In what is surely this legislative session’s biggest surprise, Governor Gavin Newsom vetoed Assembly Bill 1383, which would have substantially weakened a modest pension reform bill backed by former Governor Jerry Brown in 2012. The veto was especially unexpected given that AB 1383 cleared both houses of the legislature by nearly unanimous votes.
In 2012, California’s pension debt exceeded $200 billion, requiring the state and local governments to make up the difference out of their annual budgets. Voters then became aware of the phrase “crowd out,” meaning that the annual allocation from the state and local governments that was required to meet the constitutionally mandated pension obligations were “crowding out” money needed for all other public services.
California found itself in this precarious position when Brown’s predecessor, Gray Davis, signed Senate Bill 400 (1999), that gave prison guards, park rangers, Cal State professors and other state employees the most generous public retirement benefits in the nation. Especially benefited were California Highway Patrol officers under the bill.
The dire situation motivated Brown to propose a 12-point comprehensive pension reform plan which, had it been enacted, would have solved virtually all of California’s public pension problems. Although the California legislature rejected many of the proposals, they eventually passed a scaled down pension reform bill known as PEPRA, the Public Employees’ Pension Reform Act. A key feature of the reform was that it maintained benefits for current workers and retirees but reduced them for future hires and made employees assume a larger share of the costs.
Fast forward to the legislative session that just ended. Reminiscent of the saying that those who don’t study history are doomed to repeat it, the legislature pushed passage of AB 1383, the core of which would have given enhanced pension benefits to police officers and firefighters. Specifically, the bill proposed lowering the normal retirement age for public safety employees receiving full benefits from 57 back to 55 and would have increased maximum accrual rates up to 3% (from 2.7%) and raise compensation caps used for calculating lifetime benefits.
AB 1383 was an invitation for another pension crisis, and as this column warned back in 2018, “California’s pension crisis exists in large part due to the very nature of defined-benefit plans. Unlike defined-contribution plans, where the taxpayers’ obligation to each public employee ends with every pay period, defined-benefit plans depend on a projection of future investment returns. And therein lies the problem. California has been horribly wrong in its application of assumed rates of return, leading to hundreds of billions in unfunded liabilities. And this shortfall is occurring in good economic times when the state of California is relatively flush. A recession will quickly expose this short-sighted thinking.”
Lance Christensen, Vice President of Government Affairs & Education Policy with the California Policy Center, is a leading expert on public sector pensions. He comprehensively lays out the reasons why AB 1383 was so dangerous:
- It increases pension liabilities by billions of dollars without providing any new funding to cover those costs, repeating the exact mistake of SB 400 in 1999.
- It reduces the PEPRA safety retirement age from 57 to 55 and creates a new 3% at 55 formula, generating $338 million or more in new annual normal cost contributions and $3.6 billion or more in present value liability increases.
- It expands the definition of pensionable compensation for all PEPRA members, adding costs in the low hundreds of millions annually.
- It allows employers and unions to negotiate away the 50 percent employee cost-sharing requirement through MOUs, eliminating a key taxpayer protection without any public input or accountability.
- It imposes these costs on local governments, cities, counties, and school districts that are already financially strained and have explicitly stated their inability to absorb additional pension mandates.
- It undermines a law — PEPRA — that has already generated $5.8 billion in savings and is projected to save an additional $25 billion if left intact.
Fortunately, there was one political leader in California whose memory was clear about what happens when pension benefits are expanded irresponsibly. In vetoing AB 1383, Governor Newsom said, “This is an era of California history I do not wish to repeat.”
Jon Coupal is president of the Howard Jarvis Taxpayers Association