ACTION:
____________________________
Clerk/Secretary
Department: Finance Item No: D3
Prepared by: Mike Sylvia, Director/Treasurer Meeting Date: April 14, 2026 Approved by: John Conley, City Manager Agenda Location: Discussion SUBJECT: PENSION FUNDING STRATEGIES TO ADDRESS UNFUNDED ACTUARIAL LIABILITIES RECOMMENDATION: Receive presentation, discuss strategies to fund the City’s pension liabilities and provide direction to staff.
CORRELATION TO CITY COUNCIL GOALS: Fiscal Responsibility.
PRIOR ACTION: On February 1, 2022, conducted a workshop on pension funding strategies and provided direction to staff (No Vote).
STATEMENT ON THE SUBJECT: This item is a follow up to the original pension funding discussion completed in early 2022. At that time, staff was given direction from Council to add the topic to the list of City Council goals on a five-year rotation basis. Staff is bringing this second iteration forward slightly early due to financial market dynamics, recent year capital appreciation and near-term volatility within the City’s Section 115 Pension Trust, and for fiscal planning purposes in association with the next biennial budget process for Fiscal Year (FY) 2027/28 and 2028/29. Pending Council direction, staff will plan to bring this topic back no later than spring 2031, consistent with the five-year iteration.
The California Public Employees’ Retirement System (CalPERS) was established in 1932 during the Great Depression. In the ensuing 94 years, it has become the world’s largest pension system serving more than 2 million members and partnering with thousands of public employers in managing a pension fund with a market value of approximately $560 billion as of the end of FY 2024/25.
While the market value of the CalPERS pension system has more than tripled since 2009, its worst year in the late 2000s, the challenges it has faced since then and expectations of the same in the future are significant. First, prior to the 1990s, a majority of the pension’s investments were in fixed income investments, primarily US Treasuries, which made projecting cashflows and meeting the system’s obligations to pensioners straightforward. However, since that time, as the rate of return on these fixed income investments has declined, CalPERS has had to further diversify the system’s assets into other investments, such as US and global equities. These investments are riskier than fixed income investments, but with that risk they also provide potentially higher returns. Those returns are needed with the overall declining yields in fixed income returns over the last two decades. Next, the system’s actuarial assumptions have changed, most notably, an extended duration of benefits payouts due to greater life expectancy of its members. In addition to the actuarial changes, benefits were enhanced in the early 2000s after the system’s funded ratio reached an apex of 128 percent in 1999. Lastly, the overall expected rate of investment return of the pension system (the discount AGENDA
REPORT
CITY COUNCIL
COMMUNITY DEVELOPMENT COMMISSION
SUCCESSOR AGENCY
BUENA SANITATION DISTRICT
JOINT POWERS FINANCING AUTHORITY
Directed staff to gather more information from investment advisors and bring back for discussion as part of the Year End Fund Balance. No vote taken.
ACTION:
____________________________
Clerk/Secretary
Department: Finance Item No: D3
Prepared by: Mike Sylvia, Director/Treasurer Meeting Date: April 14, 2026 Approved by: John Conley, City Manager Agenda Location: Discussion SUBJECT: PENSION FUNDING STRATEGIES TO ADDRESS UNFUNDED ACTUARIAL LIABILITIES RECOMMENDATION: Receive presentation, discuss strategies to fund the City’s pension liabilities and provide direction to staff.
CORRELATION TO CITY COUNCIL GOALS: Fiscal Responsibility.
PRIOR ACTION: On February 1, 2022, conducted a workshop on pension funding strategies and provided direction to staff (No Vote).
STATEMENT ON THE SUBJECT: This item is a follow up to the original pension funding discussion completed in early 2022. At that time, staff was given direction from Council to add the topic to the list of City Council goals on a five-year rotation basis. Staff is bringing this second iteration forward slightly early due to financial market dynamics, recent year capital appreciation and near-term volatility within the City’s Section 115 Pension Trust, and for fiscal planning purposes in association with the next biennial budget process for Fiscal Year (FY) 2027/28 and 2028/29. Pending Council direction, staff will plan to bring this topic back no later than spring 2031, consistent with the five-year iteration.
