Advisors tell CFAC Morro Bay faces roughly $34–36M CalPERS shortfall; trust and prepayments can smooth near‑term spikes

Morro Bay’s pension costs are a growing near‑term budget pressure, consultants told the city’s Citizens Finance and Advisory Committee on Monday, pointing to a roughly $34–36 million unfunded actuarial liability (UAL) with CalPERS and an irregular payment schedule that will push annual payments higher through the late 2020s.

Mike Meyer, vice president at NHA Advisors, told the committee the city’s UAL is driven by weaker-than‑assumed investment returns over the past two decades and by CalPERS’ shift to a shorter amortization window. “The city has a $36 million debt with CalPERS,” Meyer said, and while recent investment gains will reduce that total modestly, new actuarial assumptions due this fall could change the outlook.

The consultants emphasized the shape of the payments matters as much as the aggregate size. Meyer showed modeling where annual payments to CalPERS climb from roughly $2.5 million today toward nearly $4 million by the end of the decade before dropping after 2036. He called the pattern “an aggregation of lots of different mortgages on different time frames,” and warned that the uneven schedule complicates yearly budgeting.

Why the liability rose: Meyer said CalPERS’ long‑term returns have been volatile; reductions in the discount rate and years of weaker investment performance increase a participating agency’s UAL. The city’s liability is split between safety and miscellaneous plans, and most of the UAL stems from “classic” legacy plans that predate newer, lower‑cost tiers for employees.

Trusts and other options: The presentation reviewed a menu of tools for cost management. Morro Bay has a Section 115 trust that currently holds about $3 million. Meyer said that continued disciplined deposits into that trust — plus occasional withdrawals timed to offset peak CalPERS payments — can help stabilize the general fund’s budget pressure without locking the city into higher annual payments. “Some agencies are funneling money into their trust over the last few years,” he said, noting the trust provider’s balanced portfolio outperformed CalPERS last year in the firm’s model.

Other levers discussed include lump‑sum prepayments to capture vendor discounts (the city currently receives a ~3.3% benefit by paying the UAL annually as a lump sum), negotiated cost‑sharing with employee groups, discretionary additional payments to CalPERS, and the “fresh start” amortization CalPERS offers — which shortens the repayment window but raises near‑term costs and can be irreversible.

Committee questions and staff context: Committee members pressed on timing and magnitude. Sarah asked how often CalPERS performs its asset‑liability review; Meyer said it is roughly every four years, with the next set of actuarial assumptions expected this fall. Members also asked whether employee cost‑sharing agreements have been renegotiated; staff confirmed some negotiating groups secured cost sharing effective July 1, 2024.

Meyer cautioned that the final budget impact depends on CalPERS’ return results and any change in discount rate, and urged the committee to revisit the analysis after the new CalPERS assumptions are published. He recommended continuing the city’s policy of building the Section 115 trust while evaluating discretionary options to smooth the budgetary impact over the next 5–10 years.

What happens next: The presentation was provided as an informational briefing; no formal action on pension policy was taken at the meeting beyond receiving the report. Committee members asked staff to keep pension assumptions under regular review and to incorporate updated CalPERS assumptions into the city’s multi‑year fiscal planning once they are published.