With total state and local public pension debt now over $200 billion, California’s taxpayers face the difficult task of paying the ever-growing pension costs for public workers. Despite paying down an additional $7 billion in pension debt since 2020, the state is still hundreds of billions short of funding the retirement benefits already promised to teachers, police, firefighters, and other public employees. Yet state lawmakers are poised to remove key guardrails that protect taxpayers from even more debt.
Instead, politicians in Sacramento are pushing to increase retirement benefits for police and firefighters, which could add another $14 billion in long-term costs for local governments and taxpayers, Reason Foundation finds.
Assembly Bill 1383, now under consideration by the Senate after passing the Assembly, proposes rolling back several key guardrails established by the Public Employees’ Pension Reform Act, which raised the retirement age for new hires and capped the amount of compensation that can be factored into pension benefits to prevent egregious pension spiking.
AB 1383 would undermine those crucial pension reforms and impose additional costs on taxpayers by lowering the retirement age for public safety workers from 57 to 55. It would also allow local governments to offer even more generous retirement benefits to their workers, beyond the limits set by PEPRA, likely exposing taxpayers to runaway pension costs in the future.
As Californians have unfortunately experienced in the past, the ultimate cost of pension benefits promised today is often much higher than anticipated, forcing local governments to scramble to raise additional taxpayer funding to pay for constitutionally guaranteed pension benefits.
According to figures from the nation’s largest public pension plan, the California Public Employees’ Retirement System (CalPERS), passing AB 1383 would add at least $9 billion in costs over the next 20 years. Modeling by the Reason Foundation’s Pension Integrity Project shows costs could exceed $14 billion over 30 years.
As lawmakers consider imposing more pension costs and debt on Californians, they should study their not-so-distant history of granting additional retirement benefits to public workers without fully funding them or accounting for the risks borne by future taxpayers.
In 1999, Senate Bill 400, signed by Gov. Gray Davis, significantly enhanced state worker benefits, adding an estimated $600 million in annual pension costs. At the time, CalPERS was fully funded. But the legislature granted these new benefits to workers without paying for them. Lawmakers simply assumed higher investment returns could cover the additional costs.
This terrible miscalculation led to financial disaster when the dot-com bubble burst in the early 2000s, and the market’s decline during the Great Recession of 2007-2009 reduced the value of public pension systems’ investments, adding more than $100 billion in public pension debt. The investment losses generated massive public pension funding shortfalls that continue to plague state and local government budgets today.
With public pension debt soaring to over $200 billion by 2009, state policymakers began to realize that the unfunded benefit increases they had handed to public workers would cost taxpayers for decades to come.
Following years of negotiations, the state legislature and then-Gov. Jerry Brown passed the Public Employees’ Pension Reform Act (PEPRA) in 2012, setting guardrails for collective bargaining, placing crucial limits on retirement benefit formulas, increasing retirement ages, capping the annual salary used to calculate pension benefits, and establishing equal sharing of employee pension contribution rates.
These reforms helped put the state on a better path to eventually pay its massive public pension debt. Importantly, PEPRA also imposes limits to prevent governments and politicians from granting unfunded increases in retirement benefits to government workers while pension systems like CalPERS remain underfunded.
AB 1383 directly undermines those critical PEPRA reforms. The bill would open the door to repeating the costly mistake lawmakers made in 1999, granting lavish additional benefits to public workers without paying for them, leaving costs to balloon and hit future taxpayers.
Lawmakers should learn from their costly pension mistakes that paved the way for CalPERS to accrue over $160 billion in unfunded pension liabilities for benefits promised to current and past public employees. They should not even consider expanding retirement benefits until that debt is fully paid.
A version of this column first appeared at The Orange County Register.