5D
Date: December 11, 2025
To: Chair and Members of the Finance and Governmental Operations Committee From: Ian Dailey, Finance Director | [email protected] Subject: Finance – Accept and File an Update for the California Public Employees’ Retirement System Pension Update. Expenditure: None.
RECOMMENDATION
Recommendation of the Finance Director that the Finance and Governmental Operations Committee accept and file an update on the California Public Employees’ Retirement System.
FUNDING
None required.
DISCUSSION
Since 2022, the City has provided an annual pension update to help inform residents on the basics of pensions, data on outcomes with CalPERS, and impacts to the City’s financials as a separate standalone topic outside of the budget process.
The City of Torrance participates in the California Public Employees’ Retirement System (CalPERS) for Miscellaneous and Safety employees. Employees that qualify for CalPERS are entitled to a defined benefit pension plan that is a three-factor formula of age, years of service, and pensionable income. In order to fund this defined benefit plan, the City makes payments each fiscal year, broken into two categories: normal cost and unfunded accrued liability (UAL). These two terms are defined below:
Normal Cost: this represents the annual cost for current employees UAL: this represents the annual payment to CalPERS to amortize the amount owed to CalPERS. Each year CalPERS quantifies how much the City needs to have as a balance to pay for future accrued benefits. If the market value of the assets is less than the actuarial liability, then a UAL payment is amortized over 20 years to pay down a portion of the principal balance
As of June 30, 2025 (unaudited), the City’s UAL balance stands at $215.1 million, which represents a funded status of 88.9%. In October of 2020, the City issued $349.5 million in Lease Revenue Bonds (2020 LRB) and utilized the proceeds to make an additional discretionary payment to CalPERS. The City was able to leverage historically low interest rates, borrowing the funding at 3.43%, which was much lower than the CalPERS discount rate of 7.0% at the time. At the time, it was estimated this transaction would yield approximately $172.2 million over the 1 Finance and Governmental Operations Committee
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duration of the bond issuance. As of June 30, 2025 (unaudited), the balance of this bond stood at $323.4 million.
At this same time, the City established a Section 115 Trust utilizing the California Employers’ Pension Prefunding Trust (CEPPT) with CalPERS. Given the recurring savings noted previously from issuing the 2020 Lease Revenue Bonds, City Council committed to contributing at least 20% of the annual savings from issuing the bonds into the CEPPT as a pension reserve fund that could be utilized to offset rising pension costs in the future. As of June 30, 2025 (unaudited), the balance in this fund stood at $40.9 million. The City was able to make significant additional contributions in FY23-24 and FY24-25 as a result of strong CalPERS performance in FY20-21.
The largest driver impacting the City’s contribution to CalPERS each year is a result of underlying investment performance of the fund. As shown below, there has been variability with the fund’s performance. In any year when investment performance exceeds or falls short of the target discount rate, it has a direct impact to the City’s contribution. The impact of these results are incorporated into the City’s contribution three years following. If investment performance falls short, the additional UAL payments ramps up over 5 years with a total amortization period of 20 years.
As investment performance varies, so does the City’s funded status of its plan. The unfunded balance is then incorporated into the City’s UAL payment each year. A summary of the City’s funded status is shown below for the last five years:
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As shown above, over the last five years, the City’s funded status has incrementally improved even after controlling for the 2020 LRBs issued by the City. With the investment returns for CalPERS in FY24-25 hitting 12.1 % these impacts will be incorporated into the FY26-27 Operating Budget and Capital Improvement Plan’s 10-year projection accordingly as it will begin to affect the City’s contribution in FY27-28 accordingly.
The City continues to plan proactively for rising pension costs through:
Maintaining CEPPT Fund
Incorporating multi-year pension projections into the City’s long-range financial models. Monitoring changes to actuarial assumptions and investment performance.
These strategies help ensure that the City can absorb rising costs while maintaining service levels.
FY20-21 FY21-22 FY22-23 FY23-24 FY24-25
C alPERS Funded Status 70.4% 104.6% 88.4% 87.6% 88.9%
C alPERS Funded Status w/ 2020 LRB 70.4% 87.1% 74.5% 74.4% 76.1% 3