and more volatile employer contribution requirements for participating agencies.
NHA Advisors is a municipal advisory and consulting firm based in San Rafael, California, providing services to cities throughout the State. The firm includes registered municipal advisors and specialized consulting practice groups, including a Pension and Fiscal Sustainability practice established in 2014, with a focus on pension education, financial planning and modeling, pension cost management strategies, and risk assessment for CalPERS member agencies.
The firm has previously worked with the City of Sebastopol, assisting in 2023 with a comprehensive fiscal sustainability study as well as pension strategies surrounding the establishment of theCity’s Section 115 Pension Stabilization Trust.
Through that engagement, the firm developed familiarity with the City’s CalPERS plans, financial structure, and policy considerations.
DISCUSSION:
As reflected in the City’s most recent actuarial valuations and Annual Comprehensive Financial Report (ACFR), key assumptions currently include a discount rate of approximately 6.8% (6.9% for purposes of ACFR accounting), along with updated mortality and payroll growth assumptions.
While CalPERS investment performance has generally improved since the market volatility experienced in earlier years, employer contribution rates remain sensitive to market fluctuations and assumption changes. Even in periods of strong investment returns, required contributions may continue to increase due to the long-term nature of Unfunded Accrued Liability (UAL) amortization. For example, the City is still paying off a significant portion of UAL related to the losses sustained during the 2008-09 Great Recession (-27% returns) and in FY 2022 (-7.5% returns), as well as from the 20-year amortization of UAL increases stemming from prior discount rate reductions (7.5% → 7.0% in 2016 and 7.0% →
6.8% in 2020). In positive news, CalPERS beat their targets in FY 2024 (9.5% returns) and FY 2025 (12.1% returns) and is currently at 12% year-to-date (through April 2026). Impacts of this will be discussed in the presentation, but ultimately will reduce the UAL from over $17 million to under $15 million.
Pension costs represent a significant and growing component of ongoing operating expenditures. As discussed in recent Budget Committee meetings and long-range financial forecasts, pension obligations contribute to the City’s structural budget challenges, alongside other cost pressures such as inflation, labor agreements, and infrastructure needs and pension costs are expected to remain a material driver of General Fund expenditures over the long term.
STAFF ANALYSIS:
Purpose and History
To help manage pension cost volatility, the City previously established a Section 115 Pension Stabilization Trust. Funds contributed to the trust are legally restricted for the payment of pension-related costs and are invested separately from CalPERS assets. The City initial investment to fund the trust when financial conditions allowed, with the goal of smoothing future employer contributions during periods of rate increases or market volatility.
Current Role
The Section 115 Trust provides the City with an additional financial tool, but it does not eliminate pension obligations or replace required CalPERS contributions. Policy decisions regarding whether to build, maintain, or draw upon the trust must be balanced against competing fiscal priorities, including maintaining adequate reserves and addressing ongoing operating deficits and deferred capital needs.
Recent financial modeling and consultant analyses indicate that, under various long-term scenarios, some use of pension stabilization resources may be necessary to help manage projected shortfalls in future years, particularly if new ongoing revenues are not realized. While such use would not, on its own, maintain long-term budgetary balance, it could help moderate the deficit and avoid further deterioration. Specifically, the City’s long-term forecast developed Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
by our forecast consultant assumed full depletion of the trust over 9 years, with annual withdrawals (starting in FY 2027) of around $450,000 (on average).
However, if the City is able to maintain the trust (hold off from withdrawing funds) and/or continue making regular contributions to the trust and maintain a balanced, moderate investment allocation—such as a 50/50 mix of equities and fixed income—the trust can continue to grow over time. Under such approach, investment earnings may eventually be sufficient to help offset periods of higher pension costs, reducing the need for sharp adjustments in the operating budget. Achieving this outcome requires careful balancing between ongoing contributions, investment risk, budget capacity, and other competing City priorities.
Long-Term Considerations and Highlights from NHA’s Pension Strategy Discussion As the City looks ahead, several high-level considerations may inform future pension funding strategy discussions and policy:
• How much of the structural deficit should be addressed through use of the 115 Trust? • Should it be fully depleted? Continue to be funded? Or a more balanced approach - using some of it but while still keeping enough for future “what-ifs”?
• How do the above actions impact City’s ability to address other priorities, like CIP and services? • Should updates be made to the City’s Pension Funding Policy? To help the Council understand the tradeoffs between using more or less of the trust, NHA’s presentation includes four scenarios for discussion purposes.
• Two of the scenarios (Scenarios 1 and 4) assume full depletion of the trust over the next decade. • Scenarios 2 and 3 analyze a more balanced/judicious use of the trust. • All options attempt to “smooth” the peak in UAL payments at a lower and smoother level, as demonstrated by the graphic below, to help alleviate the burden on the General Fund and enhance budget predictability. • Scenarios 2 and 3 allow the City to maintain overall payments at roughly current (FY 2026) levels (purple and blue lines below). Scenarios 2 and 3 also ensure a strong balance is maintained over the next decade (between $2.2M and $3.3M remaining).
