Lawmakers in the California Legislature passed a bill that will reverse some of the key provisions of a bipartisan cost-saving pension reform from 2012, granting a significant benefit sweetener to the state’s highest-paid police and firefighters. If Gov. Gavin Newsom signs the bill, it will undermine hard-fought progress made over the last decade on reducing the state’s massive $265 billion pension debt and put taxpayers on the hook for over $11 billion in new public pension costs at a time when few can afford it.
Despite a late amendment to reduce some costs, passing this bill is another unfortunate example of state policymakers prioritizing the demands of powerful labor interest groups over the needs of increasingly strained, inflation-weary taxpayers. It also highlights the precarious nature of prudent public pension reforms, which often require decades to succeed. During the decades it takes for a pension reform to fully run its course, policymakers face—and often succumb to—constant political pressure to undermine these hard-won policies to hand out benefit increases.
Assembly Bill 1383 (AB 1383) is now on Newsom’s desk for consideration. Bill proponents argue that crucial cost-saving reforms established in the landmark 2012 Public Employees’ Pension Reform Act (PEPRA) have created a “staffing crisis” among the state’s first responders, despite ample evidence to the contrary. The bill nonetheless reduces the retirement age for police and firefighters from 57 to 55 and makes major adjustments to the salary limits used to calculate pension benefits.
The legislation also allows government employers to introduce a new, more generous level of benefits for police and fire personnel, which will put pressure on local governments to further increase the already-high share of their budgets allocated to pay for these high-end pension promises.
Even more concerning, in prioritizing sweetheart benefits to powerful political allies, lawmakers gave only cursory consideration to the massive costs this legislation will impose on local governments and taxpayers for decades.
Is AB 1383 retroactive? Partially.
Reason Foundation’s Pension Integrity Project and other fiscally minded experts warned that AB 1383 made some of the same mistakes that California lawmakers made in 1999 when they granted huge, retroactive pension benefit sweeteners to all public employees. That move has generated hundreds of billions in unexpected costs since then. The 1999 boondoggle retroactively granted enhanced benefits to retirees at tremendous cost and drove the California Public Employees’ Retirement System’s (CalPERS) current $179 billion unfunded liability.
Fortunately, AB 1383 grants no additional benefits to those who have retired already, but it does allow current members to receive full benefits at age 55, even though employees and employers have been contributing to the fund under the assumption that this would not be granted until age 57. Now, with the newly lowered retirement age, local government employers will have to make catch-up payments to cover this, as though the age had been 55 all along. Employees will also be able to retire earlier and collect additional years of retirement benefits, neither of which they or their employer expected.
Things could have been worse. The bill’s sponsors amended AB 1383 to clarify that new benefits will not be granted “retroactively” (meaning, granted to people already retired) and will apply only after the effective date, starting in 2027. But this change was purely symbolic for those concerned about repeating the costly mistakes of 1999. The bill still provides enhanced benefits to current employees, with the potential to generate billions in unexpected costs. The amendment had no impact on this, nor did it address the core concern of those hoping to avoid another ballooning of unfunded pension liabilities.
Short-term thinking vs. long-term costs
When considering the potential costs of the added benefits of AB 1383, California lawmakers focused mainly on the near-term impact, with little thought of the much larger impact this bill will have on taxpayers decades into the future. Analysis from CalPERS shared with legislative committees indicated that the bill could increase annual costs by $632 million in the first year and add $8 billion to the system’s liabilities. Reason Foundation’s actuarial analysis was the only source to examine the total impact of these enhanced benefits, including potential costs if the system faced standard market turbulence over the next 30 years.
According to Reason Foundation’s actuarial model of CalPERS, AB 1383 will add somewhere between $7.6 billion and $11.8 billion in employer costs over the next 30 years, depending on market outcomes. If the system experiences one or two major recessions over that period, the ultimate cost of this decision would grow. Because unexpected costs would fall on future taxpayers, lawmakers should have taken a closer look at the risks taxpayers would bear.
Boosting pension benefits for the oldest, highly paid personnel
Another major concern voiced by Reason Foundation was that most of the estimated additional cost would come from boosted benefits for the state’s highest-earning police and firefighters, not the rank and file.
According to Reason’s actuarial modeling, 82% of the projected additional cost is attributable solely to AB 1383’s adjustment to the income limits used to calculate pension benefits (a crucial aspect of the PEPRA reform). This aspect of the bill accounts for most of the cost but benefits only those who earn more than $160,000 annually.
After hearing continued warnings about these potential costs, lawmakers made another last-minute amendment to AB 1383, which was at least a step in the right direction, before passing it out of the Senate. The amendment adjusted the new formula that will replace the PEPRA cap on the salary used for benefit calculations.
While the bill will still impose high costs on a system already struggling with decades of underfunding, the last-minute amendment will reduce the impact slightly. According to Reason’s modeling of the bill, the latest amendment will reduce the 30-year cost by $1.4 to $2.7 billion (again, depending on market outcomes).
Prioritizing politics over public pension health
Despite the last-minute tweaks, the passage of AB 1383 is a jarring indicator of a political system that prioritizes the interests of close allies (in this case, public-sector unions) over the potential costs and risks imposed on local government budgets and, ultimately, on already stretched California taxpayers. It also adds another example to the growing list of states chipping away at past public pension reforms well before they reach the finish line of fully funding promised pension benefits.
The 2012 PEPRA reform, shepherded by then-Gov. Jerry Brown, required sacrifices from all vested parties and earned bipartisan support. PEPRA aimed to get the state’s pensions back on track to fulfill the retirement promises made to public employees, but (as with any prudent pension reform) this process would take multiple decades to achieve.
Thanks to PEPRA’s cost-saving guardrails, CalPERS has made significant progress. At the time of the reform, the system’s funding had fallen to just under 70%, meaning it only had 70 cents for every dollar needed to cover promised benefits. According to its latest reporting, the system is now 85% funded. This is excellent news, but the plan remains vulnerable to future market downturns and is still at least a decade away from full funding. Reason Foundation modeling shows that even before AB 1383, just one bad year of market returns could have expanded CalPERS unfunded liabilities from $179 billion to $264 billion.
Silver lining
Perhaps some good news is that AB 1383 is not a complete reversal of PEPRA. The bill does not touch the benefits of the state’s other employees (teachers, elected officials, and general government employees), and many important limits remain even for public safety members. In fact, state Sen. Kelly Seyarto (a retired firefighter and Republican representing District 32) on the Senate floor urged fellow lawmakers to limit any benefit enhancements to public safety workers only, citing their unique retirement needs.
The new law, however, represents the first of what could unfortunately become many more incremental and premature rollbacks of the PEPRA reforms. The reality is that righting the course of a large pension plan takes several decades, and it is concerning to see lawmakers cave to public-employee pressure (that the data does not support) instead of seeing these crucial policies through to their originally intended goals.
Having the nation’s largest public pension systems, the rest of the country often looks to California as an example for responsible retirement plan policy. The success of PEPRA, for example, is often cited as a strong, bipartisan example of applying difficult but necessary limits to retirement benefit promises.
With the passage of AB 1383, if Gov. Newsom signs it, the state will have at least partially undermined the important reforms lawmakers enacted in 2012. With the floodgates now open and other employee groups like teachers likely taking note of the benefit increases given to public safety personnel, policymakers will need to vigilantly protect PEPRA to prevent the state’s pension reform success story from becoming another harsh lesson in short-sighted pension benefit sweeteners, with unexpected costs falling on taxpayers.