California Gov. Newsom’s veto saves taxpayers billions, preserves previous pension reforms

California Gov. Gavin Newsom recently vetoed Assembly Bill 1383 (AB 1383) and Assembly Bill 1054 (AB 1054), which sought to grant the state’s best-paid police and firefighters unfunded enhancements to their pension benefits. 

In letters to the California legislature, Gov. Newsom cited concerns about the additional risks and costs the bills would impose on local governments and emphasized the importance of staying the course on the landmark Public Employees’ Pension Reform Act (PEPRA), passed in 2012. 

Newsom’s veto is a wise, decisive response to extensive analyses and warnings from Reason Foundation, other fiscally minded interest groups, and local government leadership. While AB 1383 and AB 1054 garnered near-unanimous support in the state legislature, these vetoes were vital for a state still decades away from fully funding public pension promises already made to retirees and workers. 

Although this effort to repeat the state’s past mistakes by granting costly pension benefit increases to the state’s best-paid government workers fell short, government employee unions and interest groups will likely continue to wield their heavy political influence on future proposals of this sort. With Gov. Newsom leaving office next year, other California lawmakers must continue to protect pension reforms like PEPRA and avoid adding to the state’s gargantuan $257 billion pension funding debt.

PEPRA’s impact so far

Thanks to a massive unfunded pension benefit increase that was granted to all California public employees and retirees in 1999, the state found itself in a perilous pension funding quagmire after major investment losses during the Great Recession. In two short years, the state’s public pensions went from fully funded to $245 billion in debt by 2009. Facing projections of pension system insolvency, lawmakers had to act, and to their credit, they passed a package in PEPRA.

The most pivotal aspect of seeing pension reform through, however, is time. Even under the most optimistic of outlooks, PEPRA was always going to take multiple decades to fully realize its goal of bringing the state’s pensions back to solvency and full funding. 

The reforms’ progress is evident in the gradual improvement of the California Public Employees’ Retirement System (CalPERS), whose funding rose from 61% in 2009 (meaning it held just 61 cents to every dollar owed to its members) to 85% funded in 2026. 

Despite the progress, this trajectory, and the system’s own actuarial reports, indicate that CalPERS is still 10 to 20 years away from meeting PEPRA’s original aim.

Given the long path ahead for California’s pensions, it is concerning that lawmakers appear ready to prematurely unwind reforms and grant costly benefit increases.

A legislative threat to PEPRA

Since its passage in 2012, California has seen several attempts to chip away at PEPRA by crossing the prudent limits set in the reforms, but none generated as much support as AB 1383 and AB 1054. Before Gov. Newsom vetoed them, the bills had strong support among Democrats and Republicans, with unanimous support in the Senate and only two opposing votes in the Assembly.

Despite the fact that the bills would enhance the pensions of only the state’s best-paid and longest-serving employees, the bills were sold by their sponsors to address perceived recruitment and retention challenges facing the state’s first responders. 

In truth, AB 1383 would have lowered the retirement age of police and firefighters from 57 to 55. It would also have made significant adjustments to PEPRA’s limits on the level of compensation that could apply to the pension benefit formula and created a new, higher tier of benefits that employees could use to bargain with participating employers. 

AB 1054 would have established a new deferred retirement option plan (DROP) for first responders, creating new, unpredictable costs.

These changes would have significantly undermined several of PEPRA’s prudent cost-saving limits and would have opened the floodgates—as the state did in 1999—for granting unfunded benefit sweeteners with unforeseeable costs. The heavy burden of additional costs would have fallen on employers of public safety employees, mostly local governments, which would ultimately have been shouldered by the state’s already stretched taxpayers.

The defense of PEPRA

Drawing on more than a decade of pension reform work across the country, Reason Foundation understood how crucial this moment was for the nation’s largest system of government employee retirement plans.

To address the stated impetus of the bills, Reason Foundation conducted robust analyses showing that the state’s turnover of public workers was much lower than the national average and had not changed notably over the last seven years. 

An additional analysis of national Census Bureau survey data showed that, contrary to the bills’ proponents’ assertions, the median tenure of California’s public safety workers had doubled since the 1980s and stood well above the national average for first responders. 

These findings undermine claims that a staffing crisis exists, certainly not enough to justify adding high costs to an already underfunded pension system.

To advise on the state’s history with pension policy and the potential costs of AB 1383, Reason Foundation released the CalPERS Monitor website. This actuarial analysis included the only forward-looking perspective to account for the potential costs that could arise under recession scenarios, which was the main source of California’s current pension funding woes. According to Reason’s projections, AB 1383 could have added $9.3 to $14.5 billion in new costs over 30 years, depending on investment outcomes.

Reason’s analysis on the individual components of these costs also became a crucial feature of discussion on the bill. According to more detailed modeling of AB 1383, the bulk of new costs (86%) that the bill would generate would come from allowing higher salaries to apply to the pension formula. This meant that most of the proposed new costs would go toward granting richer benefits for employees already making more than $160,000 annually.

Alarmed by Reason’s findings, California’s fiscally minded organizations and several local government officials pushed back hard against AB 1383. In response to the backlash, the bill’s sponsor accepted two amendments: the first an attempt to distance the legislation from the disastrous retroactive benefit-gifting spree of 1999, and the second to directly reduce the aforementioned benefit boost for higher earners. By Reason’s estimate, the latter amendment would have reduced AB 1383’s 30-year cost by $2.7 billion.

The veto that stymied the reform rollback

Passing with near-unanimous support, AB 1383 and AB 1054 reached Newsom’s desk in early September. He responded decisively, justifying his vetoes by stating that the bills would “partially reverse some of PEPRA’s reforms and significantly increase state and local government costs” and create “significant long-term fiscal and administrative pressures on departments.” Newsom also said the bills would be seen as special treatment for public safety workers, putting them ahead of the state’s other government employees. 

What is next for PEPRA?

This is likely not the end of efforts to undermine PEPRA by granting pension boosts to government employees. Public safety union leadership has already said it intends to continue this push. Any future efforts will go through a different governor, but policymakers should assume the next governor, like Newsom, will also want to preserve the state’s fiscal health and its pensions.

Lawmakers in this latest legislative process unfortunately overlooked the perspectives of local city and county governments, which would have borne the brunt of Sacramento’s decision. While state senators in the Capitol echoed talking points from public safety unions, several city and county managers testified against AB 1383, urging lawmakers not to impose more costs on their annual budgets. 

Many of California’s policymakers seemed to overlook that cities and counties can already adjust compensation to meet their unique needs. If a city’s police or fire department faces recruitment challenges, it already has the tools to attract new applicants, including higher salaries. Forcing, by edict, a public pension benefit enhancement on the entire state ignores that each local government faces its own unique challenges and already has the wherewithal to identify and enact appropriate policy.

The bipartisan coalition of lawmakers that enacted the reforms in PEPRA still has a long road ahead before it reaches the goal of fully funding California’s pensions. The good news is that PEPRA’s reforms are clearly working, but today’s policymakers must honor those sacrifices and stay the course.

Lawmakers must remember that, while there has been some progress, CalPERS is still $179 billion short of funding the retirement promises made to its public employees. Now is not the time to give in to pressure from politically influential unions and employee groups to increase pension benefits, which would undermine PEPRA’s success and impose high costs on taxpayers and local governments. 

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Source: https://reason.org/commentary/california-gov-newsoms-veto-saves-taxpayers-billions-preserves-previous-pension-reforms/