Proposed pension benefit increases for first responders would burden California’s local governments and taxpayers

A bill currently under consideration in the California legislature would grant additional pension benefits to the state’s public safety workers, but it would come at the cost of eroding several crucial guardrails established by the 2012 Public Employees’ Pension Reform Act (PEPRA), which is the state’s multi-decade plan to manage runaway costs and eventually close its over $300 billion in government pension debt. Reacting to preliminary cost estimates for the proposed bill, state lawmakers amended it to mitigate some of the expected burden on taxpayers, but the text as it stands would still impose high costs on the state’s already-stressed state, city, and county governments. 

Assembly Bill 1383 (AB 1383), which has passed the assembly and is now under consideration in the senate, would grant public safety workers pension boosts by increasing final pension benefits, removing cost-sharing requirements, and lowering the minimum retirement age. The bill would also reclassify pension contributions as a collective bargaining issue, reversing over a decade of efforts to curb rising public pension costs and possibly opening the door to many more costly pension increases. 

A Reason Foundation analysis of AB 1383 indicated that the original proposal could have added an estimated $12 billion to $ 14 billion in new costs over 30 years, imposing a significant financial burden on cities and counties (and ultimately taxpayers) that would bear the costs of these newly granted benefits. Lawmakers seem to have heeded this warning, amending the bill last month to greatly reduce the estimated costs on taxpayers. 

The May amendment to AB 1383 greatly narrowed the benefit enhancement being granted to police and firefighters. Instead of increasing the pension multiplier (the part of the pension formula that determines the actual size of a benefit) for all public safety employees, the proposal would maintain the existing multipliers. The amendment also clarified that no benefits would be retroactively increased, meaning any new enhancements would apply only to years served after 2027. 

These amendments will reduce the long-term cost evaluation of AB 1383, but several concerning features remain in the bill under consideration. The bill will still allow police and firefighters to retire at age 55, down from the current 57. Caps on the income used to calculate pension benefits will also rise, granting richer benefits to the highest earners. The bill will erode crucial cost-sharing requirements established by PEPRA, opening the door to the runaway costs the state saw before 2012. 

The ever-growing costs of public employee retirement benefits have become a major concern for local governments, especially those that have experienced financial hardships in the past or are on the brink of a major fiscal crisis. A 2018 report from the League of California Cities found that the share of local general funds dedicated to California Public Employees’ Retirement System (CalPERS) benefits had risen from 8.3% in 2006 to over 11.2% in 2018 and was expected to reach over 15.8% of local general funds by 2024.  

San Bernardino is an example of a city already familiar with the consequences of runaway public pension obligations. The soaring pension costs were the primary factor in the city’s 2012 bankruptcy. Today, the city has to pay an amount equal to 110% of public safety payroll to cover the costs of CalPERS, with most of that (90%) going to pay for unfunded pension liabilities. Essentially, for every dollar spent on police officers’ and firefighters’ salaries, the city must also put a dollar toward its pension system, mostly to pay for past benefits. According to Reason Foundation analysis of the city’s financial reports, San Bernardino is on the hook for public pension liabilities totaling $2,340 per resident.  

The city of Stockton was also forced into bankruptcy in 2012 and has pension obligations that are playing an increasing role in growing budget pressures. According to the latest financial reporting, for every dollar spent on paying police and firefighters, an additional 93 cents must be dedicated to CalPERS to cover pension obligations. While some of that is the cost of benefits earned by current employees, most of it (71%) will be used to pay the pension system’s massive debt. That is a massive burden on today’s taxpayers for services that benefited people well in the past. 

Stockton and San Bernardino are not alone. A Reason Foundation review of city and county financials revealed that elevated public pension costs are not limited to entities that have previously filed for bankruptcy. More than 150 city and county governments with local public safety members participating in CalPERS had at least one major pension cost or funding warning sign, such as a funded ratio below 70%, employer pension contributions above 80% of payroll, or unfunded liability payments above 60% of payroll. 

By granting pension benefit increases to public safety workers and passing on the resulting costs to future municipal budgets and taxpayers, California risks repeating a disastrous mistake. 

In 1999, California Senate Bill 400 significantly enhanced state worker benefits, with the assumption that soaring market returns could cover the additional costs, a decision that led to an explosion in the public pension debt due to market losses in the 2000s. It was the cities and counties of California who felt the brunt of this poor policy in the past, and they are the ones who would again pay the price for benefit sweeteners granted by state lawmakers.

Despite recent amendments to reduce the estimated costs, Assembly Bill 1383 would still be a significant setback to California’s long-term project (established by PEPRA) to fully fund existing pension benefits for public workers. The state’s local governments and taxpayers are already stretched, paying for growing pension costs. Adding to that burden while current benefits remain underfunded would be a poor decision.

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