Palo Alto finance committee accepts CalPERS actuarial valuation reports to inform 2027 budget planning

The Finance Committee of the Palo Alto City Council on Sept. 16 unanimously voted to accept the California Public Employees’ Retirement System (CalPERS) actuarial valuation reports as of June 30, 2024, to use for the city’s long‑range financial forecast and preparation of the fiscal 2027 budget.

Paul Harper, director in the Office of Management and Budget, described the packet as "a transmittal of the current status of the city's retirement accounts, with CalPERS for both the safety and miscellaneous employees," and said the reports showed a generally favorable status but would be used for planning and forecasting. Harper noted the city plans to use the reports for the 10‑year forecast and the FY2027 budget process.

The reports show the mix of pension funding sources, with staff citing that "about 55% of the dollar is collected from investment earnings," while 34 cents of each dollar is from employer contributions and 11 cents from employees, based on the June 30, 2024 actuarial study. Harper said CalPERS reported a 9.3% return for the period ending June 30, 2024; preliminary returns for the year ending June 30, 2025 were described as approximately 11.6% but not yet incorporated into the valuation used tonight.

City staff and the CalPERS actuary explained how those investment returns are phased in over five years and how that phasing and recent volatility continue to affect the city’s unfunded accrued liability (UAL) and employer contributions. The city’s actuarial determined contribution (ADC) for the year is about $71.0 million, which staff said is roughly $2.6 million (3.8%) higher than the prior year. That amount includes an $18.7 million normal cost (pay‑as‑you‑go cost) and a $52.3 million UAL portion; the total UAL balance was reported as $566.4 million.

Harper described the city’s use of a Section 115 pension trust outside the CalPERS reports and said that trust holds about $110 million, which staff estimated would raise the city’s funded status by about 6.6 percentage points to roughly 72.6% if counted in the same measure.

Committee members pressed staff and the CalPERS actuary on several assumptions. Harper and Matthew Biggert, the CalPERS actuarial representative on the call, discussed discount rates and inflation assumptions. Harper explained the city currently uses a 5.3% discount‑rate assumption for planning because the city’s policy is more conservative than CalPERS’ proposed 6.8% assumption. Biggert said the proposed CalPERS long‑term assumption is 6.8% and described it as "a reasonable long term, investment assumption going forward," while acknowledging uncertainty in long‑term inflation and capital markets.

Committee members also asked about demographic assumptions, longevity risk and how risk is allocated for employees who split service among agencies; CalPERS staff answered that the city bears the actuarial cost for service credited to Palo Alto employees and that CalPERS manages pooled plans for smaller agencies to reduce volatility for those participants.

Harper and staff outlined next steps: staff will incorporate these valuation results into the long‑range financial forecast to be presented to the Finance Committee in December/January; the forecast will use the city’s retiree benefit policy assumption (5.3%) for pension trust contributions. The CalPERS Asset/Liability Management (ALM) study was expected to complete in November 2025 and could inform future changes to assumptions and the city’s retiree benefit policy.

Action and vote: A committee motion to accept the June 30, 2024 CalPERS valuation reports and use them for long‑range forecast and FY2027 budget planning passed unanimously. The committee recorded the action for use in budget development; staff said they will return with additional analysis and modeling as part of the 10‑year forecast and budget process.

The committee’s acceptance does not itself change contribution levels or adopt new policy; it designates the valuation reports as the staff basis for forecast and budget development and triggers further staff analysis and recommendations during the budget calendar.

Ending: Staff said they will return with the long‑range financial forecast for committee review in December or January, incorporate updated CalPERS information as it becomes available, and bring any proposed retiree benefit policy changes back to the committee when the ALM study is released.