California’s public employee pension fund delivered eye-popping investment returns last month, and while the timing may be pure coincidence, it has handed a political advantage to labor unions pushing to sweeten retirement benefits for police officers and firefighters.
The California Public Employees Retirement System reported a 14.8% investment gain for the 2025-26 fiscal year, a figure unions are now citing as evidence that the state can afford richer pensions for public safety workers without burdening taxpayers.
For local governments fighting the proposed pension increase, the report was unwelcome news. City officials argue that expanding benefits for police and fire employees would inevitably lead other public worker groups to demand similar treatment, straining budgets already stretched thin.
The measure at the center of the debate, Assembly Bill 1383, cleared the Assembly with strong bipartisan support before lawmakers left for their summer break. It now appears positioned for passage in the Senate before the legislative session wraps up in the coming weeks, leaving opponents with little room to maneuver.
Longtime observers of California politics see echoes of a similar episode nearly three decades ago. Shortly after Gray Davis took office as governor in the late 1990s, he moved to reward the public employee unions that had bankrolled his campaign through a bruising primary and general election. Davis backed a pair of benefit expansions — one for unemployment insurance, another for pensions — arguing, with union support, that CalPERS’ strong investment performance meant the pension boost would essentially pay for itself.
That assumption unraveled when the Great Recession hit and investment returns collapsed. Cities and counties across California found themselves on the hook for sharply higher contributions, as state law requires when pension fund earnings fall short of projections.
Local leaders at the time warned that the ballooning pension bills were siphoning money away from core services, including the very police and fire departments residents depend on. The fallout eventually forced a sweeping pension overhaul in 2012, which left benefits intact for existing employees and retirees but scaled them back for new hires — the same reforms AB 1383 would partially reverse.
Officials had hoped the 2012 changes would gradually ease the financial strain as veteran employees retired and were replaced by workers under the leaner pension formula. But the damage from the earlier benefit increases lingered for years, squeezing municipal budgets long after the recession ended.
At one point, it wasn’t unusual for California cities to contribute 50 cents to the pension fund for every dollar paid in salary to police officers, with firefighter contributions not far behind. Steve Schwabauer, who was Lodi’s city manager during that period, delivered a blunt warning to CalPERS trustees, telling them the city was on “a slow, inexorable slide toward insolvency” if pension costs kept climbing at that pace.
Three California cities — Vallejo, Stockton and San Bernardino — ultimately filed for bankruptcy, with soaring pension obligations playing a significant role in each case. During Stockton’s bankruptcy proceedings, federal Judge Christopher Klein stirred controversy by ruling that the city had legal authority to cut pension benefits as part of its financial recovery. Despite the ruling, none of the three cities chose to reduce pensions.
Now, with AB 1383 back in the spotlight, the numbers at stake are substantial. CalPERS actuaries estimate the bill would add $4.8 billion in long-term costs for state and local governments, with annual employer contributions rising by an estimated $233 million.
Critics warn the true financial impact could grow far beyond that projection. Once the 2012-era pension limits for police and firefighters are rolled back, other public employee unions are likely to push for comparable increases — and in a Legislature where Democrats aligned with labor hold strong majorities, resisting those demands may prove difficult.
Original source: CalMatters