• Maintaining that balance would give the City flexibility to deal with future unknowns, such as CalPERS assumption changes, investment volatility, or other economic shocks. • Notably, both Scenarios 2 and 3 call for a much lower withdrawal in FY 2027 (between $129K and $212K). • Scenarios 1 and 4 assume much larger withdrawals in FY 2027 (approximately $400K). • Scenarios 1 and 4 create additional relief for the General Fund but are more aggressive and assume full depletion of the trust.
While NHA intends to keep the presentation short and focused, we do note that there is also detailed numeric analysis for each of these options in Appendix A of the presentation, as well as other information related to CalPERS pensions (Appendices B and C) that could serve as helpful reading/educational material.
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City Council Meeting Packet of June 2, 2026
BUDGET COMMITTEE REVIEW:
This item was reviewed by the Budget Committee on May 18, 2026. The Committee supported and discussed the considerations associated with using more or less of the trust as part of a broader funding strategy. The analysis serves as a planning tool similar to the City’s forecasting models to support near-term decision-making while maintaining an understanding of potential long-term impacts. The Committee also discussed the potential for establishing a target range, which could be incorporated into policy in the future.
CITY COUNCIL GOALS/PRIORITIES/ AND OR GENERAL PLAN CONSISTENCY:
This agenda item represents the City Council goals/priorities as follows:
Goal 5: Achieving Greater Fiscal Resilience and Long Term Fiscal Sustainability This agenda item represents the City Council General Plan Consistency (if applicable): Not Applicable FISCAL IMPACT:
The fiscal impact associated with this item includes a professional services fee to NHA Advisors, not to exceed $12,500, for the preparation and presentation of pension and financial modeling scenarios. This cost was previously budgeted for financial advisory–related services. In addition, staff time was required to coordinate with the NHA team, prepare and review presentation materials, and develop and coordinate the associated staff report. No additional unbudgeted costs are anticipated beyond the approved consultant agreement and normal staff workload.
COMMUNITY OUTREACH:
This item has been noticed in accordance with the Ralph M. Brown Act and was available for public viewing and review at least 72 hours prior to schedule meeting date. The City has also used social media to promote and advertise the City Council Meeting Agenda Items.
As of the writing of this agenda item report, the City has not received any public comment. If staff receives public comment from interested parties following the publication and distribution of this agenda item report, such comments will be provided to the City Council as supplemental materials before or at the meeting and will be posted to the city website.
RESTATED RECOMMENDATION(S):
It is recommended that the City Council receive and consider NHA’s pension funding analysis and provide direction to proceed with planning based on Scenarios 2 and 3, which reflect a more balanced and sustainable use of the Section 115 Pension Trust. These scenarios provide meaningful General Fund relief by smoothing Unfunded Accrued Liability (UAL) payments while preserving a significant trust balance to maintain flexibility for future uncertainties. Council direction should include guidance on the preferred level and timing of trust withdrawals, the balance between $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
2026202720282029203020312032203320342035203620372038203920402041204220432044 Millions
Strategy for City’s Pension Reserves
Summary of Scenarios
Scenario 1 Scenario 2 Scenario 3 Scenario 4
UAL Payments*
Strategy for City’s Pension Reserves
Summary of Scenarios
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Annual Net Payment $1.3M $1.4M $1.5M ~$1.2M
Cumulative Cost Reduction $4.0M $2.3M $1.5M $3.9M
$362K $232K $149K $433K Average Annual Cost
Reduction
Remaining Balance ($) $0 $2.2M $3.3M $0
0% 100% 150% 0% Remaining Balance
(% of FY 2026 UAL + NC)
Last Year of Smoothing FY 2037 FY 2036 FY 2036 FY 2035
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near-term General Fund relief and long-term flexibility, and whether updates to the City’s Pension Funding Policy should be developed and returned to Council as part of future budget development.
OPTIONS:
The City Council may consider the following options during the FY 2026-27 Budget Hearing:
1. Receive the pension update and direct staff to proceed with planning based on Scenarios 2 and 3, reflecting a balanced use of the Section 115 Pension Trust that provides General Fund relief while preserving long-term flexibility.
2. Receive the pension update and direct staff to further evaluate Scenarios 1 through 4, and return to Council during the FY 2026-27 budget process with additional analysis and recommendations.
3. Receive the pension update and provide alternative policy direction regarding the use of the Section 115 Pension Trust, including preferences on withdrawal levels, timing, and long-term trust balance targets.
4. Receive the report and presentation for informational purposes only, and defer policy direction on pension trust use to the FY 2026-27 Budget Hearings.
