City Council plans $2M discretionary payment to CalPERS to reduce unfunded liability

On January 31, 2023, the Financial Review Committee convened in Dana Point, California, to address significant financial challenges facing the city, particularly concerning its unfunded liabilities with the California Public Employees' Retirement System (CalPERS). The meeting highlighted the city's current unfunded liability, which has risen to approximately $8.7 million, with a funded ratio of about 77%. This situation has prompted discussions on how best to allocate an additional $2 million that the city council set aside last September to mitigate losses from CalPERS.

The committee explored the potential benefits of making an additional discretionary payment of $2 million to CalPERS. Financial modeling indicated that such a payment could save the city around $2.2 million in interest over the long term. The rationale behind this recommendation is that the city's current investment returns from its trust fund, averaging around 4.5%, are significantly lower than the 6.8% interest charged on its unfunded liabilities. Therefore, the committee believes that paying down the unfunded liability would be more beneficial than leaving the funds in the trust.

Committee members expressed concerns about the volatility of investment returns and the risks associated with relying on CalPERS for future gains. They noted that while CalPERS had previously experienced a 21.3% gain, it subsequently faced a 7.5% loss, which has complicated the city's financial outlook. The discussion underscored the importance of addressing older amortization bases to prevent future losses from impacting the city's financial health.

The committee plans to present its recommendation to the city council during the mid-year report in March, advocating for the $2 million payment to CalPERS. If approved, this payment could improve the city's funded ratio to approximately 83%, and when combined with the trust assets, the overall funding level could reach 93%.

In conclusion, the Financial Review Committee's discussions reflect a proactive approach to managing the city's financial obligations. By considering strategic payments to CalPERS, the city aims to enhance its fiscal stability and reduce long-term liabilities, ultimately benefiting the community. The anticipated council decision in March will be crucial in determining the city's financial trajectory moving forward.