The California Public Employees’ Retirement System (CalPERS) was established in 1932 during the Great Depression. In the ensuing 94 years, it has become the world’s largest pension system serving more than 2 million members and partnering with thousands of public employers in managing a pension fund with a market value of approximately $560 billion as of the end of FY 2024/25.
While the market value of the CalPERS pension system has more than tripled since 2009, its worst year in the late 2000s, the challenges it has faced since then and expectations of the same in the future are significant. First, prior to the 1990s, a majority of the pension’s investments were in fixed income investments, primarily US Treasuries, which made projecting cashflows and meeting the system’s obligations to pensioners straightforward. However, since that time, as the rate of return on these fixed income investments has declined, CalPERS has had to further diversify the system’s assets into other investments, such as US and global equities. These investments are riskier than fixed income investments, but with that risk they also provide potentially higher returns. Those returns are needed with the overall declining yields in fixed income returns over the last two decades. Next, the system’s actuarial assumptions have changed, most notably, an extended duration of benefits payouts due to greater life expectancy of its members. In addition to the actuarial changes, benefits were enhanced in the early 2000s after the system’s funded ratio reached an apex of 128 percent in 1999. Lastly, the overall expected rate of investment return of the pension system (the discount AGENDA
REPORT
CITY COUNCIL
COMMUNITY DEVELOPMENT COMMISSION
SUCCESSOR AGENCY
BUENA SANITATION DISTRICT
JOINT POWERS FINANCING AUTHORITY
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MEETING DATE: APRIL 14, 2026 PAGE 2
SUBJECT: PENSION FUNDING STRATEGIES TO ADDRESS UNFUNDED ACTUARIAL LIABILITIES rate), has declined from 8.25 percent in the early 2000s to the current rate of 6.8 percent. In summary, CalPERS now must invest in a more diverse and riskier set of investments to provide retirement benefits for a longer period and in some cases with larger payouts, while projecting a lower return on those investments.
Given the challenging environment noted above that has developed since the turn of the millennium, CalPERS’ returns have predictably become more volatile. In fact, from the mid-1980s through 2000, the system only had one year with negative investment returns (1984) and only two others with returns below the discount rate (1988 and 1994.) Conversely, during the 2001 – 2025 period, there were four years with negative returns (2001, 2002, 2008, 2009, and 2022.) These declines were due to the Dot Com crash for the first two, the Great Recession for the second two, and the last one due to a combination of widespread market turmoil, high inflation, and simultaneous drops in both public equities and fixed income assets, which make up traditional diversification strategies. In addition to those five years of declines, seven other years saw returns below the CalPERS target discount rate (2003, 2012, 2015, 2016, 2019, 2020, and 2023.) The chart below summarizes much of the 21st century CalPERS return volatility and slow progress of funding ratio.
Source: CalPERS Annual Comprehensive Financial Reports (ACFRs)
This volatility is shared by all the CalPERS member agencies and is reflected in escalating annual expenditures paid to CalPERS and a significant shortfall of assets to fund each agency’s obligations to retirees. There are two components of the expenditures paid to CalPERS: Normal Costs and annual amortization payments of unfunded actuarial liabilities (these liabilities are known as UAL). In nominal dollar terms, Normal Costs escalate consistent with increases in total payroll for the City. As a percentage of payroll, Normal Costs are expected to decline over the next 20 years as a byproduct of shifting categories of retirement benefits among City staff (Classic versus PEPRA). These two employee categories will be detailed below.
UAL represents the fixed annual payment for past service; however, unlike Normal Costs, UAL can vary greatly from year to year depending on the actual investment return from CalPERS included in the calculation.
In essence, UAL represents a pension’s shortfall of assets to fund retirement benefits. When a pension is fully funded at 100 percent, there is no UAL. Historically, there have been points in time when CalPERS has been fully funded, although it has not occurred since 2007, just before the Great Recession.
