Pensions

The following slides were presented at the March 24, 2026, City Council Meeting and compare the City’s current Baseline Scenario — which assumes no Additional Discretionary Payments (“ADPs”) toward pension liabilities — against Scenarios 1 and 2, which incorporate $1.3 million of additional pension funding as described on the third slide.

Under the Baseline Scenario, the City continues making only the required CalPERS contributions without additional discretionary paydowns. Scenarios 1 and 2 illustrate the potential impact of making supplemental ADPs over time to accelerate improvement in the City’s pension funded status.

Based on the projections presented, the City reaches approximately 90% funded status by 2034 under the Baseline Scenario, 2032 under Scenario 1 and by 2030 under Scenario 2 

A discussion regarding 90% funding follows the slide presentation.

Importantly, these scenarios highlight one of the central policy discussions facing the City: balancing pension liability reduction with other critical financial priorities, including infrastructure investment, reserve rebuilding, public safety funding, and long-term operational sustainability. The scenarios also demonstrate that meaningful improvements in pension funding levels can be achieved over time through disciplined and consistent funding strategies without necessarily requiring immediate full funding of the pension liability.

When we talk about pension liability, it is generally not considered necessary or even optimal for most California cities to target 100% pension funding at all times. In fact, many public finance professionals would view maintaining funding levels in the range of approximately 80%–90% as financially healthy and consistent with long-term municipal best practices, depending on the circumstances.

There are several reasons for this.

1. Pension Liabilities Are Long-Term Obligations

Public pension liabilities are paid over decades, not immediately. Cities are not expected to have every future pension dollar sitting in cash today. Instead, pension systems such as California Public Employees' Retirement System are designed to:

• receive ongoing employer contributions 
• receive employee contributions 
• generate long-term investment returns 

As a result, some level of unfunded liability is expected and normal.

2. Funding Ratios Fluctuate Significantly

Pension funded status can move dramatically from year to year due to:

• investment performance 
• interest rate changes 
• actuarial assumption changes 
• payroll growth 
• retirement trends 

A city that is 95% funded one year could fall to 82% the next year following a market downturn without any mismanagement occurring.

Trying to constantly maintain 100% funding can force cities into:

• excessive volatility 
• over-contributions 
• unnecessary tax increases 
• reductions in current services 

3. There Is an Opportunity Cost to Overfunding

If a city aggressively pays pension liabilities beyond prudent levels, those dollars are unavailable for:

• infrastructure 
• road maintenance 
• sewer systems 
• public safety staffing 
• reserve rebuilding 
• parks and facilities 

Most municipalities must balance:

• current community needs 
• long-term liabilities 
• taxpayer affordability 

This is one reason many finance professionals view approximately 90% funding as a strong long-term target.

4. Best Practices Generally Focus on Sustainability, Not Perfection

Organizations such as:

• Government Finance Officers Association 
• municipal bond analysts 
• pension actuaries 

generally focus more on:

• sustainable contribution policies 
• stable funding discipline 
• realistic assumptions 
• long-term trends 

rather than demanding 100% funding immediately.

A city consistently improving toward strong funding levels while maintaining infrastructure and reserves is often viewed more favorably than a city that reaches 100% pension funding but neglects roads, facilities, or reserves.

5. California Cities Often Operate Below 100%

Many California cities operate with pension funded ratios below 100%, particularly after:

• the 2008 financial crisis 
• COVID-era volatility 
• CalPERS discount rate changes 

Funding levels around:

• 70%–80% are often considered moderate 
• 80%–90% are generally viewed as relatively healthy 
• 90%+ is considered very strong 

although context matters greatly.

6. Why Some Cities Avoid Full Funding

A city may intentionally avoid targeting 100% funding because:

liabilities are highly sensitive to market assumptions 

overfunding can create political pressure to increase benefits 

funds contributed to CalPERS are generally irreversible 

excess pension funding cannot easily be redirected later toward infrastructure or emergencies 

That last point is important:

Once money is contributed to CalPERS, the city generally loses flexibility over those funds.

Practical Municipal Finance View

For many cities, the better policy objective is:

• strong reserve levels 
• sustainable pension contributions 
• ongoing infrastructure investment 
• manageable debt 
• stable services 

rather than pursuing a mathematically perfect 100% pension funding ratio at the expense of everything else.

For PVE specifically, that becomes especially important because the City simultaneously faces:

• pension obligations 
• deferred infrastructure 
• reserve rebuilding needs 
• fire service costs 
• limited revenue growth opportunities 

Balancing those competing priorities is generally considered more prudent public finance management than focusing exclusively on achieving 100% pension funding as quickly as possible.