ATTACHMENTS:
NHA Comprehensive Powerpoint Materials
APPROVALS:
Department Head Approval: Approval Date: 5/14/26
CEQA Determination (Planning): Approval Date: N/A
The proposed action is not a project under the California Environmental Quality Act (CEQA) Administrative Services (Financial) Approval Date: 5/21/26 Costs authorized in City Approved Budget: ☐ Yes ☐ No N/A Account Code (f applicable) __N/A__________
City Attorney Approval: Approval Date: _5/22/26_____
City Manager Approval: Approval Date: __5/22/26____
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
CITY OF SEBASTOPOL
CALPERS PENSION UPDATE AND
STRATEGY DISCUSSION
JUNE 2, 2026
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2 Re-Introduction to NHA Advisors
NHA Advisors’ 9 registered municipal advisors provide Municipal Advisory and Consulting services to Cities throughout California
Recent Work for City of Sebastopol
Fiscal Sustainability Project in FY 2022-23
Section 115/Pension Strategy Project in FY 2023-24
Pension & Fiscal Sustainability Practice Group was established in 2014 and has served over 100 CalPERS members
Education – Stakeholders, White Papers, Newsletters, Workshops, Labor Groups Financial Planning – CalPERS Sensitivity Analysis & Projection Modeling Cost Management Strategies – Section 115 Trusts, Strategic Additional Discretionary Payments (ADPs), POBs/UAL Restructurings, Hard and Soft Fresh Starts, Hybrid Strategies Section 115 Trust Optimization Models
Stress Testing and Risk Assessment
Pension Funding Policy Development
Featured speaker for CSMFO, CDIAC, GovInvest, FDAC
Consulting Practice Groups
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3 Today’s Discussion
I. Background on CalPERS Costs
II. Historical & Projected CalPERS Costs
III. Cost Management Strategy Overview
IV. Pension Reserve/115 Trust Smoothing Scenarios
V. Observations and Recommendations
Appendix A – Detailed Back Up Analysis for Smoothing Scenarios Appendix B – Sebastopol Pension Reserve/115 Trust Historical Trends & Considerations Appendix C – Additional CalPERS Information
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BACKGROUND ON CALPERS COSTS
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5 City of Sebastopol CalPERS Summary
City of Sebastopol has a $17.2M CalPERS Unfunded Accrued Liability (“UAL”), as of the latest CalPERS valuation for 6/30/2024
Miscellaneous Plan: $8.3M | Safety Fire Plan: $0.7M | Safety Police Plan: $8.2M CalPERS FY 2024-25 Final Investment Returns: 12.1%*
Projected to decrease UAL to $15.1M (as of 6/30/2025) Projected benefit may be partially offset by CalPERS’ non-investment adjustments resulting from CalPERS’ 2025 Asset Liability Management (ALM) Study
City has Pension Reserves totaling $3.2M as of March 31, 2026 Discretionary Pension Account established in FY 2017 (Balance: $1.1M) Section 115 Pension Trust established in October 2023 (Balance: $2.1M) City’s long-term forecast assumes full depletion of trust (~$450K annual withdrawals) over the next 9 years
Included in this presentation are additional scenarios, including recommendations, related to how the City can leverage its Pension Reserves to achieve General Fund cost-avoidance & enhance budgetary predictability
*CalPERS’ Money-Weighted Rate of Return, as reported by CalPERS Agenda Item Number 6
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City Council Meeting Packet of June 2, 2026
6 Background on How CalPERS Works
Two Payments Made to CalPERS Annually
(1) Normal Cost (“NC”): Annual
cost for current employees
(2) Unfunded Accrued Liability
(“UAL”): Annual payment to
amortize the “debt” to CalPERS
Current UAL comprised of 68 layers
(“amortization bases”), amortized
over various terms from 3 to 24 years
Causes irregular repayment shape
New UAL is created when CalPERS
investment returns <6.80%
New UAL is amortized over 20 years
(2-year lag and 5-year payment ramp
up) Source: CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM,
6.80% Investment Returns from FY 2025-26 onward.
