California lawmakers have passed a bill that could add between $7.6 billion and $11.8 billion in employer costs over the next 30 years, according to a new analysis from Reason Foundation's Pension Integrity Project published this week. The legislation, Assembly Bill 1383, reverses key parts of a 2012 bipartisan pension reform by granting enhanced benefits to the state's highest-paid police and firefighters. The report warns that if Gov. Gavin Newsom signs the bill, it will undermine a decade of progress on reducing California's $265 billion pension debt and shift billions in unexpected costs onto taxpayers.
The bill lowers the retirement age for police and firefighters from 57 to 55 and makes major changes to the salary caps used to calculate pension benefits. Reason Foundation's actuarial modeling shows that 82% of the projected additional cost comes from adjusting income limits, a change that benefits only personnel earning more than $160,000 annually. CalPERS estimates shared with legislative committees indicated the bill could increase annual costs by $632 million in the first year and add $8 billion to the system's liabilities. A last-minute amendment will reduce the 30-year cost by $1.4 to $2.7 billion depending on market outcomes, but the bulk of the expense remains. The California Public Employees' Retirement System currently carries a $179 billion unfunded liability, and the report notes that just one bad year of market returns could expand total unfunded liabilities from $179 billion to $264 billion.
The report emphasizes that AB 1383 partially applies its enhanced benefits retroactively to current employees, even though employers and workers have been contributing under the assumption that full benefits wouldn't be available until age 57. Local government employers will now have to make catch-up payments to cover the lowered retirement age, as though it had been 55 all along. The analysis warns that "lawmakers gave only cursory consideration to the massive costs this legislation will impose on local governments and taxpayers for decades." Bill sponsors amended AB 1383 to clarify that new benefits won't be granted to people already retired and will apply only after the effective date starting in 2027, but the report states this change was "purely symbolic" for those concerned about repeating the costly mistakes of a 1999 benefit increase that generated hundreds of billions in unexpected costs.
The 2012 Public Employees' Pension Reform Act, known as PEPRA, was designed to get California's pensions back on track over multiple decades. At the time of the reform, CalPERS funding had fallen to just under 70%, meaning it only had 70 cents for every dollar needed to cover promised benefits. The system is now 85% funded, but the report cautions it remains vulnerable to future market downturns and is still at least a decade away from full funding. The analysis argues that lawmakers prioritized the demands of powerful labor groups over increasingly strained taxpayers, focusing mainly on near-term impact with little consideration for much larger costs decades into the future. The report warns that with the floodgates now open and other employee groups like teachers likely taking note of 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 lesson in short-sighted benefit increases with unexpected costs falling on taxpayers.