Finance committee forwards plan to transfer PARS Section 115 funds to CalPERS to address pension liabilities

The Palo Alto Finance Committee unanimously forwarded to City Council staff's recommendation to begin phased transfers from the city's Section 115 (PARS) pension trust to CalPERS to both reduce unfunded liability and improve long-term funded status.

Chief Financial Officer Lauren Lai presented the General Fund major tax revenue update and a retiree benefit funding recommendation. Lai said staff projects a roughly 20% decline in sales tax for fiscal year 2026 (approximately $8'$9 million), driven primarily by a 41.6% decline in business-to-business leasing revenue (a sector representing about 12.7% of the city's sales tax base) and a 32.2% decline in new-auto sales (about 11.7% of sales tax). Staff modeled a continued ongoing reduction of roughly $4 million in FY27.

To mitigate long-term pension risks and provide budgetary stability, staff recommended transmitting eligible balances from the Section 115 trust (PARS) to CalPERS as follows: transfer $10 million to CalPERS in the FY26 midyear (ADP toward unfunded liability), transfer $20 million in FY27 (ADP), and make annual ADC (employer cost) transfers of $6 million for a five-year window (FY27'FY31). Staff emphasized that transfers would be made subject to council authorization and that the strategy is part of a multi-year, multi-pronged budget balancing approach that also includes cuts, revenue exploration, and targeted use of reserves.

Lai said the Section 115 trust balance was approximately $110 million at the time of presentation and staff modeled conservative PARS earnings of about 4.5% to project roughly $130 million by June. The presentation distinguished ADP (payments toward the unfunded liability principal) from ADC (annual actuarially determined contributions). Lai also showed model runs indicating that, under the recommended phased transfers and contribution plan, the city could reach the policy goal of 90% funded status within 15 years.

Committee members asked for clarifications about the net budget impact of transfers (e.g., whether the net contribution into PARS minus distributions would reduce near-term PARS balances), timing relative to previously published long-range forecasts, and the policy's guardrails around service impacts. Staff said the transfers are consistent with the funding policy (which calls for transmitting balances in excess of one year of required employer contribution) and stressed that annual council approval would be required for each transfer amount.

A committee member moved staff's recommendation to accept the General Fund major tax revenue update and forward the recommendation to transmit funding from the PARS trust to CalPERS and incorporate it into the long-range forecast; the motion was seconded and passed unanimously.

Next steps: The recommendation will be included in the long-range forecast and be presented to the City Council for authorization of the initial midyear transfer. Staff will return with the long-range financial forecast and budget balancing details in two weeks and with a retiree benefit policy update at the ALM-aligned review.