TO: Chair and Members of the Audit Advisory Committee
FROM: Trang Nguyen, Finance Director
1. Subject
title
California Public Employees’ Retirement System (CalPERS) Annual Valuation Reports as of June 30, 2025 for the Miscellaneous and Safety Plans.
body
2. Summary
CalPERS annually prepares actuarial valuation reports for the City’s Miscellaneous and Safety pension plans to evaluate each plan’s financial condition and establish future employer contribution requirements. The valuations dated June 30, 2025, show significant improvement in the City’s pension funding position. The Miscellaneous Plan is 99.5% funded with an unfunded accrued liability (UAL) of $2.4 million, compared with 95.0% funded and a UAL of $21.8 million as of June 30, 2024. The Safety Plan is 94.9% funded with a UAL of $37.7 million, compared with 91.1% funded and a UAL of $63.3 million as of June 30, 2024.
3. Recommended Action
recommendation
1. Receive and file the California Public Employees’ Retirement System (CalPERS) Annual Valuation Reports as of June 30, 2025, for the Miscellaneous and Safety Plans.
2. Consider forming an ad hoc subcommittee to develop a pension stabilization framework for further consideration by the Audit Committee.
end
4. Discussion and Background
BACKGROUND
The California Public Employees’ Retirement System (CalPERS) prepares an annual actuarial valuation for each of the City’s pension plans. The actuarial valuation measures the assets and liabilities of each plan, evaluates its funded status, and establishes the City’s future employer contribution requirements.
The City participates in two CalPERS pension plans: the Miscellaneous Plan, which provides retirement benefits for eligible non-safety employees, and the Safety Plan, which provides retirement benefits for eligible sworn Police and Fire employees. Each plan includes multiple benefit tiers based on employee classification and date of entry into CalPERS membership.
Due to the time required for CalPERS to collect and validate employer data and complete its actuarial analysis, there is an approximate two-year lag between the valuation date and the fiscal year in which the resulting contribution requirements take effect. Accordingly, the June 30, 2025 actuarial valuations establish the City’s minimum required employer contributions for Fiscal Year 2027-28 (FY28).
Employer pension contributions generally consist of two components: the normal cost and the unfunded accrued liability (UAL) payment. Normal cost represents the actuarially determined cost of pension benefits allocated to the current year for active employees and is calculated as a percentage of pensionable payroll. A UAL exists when the actuarial value of plan assets is less than the accrued liability for benefits already earned. CalPERS amortizes these unfunded liabilities over specified periods and establishes annual required payments.
In addition to the pension liabilities reported by CalPERS, the City has outstanding Pension Obligation Bonds (POBs) issued to finance a portion of its previously existing CalPERS unfunded accrued liability. The issuance of POBs reduced the UAL reported by CalPERS by replacing a portion of the pension liability with bonded debt. Accordingly, the City's outstanding POB obligation and related annual debt service should be considered together with the CalPERS actuarial valuations when evaluating the City's overall pension-related financial obligations.
Beginning with the June 30, 2025 actuarial valuation reports, staff is establishing an annual process to formally present the City’s CalPERS actuarial valuation reports to the Audit Committee and then to the City Council. This annual review will provide an opportunity to monitor the City's pension funded status, contribution requirements, and long-term pension obligations, and to consider strategies to actively manage pension costs and the financial impact of investment volatility.
DISCUSSION
Funded Status
A pension plan's funded ratio compares the actuarial value of assets available to pay pension benefits with the actuarial accrued liability for benefits earned as of the valuation date. A funded ratio of 100% means that actuarial assets equal accrued liabilities as of that date. The unfunded accrued liability (UAL) represents the difference when accrued liabilities exceed actuarial assets.
CalPERS identifies funded status as a measure of a pension system's financial health and has established a long-term target of 100% funded status. Under its current strategic measures, CalPERS categorizes a funded status of ≥100% as On Target, 80% to 99.9% as At Risk, and <80% as Off Target. A funded ratio above 100% indicates that plan assets exceed accrued liabilities.
Both of the City's pension plans experienced significant improvement in funded status during the most recent valuation period, as summarized in Table 1.
