Lodi Finance Committee - January 27, 2026

Lodi

Jan 23

City of Lodi Finance Committee - January 27, 2026

Executive Summary

The City of Lodi Finance Committee convenes on January 27, 2026, to address critical pension funding policy reforms at a pivotal moment in the city's fiscal trajectory. The primary focus centers on proposed amendments to the Budget and Fiscal Policies that would lower the pension funded ratio target from 80% to 70% and establish a framework for strategic distributions from the city's $29+ million Section 115 Pension Trust. This policy recalibration occurs against the backdrop of a $291 million citywide budget, a projected $4.8 million five-year structural deficit, and combined CalPERS pension obligations exceeding $181 million in unfunded accrued liability.

The meeting represents a strategic inflection point where the city seeks to balance fiscal sustainability with prudent long-term pension management. With the city's combined pension funded ratio currently at 71.3% (including PARS trust assets), the proposed policy changes would enable near-term budget stabilization while consultant projections from Baker Tilly and PARS suggest a pathway to 80% funding by 2033 and full UAL elimination by 2045.

Meeting Context and Organizational Background

Committee Composition and Leadership

The Finance Committee comprises three City Council members who provide oversight of the city's fiscal policies and budget management:

Chair Mikey Hothi (absent from December 17, 2025 meeting)
Member Ramon Yepez
Member Gary Woehl

The committee operates under the Brown Act requirements with 72-hour advance posting and provides recommendations to the full City Council on fiscal matters.

Interim Leadership Context

The meeting occurs under the stewardship of James Lindsay, Interim City Manager, who assumed the position in May 2025 following administrative turmoil. Lindsay brings over 30 years of local government experience, including a decade as City Manager of Saratoga, and serves on a temporary contract at $140 per hour without benefits. His appointment provides stability during a challenging transition period marked by allegations of financial misconduct by the previous city manager and ongoing third-party investigations.

Budget Highlights - FY 2025-26

Total Budget: $291 million (8.35% increase)
General Fund: $89.7 million
Budget Mitigations: $7.4 million in adjustments
Structural Deficit: $4.8 million projected over five years
Infrastructure Investment: $16.9 million allocated

Measure L Context

Measure L, approved by voters in November 2018, provides approximately $10 million annually through a half-cent local sales tax to support public safety, infrastructure maintenance, and general government services. The measure passed after two prior failures, reflecting community support for maintaining service levels amid pension cost pressures. Measure L revenues are explicitly excluded from pension stabilization contributions under current policy, with UAL costs for Measure L-funded employees allocated to the General Fund.

Detailed Agenda Analysis

Item B.1 - Consent Calendar: Approval of December 17, 2025 Minutes

The consent calendar seeks approval of minutes from the December 17, 2025 Special Finance Committee Meeting. This precedent meeting, attended by Vice Chair Nakanishi and Member Woehl (with Chair Hothi absent), addressed two substantive items that directly set the stage for the current meeting's policy proposals.

December 17, 2025 Meeting Highlights

1. Investment Policy/Internal Controls Discussion

Interim City Manager Lindsay provided the committee with copies of the Investment Policy, including an overview of internal control functions. This represents standard annual review procedures but takes on added significance given the administrative investigation context.

2. Pension Stabilization Policy Discussion

The committee received copies of the PARS Contribution Table and existing Pension Stabilization Policy. Lindsay provided verbal updates on CalPERS Classic and PEPRA tier employees and associated pension liabilities. Critically, Lindsay recommended a "future strategic drawdown of the pension trust based on investment earnings" and indicated that "an amendment to the Pension Stabilization Policy will be proposed at a future City Council meeting."

Committee Member Woehl requested information regarding the city's current liability for CalPERS Classic versus PEPRA employees, which Budget Manager Baker-Bechthold committed to providing via email.

Item C.1 - Selection of Chair and Vice Chair for 2026

This routine organizational item involves the annual selection of committee leadership for calendar year 2026. The selection of Chair and Vice Chair determines meeting facilitation responsibilities, agenda coordination with staff, and primary spokespersonship to the full Council on finance matters.