Market Value of
CalPERS Assets:
$44.7 Million
Accrued Liability:
$59.8 Million
Shortfall (UAL):
$15.1 Million
$0
$10
$20
$30
$40
$50
$60
Millions
City of Sebastopol
CalPERS Pension Funded Status
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7 How CalPERS Benefits Get Funded
Investment
earnings used to
make up a higher
percentage
(65%-70%+) of
total
contributions
(pre-2008)
As investments
underperform
assumptions,
employers must
make up the
difference
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HISTORICAL & PROJECTED CALPERS COSTS
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9 $13.8 $14.7
$10.5
$16.6 $17.5 $17.2 $15.1
70.2% 69.8%
79.7%
69.2% 68.3% 70.1% 74.7%
74.0% 75.4%
85.1%
74.2% 73.4% 75.5%
80.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
2019 2020 2021 2022 2023 2024 2025
Million
s
UAL Funded Ratio
History of the City’s UAL Balance & Funded Ratio
Funded Ratio With and Without Pension Reserves
Source: CalPERS Actuarial Valuation Reports & CalPERS Pension Outlook Tool *CalPERS’ Money-Weighted Rate of Return, as reported by CalPERS in its ACFRs Funded Ratio w/ Pension Reserves
CalPERS Returns*: 6.5% 5.0% 22.4% -7.5% 6.1% 9.5% 12.1% Agenda Item Number 6
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10 $0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
201820192020202120222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044 Million
s
Historical & Projected CalPERS Payments (UAL + Normal Cost) Projections are best
estimates based on
CalPERS’ 12.1% FY 2025
Investment Return + ALM
Assumptions
City’s UAL + NC payment is
projected to rise to $2.5M
by FY 2029
UAL is the biggest contributor
$750K in FY 2018 → $1.3M in
FY 2025 → $1.8M in FY 2029
City’s Pension Reserves
($3.2M) are ~148% of FY
2026 pension costs (UAL +
Normal Cost)
Source: CalPERS Actuarial Valuation Reports & CalPERS Pension Outlook Tool. *Assumes FY 2024-25 investment returns of 12.1% and 6.8% investment returns thereafter. Projected UAL and Normal Cost assumes 2025 ALM impacts. $2.6M in additional cumulative
costs above FY 2026 levels
UAL Payments (12.1% FY
2025 Return + ALM)*
Normal Cost Payments*
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COST MANAGEMENT STRATEGY OVERVIEW
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12 Pension Cost-Containment Strategies – Not Mutually Exclusive Prepay UAL early in Fiscal Year (≈ 3.3% discount) City Does This When Feasible Use Cash Reserves to Pay Extra City has $3.2M in Pension Reserves (Trust + Discretionary Account)
1.Section 115 Trust – Separate trust solely dedicated to pension/OPEB
2.Additional Discretionary Payment (ADP) – Direct payments to CalPERS to reduce UAL
3.Discretionary Account– Internally held reserve earmarked for pension costs Negotiate Cost Sharing With Employees
• New employees already governed by lower cost/benefit PEPRA plans • Some agencies have negotiated employee cost sharing of the employer share of costs Fresh Start Amortization offered by CalPERS
• Pros: Smooths payment, shortens repayment period; reduces overall interest paid from shorter amortization period • Cons: New structure “locked-in” + increased annual payments in near term; still amortized at discount rate Restructure All or Portion of Remaining UAL
• Restructure portion of UAL at lower bond interest rate and “smooth out” payments for enhanced budget predictability and cash flow savings; POBs NOT recommended at this time
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PENSION RESERVE/115 TRUST
SMOOTHING SCENARIOS
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14 Strategy for City’s Pension Reserves
Preliminary Scenarios to “Smooth the Peak” in UAL Payments Scenario 1: Full Exhaustion of Pension Reserves
• $0M of Pension Reserves remain after withdrawal period Scenario 2: Pension Reserves maintained at 100% of FY 2026 UAL + NC • $2.2M of Pension Reserves remain after withdrawal period Scenario 3: Pension Reserves maintained at 150% of FY 2026 UAL + NC • $3.3M of Pension Reserves remain after withdrawal period Scenario 4: City Forecast – Full Exhaustion of Pension Reserves • Assumes Pension Reserves are exhausted over a 9-year withdrawal period, per City’s forecast All Scenarios assume the Pension Reserves achieve annual investment earnings of 5% Agenda Item Number 6
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15 $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
2026202720282029203020312032203320342035203620372038203920402041204220432044 Millions
Scenario 1: Ending Pension Reserves of $0M (FYE 2037)
Full Exhaustion of Pension Reserves
UAL Payments*
Net Payments
Smoothing Level: $1.3M
Withdrawals from Pension Reserves (FY 2027 - 2037)
$4.0M of Cumulative Cost Reduction (~$362K average/year) *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward.
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16 $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
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Scenario 2: Ending Pension Reserves of $2.2M (FYE 2036) 100% of FY 2026 UAL + Normal Cost
UAL Payments*
Net Payments
Smoothing Level: $1.4M
Withdrawals from Pension Reserves (FY 2027 - 2036)
$2.3M of Cumulative Cost Reduction (~$232K average/year) *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward.
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17 $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
2026202720282029203020312032203320342035203620372038203920402041204220432044 Millions
Scenario 3: Ending Pension Reserves of $3.3M (FYE 2036) 150% of FY 2026 UAL + Normal Cost
UAL Payments*
Net Payments
Smoothing Level: $1.5M
Withdrawals from Pension Reserves (FY 2027 - 2036)
$1.5M of Cumulative Cost Reduction (~$149K average/year) *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward.
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18 $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
2026202720282029203020312032203320342035203620372038203920402041204220432044 Millions
Scenario 4: City Forecast - Ending Pension Reserves of $0M (FYE 2035) Full Exhaustion of Pension Reserves
UAL Payments*
Net Payments
Smoothing Level: ~$1.2M
Withdrawals from Pension Reserves (FY 2027 - 2035)
$3.9M of Cumulative Cost Reduction (~$433K average/year) *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward.