Table 1 - Funded Status
|
|
Miscellaneous |
Safety |
|
Valuation Date |
06/30/2024 |
06/30/2025 |
06/30/2024 |
06/30/2025 |
|
Accrued Liability |
$435.9M |
$449.2M |
$709.7M |
$740.0M |
|
Actuarial Value of Assets |
$414.1M |
$446.7M |
$646.4M |
$702.4M |
|
Unfunded Accrued Liability (UAL) |
$21.8M |
$2.4M |
$63.3M |
$37.7M |
|
Funded Ratio |
95.0% |
99.5% |
91.1% |
94.9% |
The Miscellaneous Plan's funded ratio increased from 95.0% to 99.5%, placing the plan at risk from being fully funded. Correspondingly, the plan's UAL decreased by approximately $19.4 million, from $21.8 million to $2.4 million.
The Safety Plan's funded ratio increased from 91.1% to 94.9%, while its UAL decreased by approximately $25.6 million, from $63.3 million to $37.7 million. Both plans remain below CalPERS' 100% long-term funding target but are on target to being fully funded.
Funded status represents a point-in-time measurement and may change from year to year. CalPERS identifies the primary factors affecting funded status as the payment of unfunded liabilities, actual investment returns compared with expected returns, changes in actuarial methods and assumptions, benefit changes, and actuarial experience.
Changes in Unfunded Accrued Liability
A plan's UAL changes each year as actual experience differs from the assumptions used in the prior actuarial valuation. Changes may result from investment performance, demographic experience, changes in actuarial assumptions, employer contributions, and other actuarial gains or losses.
As shown in Table 1, the UAL for both plans decreased significantly during the most recent valuation period. Although this represents a substantial improvement in the City's pension position, it should not be viewed as a permanent elimination of pension exposure. Future investment losses, changes in actuarial assumptions, or other experience that differs from CalPERS assumptions may result in new unfunded liabilities.
Chart 1 - Projected Unfunded Accrued Liability
Employer Contribution Requirements
CalPERS establishes the employer normal cost rate and required UAL payment for each plan. For FY 2027-28, the Miscellaneous Plan employer normal cost rate is 11.87% of pensionable payroll and no UAL payment is required. The Safety Plan employer normal cost rate is 20.65%, with a required UAL payment of approximately $5.8 million.
Table 2 - Employer Contributions
|
|
FY 2026-27 |
FY 2027-28 |
Change |
|
Misc. Normal Cost |
11.97% |
11.87% |
-0.10 |
|
Misc. UAL Payment |
$1.866M |
$0 |
-$1.866M |
|
Safety Normal Cost |
20.10% |
20.65% |
0.55 |
|
Safety UAL Payment |
$4.933M |
$5.782M |
$0.849M |
While the Miscellaneous Plan currently has no required UAL payment beginning in FY 2027-28, this does not mean that the plan will permanently remain without an unfunded liability. CalPERS recalculates plan liabilities annually, and future actuarial gains or losses may result in new UAL and associated payment requirements.
The Safety Plan continues to have a required UAL payment. Based on the current valuation, the payment is projected to increase to approximately $6.0 million in FY 2028-29 before declining in subsequent years.
Chart 2 - Projected Employer Contributions
Pension Obligation Bonds
In 2021, the City issued approximately $286 million in Pension Obligation Bonds (POBs) to pay down a significant portion of its CalPERS unfunded accrued liability. The POBs converted a portion of the City's unfunded pension liability into fixed-rate bonded debt, providing more predictable annual repayment costs.
While the POBs reduced the City's CalPERS unfunded liability, they did not eliminate the underlying financial obligation. Instead, a portion of the City's pension liability was refinanced as bonded debt that must be repaid through scheduled debt service. The City currently makes annual POB debt service payments of approximately $16 million to $18 million through 2044.
The City's outstanding POB balance has declined through scheduled debt service payments, as summarized in Table 3.
