Pacific Grove staff previews two-year general-fund outlook, pension plan steps and proposed financial-policy changes

City finance staff on May 21 presented a two-year preview of the general fund, pension obligations and proposed updates to the city’s investment and financial policies, advising the council to receive the report and provide direction ahead of budget adoption.

Finance Director and staff outlined a conservative forecast: revenues such as transient-occupancy tax and sales tax are flat or modest, while costs — including pension contributions, negotiated cost-of-living adjustments and rising insurance premiums — are increasing. Staff said the city faces an operational shortfall of roughly $1 million for the coming year and roughly $1.9 million when one-time capital items are included; however, the forecast keeps the city above reserve targets for the near term under the proposed plan.

To strengthen fiscal sustainability, finance staff proposed changing reserve policy and budgeting conventions: lowering the single operating-reserve target from 35% to 25% of operating expenditures while establishing two separate reserve funds — a capital reserve and a pension reserve — each with a proposed minimum balance (staff proposed $500,000 minimums). Staff also proposed increasing the budget contingency from 1% to 2% and raising the capital threshold (the dollar amount that triggers capital treatment) to $50,000. For the sewer fund, staff suggested reserves sufficient to fund two years’ capital needs.

On pensions, staff reviewed three components of the city’s pension burden: the net pension liability reported in the annual audit, outstanding pension obligation bonds (with the last payment due in fiscal 2028–29) and ongoing normal costs for active employees. Staff described options to reduce long-term costs, including (1) continuing to require employees to pay their full employee contribution and part of employer normal cost (a policy already in effect), (2) moving to a trust structure (e.g., CalPERS or PARS trust) to invest funds set aside for pensions and (3) redirecting amounts that become available when pension-obligation-bond payments end toward a pension trust.

Investment-policy changes proposed included authorizing added pooled investments (e.g., CalTrust, CAMP, and CLASS) to improve liquidity and yield while maintaining safety; clarifying interest allocation across funds; and making investment-policy review conditional (only when policy changes are proposed) instead of automatic every two years.

Council discussion touched on using reserves strategically for capital needs and potential pension strategies (including shorter amortizations that increase payments now but reduce long-term interest costs). Several council members praised the transparency of the two-year preview. Council unanimously received the budget and policy report and asked staff to return with budget materials and proposed policy language concurrent with the upcoming budget hearings.

Ending: Staff will bring a detailed all-funds budget and proposed reserve and investment policy language to council during the formal budget process in June. Staff also said they will assess options for pooled investments and trusts and return with recommended implementation steps.