Item C.2 - Mid-Year Budget Overview

The Mid-Year Budget Overview represents a critical checkpoint in the city's fiscal year, typically occurring six months into the FY 2025-26 budget cycle. This agenda item serves several essential functions in municipal financial management:

Revenue Performance Analysis: Comparison of actual revenue collections against budgeted projections
Expenditure Tracking: Assessment of spending patterns to identify potential over/under-runs
Budget Adjustments: Recommendations for mid-year modifications based on actual experience
Reserve Status: Updated calculation of fund balance reserves relative to policy targets
Forecast Updates: Revised projections for year-end financial position

Item C.3 - Proposed Updates to Budget and Fiscal Policies (PRIMARY FOCUS)

This agenda item constitutes the substantive core of the meeting and represents a significant policy shift in the city's approach to pension liability management. The staff report, prepared by Interim City Manager Lindsay, recommends updates with far-reaching implications for the city's long-term fiscal strategy.

Proposed Structural Changes

1. Administrative Position Updates: The policies remove references to the Deputy City Manager position, which "has not been an active job classification for several years," and replace it with the Administrative Services Director position throughout the document. This reflects organizational restructuring and ensures policy alignment with current staffing models.

2. Pension Stabilization Policy Amendments: The proposed amendments to the Pension Stabilization Policy represent the most significant policy modifications.

Current Policy Framework

Funding Trigger: Annual budget savings deposited to Pension Trust until combined CalPERS assets plus PARS fund assets exceed 80% of combined accrued liability
Investment Authority: City Treasurer authorized to invest General Fund balance exceeding 16% into PARS Section 115 Trust
No Withdrawals: Policy directed accumulation until 80% threshold achieved; no distribution framework established

Proposed Policy Amendments

Funded Ratio Target Reduction: Lower from 80% to 70%

With current combined funded status at 71.3% (as of December 2025), this amendment reflects the reality that the city has essentially achieved its original target when PARS assets are included. The reduction provides flexibility to begin strategic distributions without waiting for further asset accumulation.

Distribution Framework Establishment

New language authorizes distributions when assets exceed 70% threshold: "If the value of Assets in the PARS fund exceed 70% of the combined liability, the City Manager may include a recommendation for disbursements from the PARS fund to offset qualified pension expenses as part of the Annual or Mid-Year Budget reports. No disbursements will be made without City Council approval."

Supporting Actuarial Analysis

The agenda packet includes extensive actuarial documentation supporting the policy amendments:

CalPERS Plan	Accrued Liability	Market Value Assets	Unfunded Liability	Funded Ratio
Miscellaneous	$255,976,314	$179,966,863	$76,009,451	70.3%
Safety	$268,772,115	$163,202,177	$105,569,938	60.7%
Combined	$524,748,429	$343,169,040	$181,579,389	65.4%

Five-Year Miscellaneous Plan Contribution Projections

Fiscal Year	Normal Cost Rate	Annual UAL Payment
2027-28	9.9%	$7,177,000
2028-29	9.7%	$7,883,000
2029-30	9.6%	$7,966,000
2030-31	9.5%	$8,024,000
2031-32	9.4%	$7,947,000

Baker Tilly Projections (February 2025)

Baker Tilly, a national municipal advisory firm with extensive public sector pension expertise, provided projections demonstrating:

80% Funded Ratio Achievement: Projected by 2033 (approximately 7 years) assuming 6.8% average annual return
UAL Elimination: Full payoff by 2045 under same return assumptions
Cost Reduction: Annual pension costs declining from approximately $20 million to $7 million once UAL eliminated
Strategy Validation: City can cease deposits to PARS trust and still achieve these outcomes through investment returns and scheduled CalPERS payments

PARS 115 Trust Analysis (December 2025)

PARS provided updated analysis showing projected funded ratios under strategic distribution scenarios:

Fiscal Year	CalPERS FR	PARS Contribution	Combined FR
2025-26	66.78%	5.29%	72.07%
2026-27	68.19%	5.37%	73.56%
2027-28	69.63%	5.34%	74.98%
2028-29	71.11%	5.31%	76.42%
2029-30	72.61%	5.28%	77.89%
2030-31	74.15%	5.25%	79.39%
2031-32	75.72%	5.21%	80.93%

Financial Analysis and Context

CalPERS System Overview

The California Public Employees' Retirement System (CalPERS) serves as the pension administrator for the City of Lodi and approximately 3,000 other public agencies. Understanding CalPERS' structure and policies provides essential context for Lodi's pension management decisions.

