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East Palo Alto council approves $3 million CalPERS payment to cut pension liability
Summary
The council approved a $3 million additional discretionary payment (ADP) to CalPERS to accelerate reduction of the city’s unfunded pension liability and directed staff to evaluate whether roughly $540,000–$575,000 in interest earnings should also be applied in the budget process.
The East Palo Alto City Council voted to send $3 million in additional discretionary payments to the California Public Employees’ Retirement System (CalPERS) to reduce the city’s unfunded pension liability.
Drew Ballard, an actuary with Foster and Foster, told the council the city’s combined unfunded liability across its CalPERS plans was roughly $17.4 million — about $7.2 million for the miscellaneous plan and about $10.2 million for safety — and that the city’s current annual payment to CalPERS is approximately $1.8 million. “The motion that’s in front of you…is to accelerate that funding target,” Ballard said, explaining that an upfront payment would save interest costs over time.
Finance Director Tomo Oku advised the council that staff’s recommendation was to make the payment directly to CalPERS as an ADP rather than place funds in a Section 115 trust. “Putting the money to the ADP payments is more preferable from staff perspective,” Tomo said, noting ADP payments reduce the city’s net pension liability dollar-for-dollar and provide immediate cash‑flow benefits.
Council members pressed staff and the consultant on discounting assumptions and timing. Ballard explained CalPERS uses a long-term discount assumption of 6.8 percent and that recent strong returns can be offset by future years of lower returns; he noted CalPERS now generally amortizes new layers over about 20 years. ‘‘If they earn less than 6.8 percent…that will add to the unfunded liability,’’ Ballard said.
Councilmember Romero moved approval and asked staff to return with a review of the approximately $540,000–$575,000 in interest that the city has accrued on the segregated $3 million and whether that amount should be added to the ADP. Tomo said staff could calculate the exact interest amount and consider it during the upcoming budget process. The motion to approve the $3 million ADP — and to revisit allocation of accrued interest — passed.
What happens next: staff will finalize the precise interest calculation, proceed with the additional payment to CalPERS, and report back during the budget cycle on whether to include the earned interest amount as an additional discretionary payment or to use it for other budget priorities.