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19 $0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
2026202720282029203020312032203320342035203620372038203920402041204220432044 Million
s
Strategy for City’s Pension Reserves
Summary of Scenarios
Scenario 1 Scenario 2
*Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward.
Scenario 3 Scenario 4
UAL Payments*
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20 Strategy for City’s Pension Reserves
Summary of Scenarios
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Annual Net Payment $1.3M $1.4M $1.5M ~$1.2M
Cumulative Cost Reduction $4.0M $2.3M $1.5M $3.9M
Average Annual Cost
Reduction
$362K $232K $149K $433K
Remaining Balance ($) $0 $2.2M $3.3M $0
Remaining Balance
(% of FY 2026 UAL + NC) 0% 100% 150% 0%
Last Year of Smoothing FY 2037 FY 2036 FY 2036 FY 2035
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OBSERVATIONS AND RECOMMENDATION
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22 NHA Observations and Recommendations
City has been proactive in managing rising pension costs Prepayment discount ($48K for FY 2026) and Strong Pension Reserves (148% of annual costs) Cautious/strategic leveraging (withdrawals) of the Pension Reserves is justified How much, and when, is dependent on other City priorities and budgetary constraints Options 1 and 4 (full depletion of Pension Reserves over next decade) call for a sizeable FY 2027 withdrawal of around $400K
However, City may want to consider taking a more balanced approach to withdrawing funds Given current economic/geopolitical volatility and unknown results of 2025 actuarial valuation/ALM impacts (new actuarial reports to be released August 2026), it may be prudent to defer a FY 2027 withdrawal (if financially feasible) and instead assess the timing/amount of a potential FY 2028 withdrawal at a future date If withdrawal is needed in FY 2027, Options 2 and 3 offer a more sustainable strategy that provide cost reductions, while still maintaining strong Pension Reserves to handle future volatility and unknowns Option 2: $212K FY 2027 withdrawal | Option 3: $129K FY 2027 withdrawal Pension Reserve/withdrawal strategy should be re-calibrated annually to adapt to changing CalPERS and other economic/budgetary conditions
City should work with its investment advisor (Shuster) to ensure Trust investment profile is in line with projected withdrawal schedule/risk tolerance (NHA is not an investment advisor) Agenda Item Number 6
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APPENDIX A – DETAILED BACK UP ANALYSIS FOR
SMOOTHING SCENARIOS
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Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
24 Scenario 1: Ending Pension Reserves of $0M (FYE 2037) Full Exhaustion of Pension Reserves
Fiscal Year UAL Payments* Beginning Pension
Reserves Balance
Withdrawals from
Pension Reserves
Interest Earnings of
Pension Reserves**
Ending Pension
Reserves Balance Net UAL Payment Difference vs. Current UAL Payments 2026 $1,495,345 $3,224,767 $0 $40,310 $3,265,076 $1,495,345 $0 2027 $1,641,189 $3,265,076 $373,102 $144,599 $3,036,573 $1,268,087 $373,102 2028 $1,675,000 $3,036,573 $406,913 $131,843 $2,761,502 $1,268,087 $406,913 2029 $1,774,000 $2,761,502 $505,913 $112,779 $2,368,368 $1,268,087 $505,913 2030 $1,733,900 $2,368,368 $465,813 $95,128 $1,997,683 $1,268,087 $465,813 2031 $1,691,100 $1,997,683 $423,013 $78,733 $1,653,403 $1,268,087 $423,013 2032 $1,674,000 $1,653,403 $405,913 $62,545 $1,310,034 $1,268,087 $405,913 2033 $1,657,000 $1,310,034 $388,913 $46,056 $967,177 $1,268,087 $388,913 2034 $1,638,000 $967,177 $369,913 $29,863 $627,127 $1,268,087 $369,913 2035 $1,596,700 $627,127 $328,613 $14,926 $313,439 $1,268,087 $328,613 2036 $1,527,900 $313,439 $259,813 $2,689 $56,314 $1,268,087 $259,813 2037 $1,324,400 $56,314 $56,313 $0 $0 $1,268,087 $56,313 2038 $869,100 $0 $0 $0 $0 $869,100 $0
2039 $785,900 $0 $0 $0 $1 $785,900 $0
2040 $720,700 $1 $0 $0 $1 $720,700 $0
2041 $679,300 $1 $0 $0 $1 $679,300 $0
2042 $557,500 $1 $0 $0 $1 $557,500 $0
2043 $435,000 $1 $0 $0 $1 $435,000 $0
2044 $826,100 $1 $0 $0 $1 $826,100 $0
Total $24,302,134 -- $3,984,237 $759,471 -- $20,317,897 $3,984,237 *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward. **Assumes 5.00% annual investment return in FY 2026 – FY 2044. The investment return in FY 2026 is applied pro-rata for 3 months, as the starting Pension Reserves balance is as of 3/31/2026.