Discount Rate and Funding Policy

CalPERS maintains a 6.8% discount rate (assumed long-term investment return) as of January 2026, reduced from 7.0% in 2016-2018 and 7.5% prior to 2015. The FY 2024-25 fiscal year saw CalPERS achieve a preliminary 11.6% return, significantly exceeding the discount rate and improving the system-wide funded status to approximately 79%.

Member Tiers

CalPERS members fall into two primary categories with significantly different benefit structures:

Classic Members (hired before January 1, 2013)

Higher benefit formulas (e.g., 2.5% at 55, 2.7% at 55)
Three-year final compensation calculation
Lower contribution rates (7-8%)
Compensation cap: $350,000 for 2025

PEPRA Members (hired on/after January 1, 2013)

Reduced benefit formulas (2% at 62 for miscellaneous)
Three-year final compensation calculation
Higher contribution rates (50% of normal cost, typically 8%+)
Lower compensation caps based on Social Security participation

Section 115 Trust Mechanics

Internal Revenue Code Section 115 trusts provide governmental entities a dedicated vehicle for prefunding pension obligations while obtaining favorable tax treatment and investment opportunities.

Key Characteristics

Irrevocable Dedication: Assets must be dedicated exclusively to pension purposes
Tax-Exempt Status: Investment earnings grow tax-free under IRC Section 115
GASB 68 Offset: Assets can offset Net Pension Liability on GASB financial statements
Separate from CalPERS: Remain separate providing diversification and local control
Withdrawal Flexibility: Assets can be drawn down when needed for budget stabilization

Funded Ratio Standards and Implications

The 80% Standard - Origins and Limitations

The 80% funded ratio threshold has become a widely cited benchmark in public pension discussions, but actuarial experts emphasize it is not a definitive standard of pension health. The American Academy of Actuaries' Pension Practice Council clarifies:

"While the funded ratio may be a useful measure, understanding a pension plan's funding progress should not be reduced to a single measure or benchmark at a single point in time. Pension plans should have a strategy in place to attain or maintain a funded status of 100% or greater over a reasonable period of time."

Academic research demonstrates that maintaining funding below 100% creates intergenerational inequity, with current taxpayers underpaying for accrued benefits and shifting costs to future generations.

Credit Rating Implications: Lodi's current 71.3% combined funded ratio
        places the city below national medians but within a range that many financially stressed municipalities occupy.
        The city's trend toward improvement demonstrates positive momentum that rating agencies view favorably.
    

Risk Analysis and Considerations

Investment Return Risk

The entire pension funding strategy hinges on achieving assumed investment returns over extended periods. Both the CalPERS valuation and PARS/Baker Tilly projections assume returns averaging 6.8% over 20+ years.

Discount Rate Scenario	Accrued Liability	Unfunded Liability	Funded Ratio
5.8% (-1%)	$288,978,856	$109,011,993	62.3%
6.8% (current)	$255,976,314	$76,009,451	70.3%
7.8% (+1%)	$228,697,808	$48,730,945	78.7%

A 1% lower return (5.8%) would increase the UAL by $33 million and drop the funded ratio 8 percentage points. This demonstrates significant sensitivity to return assumptions.

Budget and Fiscal Risks

Structural Deficit: The city's projected $4.8 million structural deficit over five years creates ongoing pressure. If this deficit materializes, there will be less capacity for discretionary pension contributions, potential need to draw on reserves, pressure to accelerate PARS distributions beyond prudent levels, and risk of service cuts or revenue enhancement measures.

