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\u2019s 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\u2019s massive\u00a0$265 billion\u00a0pension debt and put taxpayers on the hook for over\u00a0$11 billion\u00a0in new public pension costs at a time when few can afford it.\u00a0\u00a0<\/p>\n
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\u2014and often succumb to\u2014constant political pressure to undermine these hard-won policies to hand out benefit increases.\u00a0<\/p>\n
Assembly Bill 1383\u00a0(AB 1383<\/a>) is now on Newsom\u2019s desk\u00a0for\u00a0consideration.\u00a0Bill\u00a0proponents\u00a0argue that crucial cost-saving reforms established in the landmark 2012 Public Employees\u2019 Pension Reform Act (PEPRA)\u00a0have created a\u00a0\u201cstaffing crisis<\/a>\u201d\u00a0among the state\u2019s\u00a0first responders,\u00a0despite\u00a0ample evidence to the contrary.<\/a>\u00a0The\u00a0bill nonetheless reduces the retirement age\u00a0for police and firefighters from 57 to 55 and makes major adjustments to the salary limits\u00a0used to calculate pension benefits.\u00a0\u00a0<\/p>\n The legislation also allows government employers to\u00a0introduce 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\u00a0to pay for these\u00a0high-end\u00a0pension promises.\u00a0<\/p>\n 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.\u00a0<\/p>\n Is AB 1383 retroactive? Partially.\u00a0<\/p>\n Reason Foundation\u2019s Pension Integrity Project and other fiscally minded experts warned<\/a> 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\u00a0then. The 1999 boondoggle retroactively granted enhanced benefits to retirees at tremendous cost and drove the California Public Employees\u2019\u00a0Retirement System\u2019s (CalPERS) current\u00a0$179 billion\u00a0unfunded liability.\u00a0\u00a0<\/p>\n 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.\u00a0<\/p>\n Things could have been worse. The bill\u2019s sponsors amended AB 1383 to clarify that new benefits will not be granted \u201cretroactively\u201d (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\u00a0provides 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.\u00a0<\/p>\n Short-term thinking vs.\u00a0long-term costs\u00a0<\/p>\n When considering the potential costs of the added benefits of AB 1383, California lawmakers focused\u00a0mainly on\u00a0the near-term impact, with little thought of the\u00a0much larger impact this bill will have on\u00a0taxpayers\u00a0decades into the future. Analysis from\u00a0CalPERS\u00a0shared<\/a>\u00a0with legislative committees\u00a0indicated\u00a0that the bill could increase annual costs by $632 million in the first year and add\u00a0$8 billion\u00a0to the system\u2019s liabilities. Reason Foundation\u2019s actuarial analysis was the only source to examine the total impact of these enhanced benefits, including potential costs if the system faced\u00a0standard\u00a0market turbulence over the next 30 years.\u00a0<\/p>\n According to\u00a0Reason Foundation\u2019s\u00a0actuarial model of CalPERS, AB 1383 will add somewhere between\u00a0$7.6 billion\u00a0and\u00a0$11.8 billion\u00a0in 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.\u00a0<\/p>\n Boosting pension benefits for the oldest, highly paid personnel\u00a0<\/p>\n Another major concern voiced by Reason Foundation was that most of the estimated additional cost would come from boosted benefits for the state\u2019s highest-earning police and firefighters, not the\u00a0rank and file.\u00a0\u00a0<\/p>\n According to Reason\u2019s\u00a0actuarial modeling<\/a>, 82% of the projected\u00a0additional\u00a0cost\u00a0is\u00a0attributable solely to AB 1383\u2019s adjustment to the income limits\u00a0used to calculate pension benefits (a crucial aspect of the PEPRA reform).\u00a0This aspect of the bill\u00a0accounts for most of the cost but benefits only those who earn\u00a0more than $160,000 annually.\u00a0\u00a0<\/p>\n 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\u00a0adjusted\u00a0the new formula that will replace the PEPRA cap on the salary used for benefit calculations. <\/p>\n 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.\u00a0According to Reason\u2019s 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).\u00a0\u00a0<\/p>\n Prioritizing politics over public pension health\u00a0<\/p>\n 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\u00a0imposed on local government budgets and, ultimately, on already stretched California taxpayers. It also adds another example to the\u00a0growing list<\/a>\u00a0of states chipping away at past public pension reforms well before they reach the finish line of fully funding promised pension benefits.\u00a0<\/p>\n The 2012 PEPRA reform, shepherded by then-Gov. Jerry Brown,\u00a0required\u00a0sacrifices from all vested\u00a0parties\u00a0and\u00a0earned bipartisan support. PEPRA aimed to get the state\u2019s 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.\u00a0\u00a0<\/p>\n Thanks to PEPRA\u2019s cost-saving guardrails, CalPERS has made\u00a0significant progress. At the time of the reform, the system\u2019s 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\u00a0is now 85% funded<\/a>. This is excellent news, but the plan\u00a0remains\u00a0vulnerable 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\u00a0$179\u00a0billion\u00a0to\u00a0$264\u00a0billion.\u00a0<\/p>\n Silver lining\u00a0<\/p>\n Perhaps some\u00a0good news is that AB 1383 is not a complete reversal of PEPRA. The bill does not\u00a0touch\u00a0the benefits of the state\u2019s other employees (teachers, elected officials, and general government employees), and many important limits\u00a0remain\u00a0even for public safety members. In fact, state Sen. Kelly Seyarto (a retired firefighter and Republican\u00a0representing\u00a0District 32) on the Senate floor urged fellow lawmakers to limit any benefit enhancements to public safety workers only, citing their unique retirement needs.\u00a0<\/p>\n 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<\/a>) instead of seeing these crucial policies through to their originally intended goals.\u00a0\u00a0<\/p>\n Having the nation\u2019s largest public pension systems, the rest of the country often looks to California\u00a0as 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\u00a0necessary\u00a0limits to retirement benefit promises.\u00a0\u00a0<\/p>\n 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\u00a02012. 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\u2019s pension reform success story from becoming another harsh lesson\u00a0in\u00a0short-sighted pension benefit sweeteners, with unexpected costs falling on\u00a0taxpayers.\u00a0<\/p>\n \t\tStay in Touch with Our Pension Experts<\/p>\n