Table 3 - POB Outstanding Balance
|
Fiscal Year Ending June 30, |
General Fund |
Business-Type Funds |
Total Outstanding Balance |
|
2021 |
$265,478,276 |
$21,006,224 |
$286,485,000 |
|
2022 |
258,348,004 |
20,441,996 |
278,790,000 |
|
2023 |
248,970,043 |
19,699,957 |
268,670,000 |
|
2024 |
238,632,971 |
18,882,028 |
257,514,999 |
|
2025 |
228,231,033 |
18,058,996 |
246,290,029 |
|
2026 |
217,731,794 |
17,228,205 |
234,959,999 |
Although the City's CalPERS funded status has improved significantly, the actuarial valuations do not reflect the City's outstanding POB debt. The POBs converted a portion of the City's CalPERS unfunded liability into bonded debt. Therefore, the City's overall pension-related financial obligations include the ongoing normal cost, remaining CalPERS UAL payments, and POB debt service.
Pension Risks
Although the City’s pension funded status has improved significantly, pension costs remain subject to a number of factors that can affect future liabilities and contribution requirements. Many of these factors are outside of the City’s direct control and can result in significant changes in pension costs from year to year.
Investment Risk. Investment earnings are the largest source of funding for CalPERS pension benefits. Actual investment returns above or below CalPERS’ assumed rate of return can result in actuarial gains or losses that affect the City’s funded status and future UAL payments. Investment performance can vary significantly from year to year.
Actuarial Assumption Risk. CalPERS periodically reviews and updates the assumptions used to calculate pension liabilities. These include the discount rate, inflation, salary growth, mortality, retirement patterns, and other demographic assumptions. Changes in these assumptions can increase or decrease actuarial liabilities even when there has been no change in pension benefits. The June 30, 2025 valuations, for example, incorporate updated assumptions resulting from CalPERS’ November 2025 Experience Study.
Discount Rate Risk. The discount rate is particularly significant because it is used to determine the present value of future pension obligations. A reduction in the discount rate increases the actuarial value of pension liabilities and can result in a lower funded ratio, higher UAL, and increased employer contributions. CalPERS currently uses a discount rate of 6.8 percent.
Amortization Risk. Changes in CalPERS’ amortization policies can affect the timing and amount of required UAL payments. Shorter amortization periods generally result in higher annual payments but pay down liabilities more quickly, while longer periods reduce near-term payments but extend costs over a longer period. As a result, annual UAL payments may increase even when the overall UAL balance is declining.
Demographic Risk. Pension liabilities are affected by actual employee and retiree experience compared with actuarial assumptions, including mortality, retirement age, employee turnover, and salary growth. Employees living longer than assumed, retiring earlier than expected, or other demographic experience can increase pension liabilities and future contribution requirements.
Legislative and Benefit Risk. Changes in State law or pension benefits may also affect future costs. Assembly Bill 1383 (McKinnor), for example, proposes changes to PEPRA Safety retirement benefits, including retirement formulas and pensionable compensation limits. If enacted, these changes could increase future pension costs for the City's Safety Plan.
Payroll and Workforce Risk. Changes in the size and composition of the City's workforce, employee compensation, and the mix of Classic and PEPRA employees can affect normal cost and future pension liabilities. While workforce reductions may reduce future benefit accruals, they do not eliminate pension benefits already earned.
POB and Debt Service Risk. The City's POB debt service is a fixed financial obligation that continues regardless of changes in CalPERS investment performance or funded status. Consequently, adverse actuarial or investment experience could result in increased CalPERS contributions while the City continues to make its scheduled POB debt service payments.
Collectively, these risks demonstrate that the City's current funded status represents a point-in-time measurement and does not eliminate the potential for future pension cost increases. Establishing a pension stabilization framework would provide the City with tools to manage these risks and reduce their potential impact on the operating budget.
Pension Stabilization Strategies
The significant improvement in the funded status of both pension plans provides an opportunity for the City to consider strategies to preserve these gains and reduce the impact of future pension cost volatility on the City's operating budget.
A pension stabilization framework could establish a disciplined approach for managing these risks and future cost fluctuations. Strategies could include establishing a target funded status, using a Section 115 pension trust, establishing criteria for additional discretionary payments, and setting aside reductions in required UAL payments or other one-time resources for future pension obligations.
Staff recommends that the Audit Committee discuss these strategies and form an ad hoc subcommittee to develop a pension stabilization framework for further consideration by the full Audit Committee
5. ATTACHMENTS
• Attachment 1 - CalPERS Annual Report - Safety, June 30, 2025
• Attachment 2 - CalPERS Annual Report - Misc., June 30, 2025