Revenue Volatility: The city depends significantly on economically sensitive revenues including sales taxes, utility revenues, and development fees. Economic downturns could simultaneously reduce revenues and trigger CalPERS investment losses.

Committee Considerations and Decision Framework

Questions for Staff and Deliberation

Distribution Pacing and Sustainability: What criteria will guide distribution amount recommendations? How will distributions be sized relative to projected pension cost increases?
Return Assumption Validation: What is the basis for the 6.5% PARS return assumption vs. 6.8% CalPERS assumption? How sensitive are projections to alternative return scenarios?
Budget Integration: How will distributions interact with the General Fund's 16% reserve requirement? Will distributions supplant or supplement other budget strategies?
Comparison to Alternatives: Has staff evaluated making Additional Discretionary Payments (ADPs) directly to CalPERS instead of distributing from PARS?
Reporting and Oversight: What triggers would prompt reconsideration of the distribution strategy?

Alternative Policy Options

Option A - As Proposed: Adopt 70% target with distribution framework as recommended. Advantages: Immediate flexibility; maintains substantial trust balance; supports budget stabilization.

Option B - Maintain 80% Target: Keep 80% target but establish distribution framework once threshold achieved. Advantages: Maintains aspirational target consistent with best practices.

Option C - Phased Approach: 70% target with distributions limited to 50% of earnings until 75% achieved. Advantages: Balances near-term relief with continued funding progress; automatically reduces distributions if returns disappoint.

Option D - Return-Based Distributions: Limit distributions to actual earnings above 6.8% threshold. Advantages: Inherently conservative; ensures principal preservation.

Background on Referenced Committees and Reports

Measure L Citizens' Oversight Committee

While not directly involved in this Finance Committee meeting, the Measure L Citizens' Oversight Committee plays a related role in Lodi's fiscal governance. Established under Lodi Municipal Code, this committee provides accountability for Measure L sales tax expenditures. The committee recently discussed potential amendments to expand its oversight from Measure L-specific revenues to all sales tax expenditures, representing a broader accountability mandate.

Consultant Reports

Baker Tilly: Baker Tilly Municipal Advisors, LLC serves as a registered municipal advisor providing comprehensive financial planning services to public sector entities. The firm's February 2025 forecast represents sophisticated pension projection modeling incorporating CalPERS actuarial data, investment return scenarios, contribution dynamics, and funded status trajectory analysis.

PARS Analysis: The December 2025 PARS 115 Trust Analysis provides the trust administrator's perspective on asset growth, distribution capacity, and funded status projections. The convergence between the independent Baker Tilly projections and PARS' analysis strengthens confidence in the pathway to 80% funding by 2031-32.

Conclusion

The January 27, 2026 Finance Committee meeting addresses pension policy amendments with profound implications for the City of Lodi's fiscal trajectory. The proposed reduction of the funded ratio target from 80% to 70%, coupled with establishment of a distribution framework from the $29+ million Section 115 Trust, represents a strategic inflection point in the city's pension management approach.

The policy changes emerge from sound analytical foundations, supported by comprehensive actuarial valuations showing improved funded status, consultant projections demonstrating pathways to full funding, and the practical reality of a structurally constrained budget environment. The Baker Tilly and PARS analyses converge on projections showing the city can achieve 80% combined funding by 2031-32 while making strategic distributions to stabilize near-term budget impacts.

However, these projections depend critically on achieving 6.8% average investment returns over extended periods. The proposed 70% threshold provides less margin for error than the traditional 80% standard, requiring vigilant monitoring and responsive adjustments if experience deviates from expectations.

Recommended Approach

The Finance Committee should ensure robust reporting requirements, clear distribution criteria, and regular reassessment trigger points are embedded in the final policy framework. With these safeguards, the proposed amendments represent prudent risk management adapted to Lodi's specific circumstances rather than abandonment of fiscal discipline.

References & Sources

Lodi Finance CommitteeSpecial AgendaMeeting Summary

Don Bradford