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
25 Scenario 2: Ending Pension Reserves of $2.2M (FYE 2036) 100% of FY 2026 UAL + Normal Cost
Fiscal Year UAL Payments* Beginning Pension
Reserves Balance
Withdrawals from
Pension Reserves
Interest Earnings of
Pension Reserves**
Ending Pension
Reserves Balance Net UAL Payment Difference vs. Current UAL Payments 2026 $1,495,345 $3,224,767 $0 $40,310 $3,265,076 $1,495,345 $0 2027 $1,641,189 $3,265,076 $212,102 $152,649 $3,205,624 $1,429,087 $212,102 2028 $1,675,000 $3,205,624 $245,913 $148,391 $3,108,102 $1,429,087 $245,913 2029 $1,774,000 $3,108,102 $344,913 $138,159 $2,901,349 $1,429,087 $344,913 2030 $1,733,900 $2,901,349 $304,813 $129,827 $2,726,363 $1,429,087 $304,813 2031 $1,691,100 $2,726,363 $262,013 $123,218 $2,587,568 $1,429,087 $262,013 2032 $1,674,000 $2,587,568 $244,913 $117,454 $2,460,109 $1,429,087 $244,913 2033 $1,657,000 $2,460,109 $227,913 $111,610 $2,343,806 $1,429,087 $227,913 2034 $1,638,000 $2,343,806 $208,913 $106,745 $2,241,638 $1,429,087 $208,913 2035 $1,596,700 $2,241,638 $167,613 $103,701 $2,177,727 $1,429,087 $167,613 2036 $1,527,900 $2,177,727 $98,813 $104,231 $2,183,145 $1,429,087 $98,813 2037 $1,324,400 $2,183,145 $0 $109,157 $2,292,302 $1,324,400 $0 2038 $869,100 $2,292,302 $0 $114,615 $2,406,917 $869,100 $0 2039 $785,900 $2,406,917 $0 $120,346 $2,527,263 $785,900 $0 2040 $720,700 $2,527,263 $0 $126,709 $2,653,973 $720,700 $0 2041 $679,300 $2,653,973 $0 $132,699 $2,786,671 $679,300 $0 2042 $557,500 $2,786,671 $0 $139,334 $2,926,005 $557,500 $0 2043 $435,000 $2,926,005 $0 $146,300 $3,072,305 $435,000 $0 2044 $826,100 $3,072,305 $0 $154,036 $3,226,341 $826,100 $0 Total $24,302,134 -- $2,317,915 $2,319,489 -- $21,984,219 $2,317,915 *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward. **Assumes 5.00% annual investment return in FY 2026 – FY 2044. The investment return in FY 2026 is applied pro-rata for 3 months, as the starting Pension Reserves balance is as of 3/31/2026.
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
26 Scenario 3: Ending Pension Reserves of $3.3M (FYE 2036) 150% of FY 2026 UAL + Normal Cost
Fiscal Year UAL Payments* Beginning Pension
Reserves Balance
Withdrawals from
Pension Reserves
Interest Earnings of
Pension Reserves**
Ending Pension
Reserves Balance Net UAL Payment Difference vs. Current UAL Payments 2026 $1,495,345 $3,224,767 $0 $40,310 $3,265,076 $1,495,345 $0 2027 $1,641,189 $3,265,076 $129,470 $156,780 $3,292,387 $1,511,719 $129,470 2028 $1,675,000 $3,292,387 $163,281 $156,884 $3,285,991 $1,511,719 $163,281 2029 $1,774,000 $3,285,991 $262,281 $151,185 $3,174,895 $1,511,719 $262,281 2030 $1,733,900 $3,174,895 $222,181 $147,636 $3,100,350 $1,511,719 $222,181 2031 $1,691,100 $3,100,350 $179,381 $146,048 $3,067,018 $1,511,719 $179,381 2032 $1,674,000 $3,067,018 $162,281 $145,635 $3,050,372 $1,511,719 $162,281 2033 $1,657,000 $3,050,372 $145,281 $145,255 $3,050,346 $1,511,719 $145,281 2034 $1,638,000 $3,050,346 $126,281 $146,203 $3,070,269 $1,511,719 $126,281 2035 $1,596,700 $3,070,269 $84,981 $149,264 $3,134,553 $1,511,719 $84,981 2036 $1,527,900 $3,134,553 $16,181 $156,346 $3,274,718 $1,511,719 $16,181 2037 $1,324,400 $3,274,718 $0 $163,736 $3,438,454 $1,324,400 $0 2038 $869,100 $3,438,454 $0 $171,923 $3,610,377 $869,100 $0 2039 $785,900 $3,610,377 $0 $180,519 $3,790,895 $785,900 $0 2040 $720,700 $3,790,895 $0 $190,064 $3,980,959 $720,700 $0 2041 $679,300 $3,980,959 $0 $199,048 $4,180,007 $679,300 $0 2042 $557,500 $4,180,007 $0 $209,000 $4,389,008 $557,500 $0 2043 $435,000 $4,389,008 $0 $219,450 $4,608,458 $435,000 $0 2044 $826,100 $4,608,458 $0 $231,054 $4,839,512 $826,100 $0 Total $24,302,134 -- $1,491,595 $3,106,341 -- $22,810,539 $1,491,595 *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward. **Assumes 5.00% annual investment return in FY 2026 – FY 2044. The investment return in FY 2026 is applied pro-rata for 3 months, as the starting Pension Reserves balance is as of 3/31/2026.
