Assembly Bill 1054’s DROP proposal would increase risks for CalPERS

A version of the following public comment was submitted to the California State Senate Labor, Public Employment and Retirement Committee on May 12, 2026.

DROP plans, like the one proposed in Assembly Bill 1054, aim to appeal to the most experienced members by granting additional benefits to workers who have already reached retirement age. They allow an employee to “retire” on paper while continuing to work, diverting their monthly pension payments into a separate guaranteed interest-bearing account that is paid out as a lump sum when they officially leave the workforce. While other state and local governments have adopted similar programs, lawmakers should be aware of the unique costs and funding risks that a DROP can pose to government pensions.

• A DROP changes the way a pension system can invest its assets. As the system chases illiquid assets to hit an assumed rate of return, a DROP puts more pressure on liquidity needs.
• Actuarial Standard of Practice (ASOP) No. 51 warns that a DROP could expose pensions to a significant cash flow risk. CalPERS’ aim to achieve assumption targets becomes more challenging with added volatility, and there is an increased risk of underfunding if more assets must be held back to pay for large DROP lump sums.
• According to an Assembly Appropriations report on AB 1054, previous CalPERS actuarial cost analyses found that a DROP is unlikely to be cost-neutral to CalPERS. Approximately 75% of peace officers remain beyond their retirement age stipulated by their pension benefit. Most members eligible under AB 1054 would be expected to retire and participate in the proposed DROP rather than continue working without additional pension benefits. Due to this eventuality, a DROP will drive up employer costs by an uncertain amount.

The implementation of a DROP also fundamentally alters the actuarial framework of a public pension system. To maintain fiscal stability, plans conduct regular experience studies to ensure retirement age assumptions align with reality. For example, while CalPERS allows for retirement at age 57 for public safety members, funding is often based on an observed average retirement age above that. A DROP disrupts this funding model by incentivizing members to enroll at the earliest possible eligibility date. This shift forces the pension system to downwardly revise its assumed retirement age, necessitating higher contribution rates to maintain adequate funding levels. This financial pressure is particularly acute for public safety benefits, which already feature lower retirement ages and early-exit options.

Rather than granting new benefits with uncertain costs, we recommend focusing on clear policy and funding guardrails that continue the work toward paying down $165 billion in CalPERS unfunded pension liabilities. We would welcome any opportunity to continue the conversation and share our data and experience working in state capitals throughout the country on these important issues.

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