Consultant outlines $137 million CalPERS shortfall, urges active liability management
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Summary
A consultant told the Tracy Finance Committee the city faces roughly $137 million in CalPERS unfunded liabilities (73.5% funded as of 6/30/2024) and outlined strategies — prepayments, targeted layer paydowns, capital financing and eliminating negative amortization — to reduce long-term interest costs.
Dimitri Simonov, principal of Bridgeline Municipal Strategies, told the Tracy Finance Committee on April 13 that the city’s two CalPERS pension plans had a combined accrued liability of about $520,000,000 and market assets near $382,000,000 as of June 30, 2024 — leaving an unfunded accrued liability (UAL) of roughly $137,000,000 and a funded ratio of about 73.5 percent.
Simonov said CalPERS issues an annual minimum payment schedule and that, under current amortization, the city will pay not only the UAL but about $81,000,000 in interest over the repayment period. “At that interest rate, that’s pretty much the city’s most expensive debt,” he said, urging the committee to view UAL as a form of long-term debt that can be actively managed.
The presentation traced drivers of rising UAL: benefit increases enacted in state bills that raised retiree benefits, longer retiree lifespans, salary and cost‑of‑living adjustments that exceed CalPERS assumptions (2.85% payroll growth used in assumptions), and CalPERS’ repeated changes to actuarial assumptions. Simonov illustrated how investment performance and CalPERS’ discount rate interact with those assumptions to change UAL. He noted that although 2024 and preliminary 2025 returns were strong, CalPERS’ subsequent adjustments can offset those gains; for 2024 Simonov said investment returns reduced UAL by roughly $9.5 million but other CalPERS adjustments increased it by $12.6 million, producing a net $3.2 million increase.
Simonov explained “negative amortization,” showing that when new liability layers are added CalPERS often ramps required payments slowly (20%/40%/60%/80%/100% schedule). That can increase a layer’s balance by roughly 23 percent before full repayment begins and add interest costs equivalent to roughly 121 percent of the new layer, he said.
Recommended management approaches fell into three categories: accelerating paydown (annual prepayments, targeted paydowns of specific liability layers and using surplus cash when available); refinancing strategies (informal or formal ‘fresh start’ amortization, and using tax‑exempt financing for capital projects and redirecting cash to pay down UAL); and other tactics (eliminating negative amortization and maintaining a pension-rate stabilization trust). Simonov noted the city already takes advantage of the July prepayment discount and uses a Section 115 pension trust but said targeting specific liability layers or redirecting cash from capital projects could yield materially better outcomes.
Finance Director Sarah Castro introduced the item as informational and said staff planned to return with detailed scenarios if the committee wanted to pursue active strategies. Following the presentation the committee had clarifying questions about why the city has followed CalPERS’ recommended schedule and what peers are doing. Simonov said most agencies make the CalPERS minimum payment but many now supplement it with prepayments or targeted contributions.
The committee voted to accept the informational report and recommended staff return to Council with the presentation as a pre‑council briefing so Council could consider policy options.
The presentation was informational; no policy change was adopted at the meeting. The next step is staff-run modeling and an eventual policy recommendation if the committee elects to pursue a liability‑management strategy.