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
27 Scenario 4: City Forecast - Ending Pension Reserves of $0M (FYE 2035) Full Exhaustion of Pension Reserves
Fiscal Year UAL Payments* Beginning Pension
Reserves Balance
Withdrawals from
Pension Reserves
Interest Earnings of
Pension Reserves**
Ending Pension
Reserves Balance Net UAL Payment Difference vs. Current UAL Payments 2026 $1,495,345 $3,224,767 $0 $40,310 $3,265,076 $1,495,345 $0 2027 $1,641,189 $3,265,076 $438,000 $141,354 $2,968,430 $1,203,189 $438,000 2028 $1,675,000 $2,968,430 $451,000 $126,216 $2,643,647 $1,224,000 $451,000 2029 $1,774,000 $2,643,647 $472,000 $108,582 $2,280,229 $1,302,000 $472,000 2030 $1,733,900 $2,280,229 $470,000 $90,511 $1,900,740 $1,263,900 $470,000 2031 $1,691,100 $1,900,740 $469,000 $71,587 $1,503,327 $1,222,100 $469,000 2032 $1,674,000 $1,503,327 $473,000 $51,658 $1,081,985 $1,201,000 $473,000 2033 $1,657,000 $1,081,985 $479,000 $30,149 $633,134 $1,178,000 $479,000 2034 $1,638,000 $633,134 $485,000 $7,407 $155,541 $1,153,000 $485,000 2035 $1,596,700 $155,541 $155,541 $0 $0 $1,441,159 $155,541 2036 $1,527,900 $0 $0 $0 $0 $1,527,900 $0
2037 $1,324,400 $0 $0 $0 $0 $1,324,400 $0
2038 $869,100 $0 $0 $0 $0 $869,100 $0
2039 $785,900 $0 $0 $0 $0 $785,900 $0
2040 $720,700 $0 $0 $0 $0 $720,700 $0
2041 $679,300 $0 $0 $0 $0 $679,300 $0
2042 $557,500 $0 $0 $0 $0 $557,500 $0
2043 $435,000 $0 $0 $0 $0 $435,000 $0
2044 $826,100 $0 $0 $0 $0 $826,100 $0
Total $24,302,134 -- $3,892,541 $667,774 -- $20,409,593 $3,892,541 *Source: CalPERS Actuarial Valuations and CalPERS Pension Outlook Tool. Assumes 6.80% Discount Rate, 12.1% FY 2024-25 Investment Returns + ALM, 6.80% Investment Returns from FY 2025-26 onward. **Assumes 5.00% annual investment return in FY 2026 – FY 2044. The investment return in FY 2026 is applied pro-rata for 3 months, as the starting Pension Reserves balance is as of 3/31/2026.
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
APPENDIX B – SEBASTOPOL PENSION RESERVE/115
TRUST HISTORICAL TRENDS & CONSIDERATIONS
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
29 Pension Reserves – Background
City’s Discretionary Pension
Account was established in FY
2017; Section 115 Pension
Trust was established in FY
2024
Combined Pension Reserves
have grown from $1M to
$3.2M due to contributions +
investment earnings
Section 115 Trust is invested
in 40% Equity/60% Fixed
Income portfolio
10.45% annualized return
since the Trust’s inception in
October 2023
The non-Trust pension
reserve is invested in money
market
Source: City
$1.0
$1.6
$1.7
$2.7 $2.8 $2.7 $2.8
$3.1
$3.3 $3.2
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
Millions
City of Sebastopol Pension Reserves
Discretionary Pension Account Section 115 Trust
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
30 Pension Reserve Smoothing – Tradeoffs
Use More Pension Reserves
• Lower annual net payment for City
• More cost reduction and budgetary predictability
• More resources for other priorities (CIP, operations, etc.) • Less dedicated resources for future pension costs
Use Less Pension Reserves
• Higher annual payment for City
• Less cost reduction
• Less resources for other City priorities
• More dedicated resources for future pension costs
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
APPENDIX C – ADDITIONAL CALPERS
INFORMATION
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
32 Now…
Assumptions have changed/grown more
conservative
Discount Rate (assumed rate of investment
returns): 8.25% → 7.00% → 6.80%
Inflation rate (prices going up)
Mortality rates (people living longer)
Shorter, more conservative amortizations
Investment returns not meeting original
expectations
Why CalPERS Costs Have Trended Higher
Then (late 1990s)…
Robust investment returns (10%+)
Retirement plans were “SuperFunded” through the late 1990s Earnings on funds were more than
adequate to cover retirement costs
Super-funded status induced
widespread retirement benefits
enhancements
Past funding policies led to
contribution holidays and “free”
benefit improvements
Historical PERS
Returns
5-Year: 8.0%
10-Year: 7.1%
20-Year: 6.7%
30-Year: 7.6%
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
33 City’s CalPERS Retirement Plans
3 Main CalPERS plans: Miscellaneous, Safety Fire, Safety Police Miscellaneous: 112 covered members; $8.3M UAL as of 6/30/2024 Valuation Safety Fire: 6 covered members; $0.7M UAL as of 6/30/2024 Valuation Safety Police: 63 covered members; $8.2M UAL as of 6/30/2024 Valuation PEPRA (effective 2013) helpful to manage long term pension costs for new employees
Enacted revised benefit levels for new plan members
Higher employee contribution rates mean more normal cost is being paid by the employee
However, 98% of current UAL comes from Classic plans and is not impacted by PEPRA