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SUBJECT: PENSION FUNDING STRATEGIES TO ADDRESS UNFUNDED ACTUARIAL LIABILITIES Given the additional investment return uncertainty seen in the 21st century, in 2013 the Public Employees Pension Reform Act (PEPRA) was enacted. This essentially created two sets of employees: Classic and PEPRA. In general, PEPRA employees’ retirement benefits are reduced compared to Classic employees in the same job classification, which will assist CalPERS as a whole, as well as the City in funding retirement benefits in the future. However, this effect will take a long time, and based on current estimates, the City is not expected to be entirely PEPRA-staffed until well into the 2040s.
While the addition burden of UAL is material, the City has been proactive in addressing the issue, most notably creating a Section 115 Pension Trust in 2017. Section 115 Trust accounts are financial tools that allow municipalities to set aside dedicated resources for pension funding and invest them beyond the 60-month duration limit of the City’s pooled portfolio and invest in a much broader pool of investments, including equities.
Currently the City’s trust is invested 50 percent in equities and 50 percent in fixed income with an approximate market value of $24.8 million as of March 31, 2026.
Staff have analyzed the City’s future CalPERS pension obligations closely with the City’s municipal advisor, NHA Advisors, and anticipates annual CalPERS UAL obligations to be elevated above the current fiscal year beginning in FY 2026/27 through 2036/37, with FY 2028/29 through 2030/31 being the three-year peak of escalation. Notably, staff forecast sufficient funding for FY 2026/27 CalPERS obligations with budgeted revenues (year two of the current Biennial Operating Budget); however, after that, starting in FY 2027/28, staff anticipate these elevated UAL obligations will require a partial funding source to nominally equalize the annual UAL amounts. This item will present two scenarios utilizing a portion of the City’s Section 115 Trust to achieve this equalization: 1) maintaining 100 percent of Total CalPERS annual expenditures or 2) maintaining 150 percent of Total CalPERS annual expenditures, consistent with the current operating limits of the City’s CalPERS reserve as a part of City Council Policy 200-19, Use of Year End Fund Balance and General Fund Reserves.
FISCAL IMPACT: There is no direct fiscal impact associated with this discussion. Any future fiscal impact is dependent upon the City Council’s direction provided to staff during the workshop. Any direction provided by City Council will be brought back for formal consideration by Council with requisite fiscal impacts provided at that time.
EXHIBITS:
1.City Council Policy 200-19, Use of Year End Fund Balance and General Fund Reserves 04/14/2026 D3 3 of 4
Vista City Council Policy
200-19 USE OF YEAR END FUND BALANCE AND GENERAL FUND
RESERVES
PURPOSE
Establish guidelines for the use of any funds remaining at the end of a fiscal year commonly referred to as a “Year End Fund Balance”).
POLICY
Any available amount of a Year End Fund Balance should be strategically used to meet current budget year needs, enhance the City’s infrastructure, strengthen the City’s financial position, or support one-time uses that align with the City Council’s adopted goals. Given these criteria, use of a Year End Fund Balance is authorized for the following purposes:
1. If existing, close any remaining structural deficit amount in the budget.
2. Maintain the City’s Emergency Reserve Account at a range of 30% to 35% of the greater of the two fiscal years’ original General Fund appropriations (including Transfers Out to other funds) within the current biennial Operating Budget or the second year (mid-term) amended and adopted Operating Budget of the same.
3. Maintain the City’s Section 115 Pension Trust balance to a range of 1.0 to
1.5 times the total annual CalPERS pension obligation (both Unfunded Actuarial Liability and Normal Costs) of the greater of the two fiscal years’ original pension expenditure appropriations within the current biennial Operating Budget or the second year (mid-term) amended and adopted Operating Budget of the same.
4. Other uses as identified in the current fiscal year fourth quarter financial report, or as directed by a majority of the City Council.
Items are ranked in priority order. Funds required to satisfy Item #1, if needed, should be allocated in full. After Item #1 has been satisfied, any remaining Year End Fund Balance may be allocated to Items 2 through 4, by a majority vote of the City Council.
HISTORY
Adopted June 14, 2011, City Council Resolution No. 2011-121.
Amended October 11, 2016, City Council Resolution No. 2016-151.
Amended November 13, 2018, City Council Resolution No. 2018-175.
Amended October 24, 2023, City Council Resolution No. 2023-185.
Amended September 24, 2024, City Council Resolution No. 2024-154 200-19 (1)
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