Pension Reform News: Threats to California’s public pension reforms

In This Issue:

Articles, Research & Spotlights 

• Threats to California Public Pension Reforms
• Washington’s Unprecedented Move Will Increase Pension Costs
• San Diego Needs to Manage Pension Costs
• How Are Public Pension Costs Shared Between Employers and Workers? 

News in Brief
Quotable Quotes
Data Highlight
Reason Foundation in the News
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

California Bills Would Increase Taxpayers’ Costs and Public Pension Debt

In 2012, California lawmakers, headed by then-Gov. Jerry Brown, committed to important pension reforms that would place the state’s massive system of pensions on the path to full funding. At the time, California’s pension debt had ballooned to over $200 billion, and governments at all levels were seeing required cost increases cut into their annual budgets. The reform, known as the Public Employees’ Pension Reform Act (PEPRA), slowed the growth of ongoing costs by placing prudent limits on the benefits promised to new workers. With California pensions around 80% funded by the latest reporting, the state still has a long way to go to reach the intended endpoint of PEPRA reforms. However, lawmakers are beginning to undermine these cost-saving measures. Two bills currently under consideration, Assembly Bill 569 and Assembly Bill 1383, would remove the PEPRA provisions that protect government budgets and taxpayers from unfunded pension promises. Instead of reopening the floodgates to more pension debt, California policymakers need to stay the course on the landmark PEPRA reform.
TESTIMONY: Reason Foundation Comments on Assembly Bill 1383 – PEPRA Repeal

Washington Lawmakers Passed a Ticking Time Bomb for Pension Solvency and the State Budget

Washington is one of the best states when it comes to pension funding, but a new short-sighted bill puts years of prudent funding policies at risk. Engrossed Substitute Senate Bill 5357 seeks to reduce immediate costs on public employers by increasing the assumed rate of return for the state’s pension systems and taking a holiday on paying off existing debt. The problems with this approach are twofold: there appears to be no basis for an increase in investment returns, meaning that this change will likely increase costs in the long run and shift them to future taxpayers, and the existing debt was only one or two years from being fully paid off. In this commentary, Reason Foundation’s Ryan Frost explains that all public pensions have been downgrading their market return assumptions, and Washington would be the first to raise its assumed rate of return. Making this move may reduce costs today, but it will ultimately prove extremely costly for governments and taxpayers.

San Diego Doesn’t Have to Accept Spiraling Public Pension Costs

San Diego is unfortunately re-entering a public pension crisis, despite significant past efforts to resolve it. A court decision forcing the city to reactivate its defined benefit pension system has brought back the inherent structural weaknesses that previously led to crippling levels of public pension debt. But Reason’s Mariana Trujillo explains that escalating pension costs are not a foregone conclusion. Successful reforms in other cities and states demonstrate that these risks can be contained. They’ve achieved this by adopting risk-sharing approaches that more fairly allocate financial obligations between public employees and their employers.

Sharing Defined Benefit Pension Costs: A Survey of Public Sector Practices

Pensions generally require contributions from both employers and employees, but not all pension plans distribute these contributions equally between the two parties. New research from Reason Foundation’s Rod Crane examines the employee/employer contribution share for 230 state and locally administered public pension plans. The results show that, on average, employees tend to bear about half of the normal cost of pension benefits when debt-related costs are not included. However, with employers typically covering the remaining costs, as well as any additional debt-generated expenses, governments bear on average 75% of the total annual costs. While these results vary significantly from plan to plan, pension debts have imposed a substantial fiscal burden on government employers.

News in Brief

Partisan Politics Shapes Pension Fund Voting

Using newly mandated Securities and Exchange Commission filings, a study from Northwestern University examines how political affiliation affects the voting outcomes of U.S. public pension funds. The paper uses the political party of a state’s governor to apply a loose political leaning label for a pension board. While this method may not be a perfect predictor of a board’s political leaning, it does help identify some potentially useful correlations. When it comes to decisions on staff compensation, Democratic-aligned funds are ~five percentage points more likely to vote against management and respond strongly to proxy advisor recommendations. In contrast, data indicate that Republican-aligned funds—especially in states with anti-ESG, or environmental, social, and governance, laws like Florida and Texas—anchor their voting behavior to firm performance and are less influenced by proxy advisors. The study also finds that underfunded public pension plans are more likely to engage in share lending—potentially diluting governance influence—though this is driven by funding status, not political alignment. Read the full report here.

Quotable Quotes on Pension Reform

“Having said all of that I also don’t think we should defend things the way they’re working just because it’s the way it’s been done […] You know when I was first State Treasurer I inherited what I thought was a broken dysfunctional pension system. And I fixed it and it was super hard…all constituencies in my party and the entire legislature in Rhode Island, which was mostly Democrats, told me to leave it alone, that politics are too tough. leave it alone […] But I couldn’t…I just couldn’t sleep at night.”
—Gina Raimondo, former U.S. Secretary of Commerce and Rhode Island governor, quoted in “Raimondo Spoke to Harvard Students About Her Success in Rhode Island” GoLocal Prov News, April 14, 2025. 

“First priority is to keep funding the pension system, so people have, at a minimum, their pension.”
—Rep. Mikie Sherrill (D-NJ), quoted in “What’s the potent sleeper issue in this year’s NJ governor’s race? COLAs” North Jersey, April 28, 2025. 

Data Highlight

Each month, we feature a pension-related chart or infographic. This month, Reason’s Rod Crane examines how public pension costs are shared between employers and employees. Using 2023 data, the chart shows that employees cover an average of 51% of normal costs (the estimated cost of benefits earned) but only 25% of total costs when unfunded liabilities are included. The full commentary is here.

Reason Foundation in the News

“Public pension systems should keep politics of all kinds out of their investments to serve their core duty of maximizing investment returns to provide workers with the retirement benefits they’ve been promised while minimizing financial risks for taxpayers. The modern guardrails and reporting standards in this bill can significantly strengthen these vital systems.”
— Zachary Christensen, Pension Integrity Project Managing Director, quoted in “Runestad introduces bill to ban ‘financial DEI’ investing for Michigan’s public pension funds” Michigan Senate Republicans, May 8, 2025.

“The benefit changes back then helped bend the cost and liability curves and built in some risk protections around new hires, but they didn’t fundamentally pour a bunch of money in to solve the current underfunding. It was a Phase 1 reform and then their leadership team left and they stopped pushing additional phases.”
— Len Gilroy, Reason Vice President of Government Reform, quoted in “New Mexico’s Pensions Remain Problematic” Rio Grande Foundation, May 12, 2025.

“Connecticut still has $40 billion in unfunded pension liabilities and another $20 billion in unfunded retiree healthcare liabilities to pay—the second highest in the country in per capita terms, equivalent to $16k per resident. Interest on that debt compounds at 6.9% annually. Any pause or reduction in pension contributions carries long-term costs.”
— Mariana Trujillo, Reason Foundation Policy Analyst, “Opinion: Why Connecticut Risks Return to Fiscal Chaos,” Hartford Courant, May 8, 2025.

The post Pension Reform News: Threats to California’s public pension reforms appeared first on Reason Foundation.

Source: https://reason.org/pension-newsletter/threats-to-californias-public-pension-reforms/