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
34 CalPERS 2025 Asset-Liability Management (ALM) Study Results How Does it Impact the City?
UAL: No material impact projected
for the City
Note, some agencies with larger
COLA’s (5-7%) seeing >10% jumps in
UAL just from ALM assumption
adjustments
Normal Cost: Annual increase of
~4.9% ($35K) starting in FY 2028
Little support/guidance from
CalPERS for further discount rate
reductions
Notable Assumptions*
• Discount Rate: No change; remains at 6.8%
• Price Inflation: Increase from 2.3% to 2.5%
• Wage Growth Assumption: Increase from
2.8% to 3.0%
• Salary Scale: Moderate to higher merit
increases for most plans
*Source: CalPERS Asset Liability Management Stakeholder Webinar (December 4, 2025)
Source: CalPERS Pension Outlook Tool
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
35 Section 115 Trust – Overview
Funds Earmarked for Pension and OPEB
What is it? Restricted Account for pension and/or OPEB Advantages:
Potential Higher Investment Returns in Managed Account In FY 2025, Moderate Risk Section 115 Trust portfolios (40-50% Equity / 50-60% Fixed Income) had investment returns of 8.5-11.0%
Longer-Term Benefit: Trust funds can grow over time and pay off a large % of UAL or OPEB liability in the future
Shorter-Term Benefit: Apply funds to “smooth” payment spikes in UAL, Normal Cost, or OPEB; can reimburse City for pensions costs made if severe budgetary challenges Flexibility – more investment options than CalPERS and the City can decide when and how to use Disadvantages:
Doesn’t directly reduce UAL until funds are transferred to CalPERS Requires reserves/surplus contributions to build account balance Investment risk (dependent on type of investment portfolio) Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
36 Additional Discretionary Payment (“ADP”)
What is it? City makes ADP directly to CalPERS and CalPERS eliminates payments associated with the portion of the UAL paid off, essentially giving the City credit at the discount/interest rate (currently 6.8%) Advantages:
Reduced UAL / higher CalPERS funding ratio
Reduced future payments
Broader, less restrictive CalPERS investment portfolio has potential for higher returns Disadvantages:
Requires reserves / surplus to fund
Re-investment and market timing risk with ADP funds
Less budgetary flexibility and investment control (vs. Section 115 Trust) Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
37 Section 115 Trust vs. CalPERS ADP Comparison
OPTION Section 115 Trust CalPERS ADP
Reduced UAL & UAL Payments
with CalPERS No Yes
Reduced Pension Liability in
Financial Report (ACFR)
No (Show up as an asset on the
City’s financial statements) Yes
Control of Investment
Strategy
Yes No
Funds Managed By Trust Administrator CalPERS
Flexibility in Uses Yes No
Enhanced Budgetary
Flexibility Yes No
Savings Varies; Depends on when City
utilizes funds to pay liabilities
Immediate; Length of time
varies based on which
amortization component is paid
off
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026
38 Classic vs. PEPRA Pension Example Comparison
Employee #1 is a Classic member and Employee #2 is a PEPRA member – both have served for 25 years and have a final average compensation of $125K
Employee #2 will have a lower pension than Employee #1 due to a lower benefit factor, and will also retire at 57 years old instead of 50 years old like the Classic member The City will save money from PEPRA’s lower pension amount and because PEPRA’s pension may be paid out for a shorter amount of time due to retirement occurring 7 years later compared to Classic The difference in pension between Classic and PEPRA is even more apparent at higher compensation levels, as there is a pensionable compensation limit of approximately $175K for PEPRA and $330K for Classic Service
Credit
Benefit
Factor
Final
Compensation
Annual
Pension
Employee #1 (Classic)
25 Years x 3.0% @ 50 x $125,000 = $93,750
Employee #2 (PEPRA)
25 Years x 2.7% @ 57 x $125,000 = $84,375
Agenda Item Number 6
Agenda Item Number 6
City Council Meeting Packet of June 2, 2026