Albany subcommittee hears pension-funding briefing; UAL projected to peak around $5.1M annual payment

The Audit and Fiscal Sustainability Subcommittee on Oct. 27 received an extended briefing from Finance Director Bridal Schwartz on the city's pension costs, the CalPERS unfunded actuarial liability (UAL) and strategies available to manage those costs.

Schwartz summarized how pension costs are composed of normal costs (a percentage of payroll shared between employees and the employer) and the unfunded actuarial liability, which represents the portion of projected future pension obligations not funded by existing plan assets. She explained that CalPERS amortizes UAL changes over a 20-year period with a five-year ramp, and that the discount rate (CalPERS' assumed investment return) materially affects required employer payments.

Schwartz told the committee that, as of June 30, 2023, the city's UAL was about $45 million and that the city's minimum annual UAL payment had risen over recent years from roughly $1.5 million to about $3.3 million; under current estimates CalPERS' amortization schedule the annual payment could peak near $5.1 million in five to six years. She noted the city already pays the annual UAL payment once per year at the beginning of the fiscal year to capture an approximate 3.4% discount offered by CalPERS for a lump-sum annual payment.

Committee members and staff discussed several potential responses. Options reviewed included:

- Continue the current practice of paying the annual UAL once each year (the city already does this). - Make discretionary additional payments to CalPERS ("ADPs") when resources allow; those payments reduce total interest costs over time but require available cash. - Pursue a "fresh start" refinancing of the amortization schedule to shorten the amortization period and produce a different payment pattern (this reduces total interest but increases near-term payments and is inflexible). - Establish an irrevocable Section 115 pension prefunding trust (allows broader investment options, including equities, but the funds are irrevocable and can only be used for pension costs; trustee/management fees vary). - Issue pension obligation bonds (borrowing to pay down UAL), which historically has occasionally been effective when borrowing rates were well below CalPERS assumed returns; staff advised this is not recommended in the current rate environment.

Schwartz and staff said Section 115 trusts and discretionary prepayments can improve long-term costs and credit perceptions but stressed that each option requires available funds and involves trade-offs: funds placed in an irrevocable trust are no longer available for other budget needs; fresh starts lock in an amortization schedule but do not prevent future increases in UAL from other causes; pension obligation bonds carry borrowing costs and do not eliminate future UAL growth.

Committee members asked for a clearer breakdown showing how much of the total UAL would be covered by the city's current expected payments (for example, if the city continues to budget $3.5 million annually) versus the residual UAL that would remain. Schwartz and staff said they would prepare additional materials framing the UAL relative to current budgeted payments and reiterated that the city has limited capacity to make a dramatic one-time reduction of the total UAL without significant additional resources; staff noted a city reserve balance of about $775,000 that Council previously set aside.

No formal action was taken. Members directed staff to include pension funding in upcoming budget deliberations, to provide a breakdown of the UAL relative to currently budgeted annual payments, and to return with materials that quantify the effects of discretionary payments, fresh-start amortizations, and Section 115 trust options. Staff recommended against issuing pension obligation bonds given current market conditions.

The presentation closed with committee members agreeing to keep the topic on future agendas as the budget process unfolds.