It may be just a coincidence, but when California’s public employee pension system touted very high earnings on its investments last month, it was a political windfall for unions seeking to increase retirement benefits.
They could argue that the California Public Employees Retirement System’s report of a 14.8% gain during the 2025-26 fiscal year indicated that California could afford to boost pensions for police and firefighters with little or no impact on taxpayers.
Conversely, the CalPERS report was a setback for local governments that oppose the pension boost, contending it would open the door to higher pensions for other categories of public workers and would exacerbate budget shortfalls.
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Opponents of the pension increase proposed in Assembly Bill 1383 appear to face an uphill battle. The legislation passed the Assembly with an overwhelming bipartisan vote prior to the Legislature’s summer recess and could gain Senate approval before adjournment in a few weeks.
The situation is similar to what happened 27 years ago, shortly after Gray Davis was inaugurated as governor. Davis had survived a bruising primary battle in 1998 against two wealthy, self-financed opponents and a tough duel with Republican Attorney General Dan Lungren, thanks largely to big donations from public employee unions.
Davis repaid his political debt to the unions by sponsoring two benefit increases, one in unemployment benefits, the other in pensions. He and the unions contended the pension boost could be covered without new taxes because CalPERS said as much.
However, investment earnings cratered during the Great Recession a few years later. Local governments struggled to pay the increased contributions that law requires them to make when pension fund investments falter.
Local officials argued that the mandatory increases in contributions to cover the pension system’s weak earnings were diverting money that otherwise would support vital and popular services, including police and fire protection.
Eventually that led to a major overhaul of pension benefits and the contributions to finance them in 2012 — changes that AB 1383 would partially undo. Among other things, the reforms didn’t affect pensions of current retirees or employees, but reduced them for future hires.
The 2012 reforms would, it was believed, slow the increase in pension costs as workers retired and replacements were hired with lower pension guarantees. However, the impacts of the Davis-era increases continued to affect local budgets.
It was common for California cities to pay 50 cents into the pension fund for every dollar in salary for their police officers and only slightly less for firefighters. Lodi’s city manager at the time, Steve Schwabauer, told CalPERS trustees at a meeting, “I have the unfortunate obligation to tell you that Lodi is on a slow, inexorable slide toward insolvency if you maintain your present course.”
Three California cities — Vallejo, Stockton and San Bernardino — declared bankruptcy, with fast-rising pension costs as major factors. During Stockton’s bankruptcy, the presiding federal judge, Christopher Klein, declared the city could reduce pension benefits to improve its financial position, touching off a brief but fiery debate. However, none of the three cities acted on Klein’s advice.
Back to AB 1383. Sweetening the pensions of public safety employees would increase costs for the state and local governments by $4.8 billion, an analysis by CalPERS actuaries estimates, with contributions by employers rising by $233 million a year.
That’s a hefty number. The true impact of passing AB 1383 could be much higher, because once the pension limits on police and firefighters hired since 2012 are breached, unions representing other categories of workers will demand parity. And a Legislature dominated by union-friendly Democrats will be hard-pressed to refuse.
