SF Standard: California’s pension funds are rigged to stick taxpayers with the bill

AB 1383 would let CalPERS and CalSTRS keep lowballing what they ask public employees to pay, leaving taxpayers to cover the gap — again.

Originally published in The San Francisco Standard – Opinion on August 3, 2026

At 10 a.m. Monday, the ​​California State Senate Appropriations Committee will hold a hearing in Sacramento on Assembly Bill 1383, which would boost pension promises to certain government employees without requiring sufficient funds to be invested upfront to meet those promises. That would be a disaster. It re-creates the very same lethal combination that has already saddled taxpayers with huge retirement costs, diverting tens of billions of dollars per year from classrooms, police forces, and other services taxpayers rely on.

Whenever a government promises future defined-benefit pension payments to employees, current employees and taxpayers equally split a contribution upfront — the “normal cost” — to a public pension fund. Along with investment earnings, the upfront money is expected to be enough to cover the promised payments when they come due. When it isn’t, the resulting gap — an “unfunded liability” — must be covered by additional contributions, and under California law, taxpayers alone are on the hook for it. Because California’s public pension funds (CalPERS and CalSTRS) have long required insufficient normal cost contributions, they’ve built up huge unfunded liabilities that taxpayers have had to cover. That’s why taxpayers had to contribute $36.4 billion to the state’s pension funds in 2024-25, compared with just $11.6 billion from employees. What was supposed to be a 50/50 split between taxpayers and public employees has become a lopsided 76/24 burden on taxpayers.

That shift wasn’t an accident. It’s the result of a deliberate strategy by the boards of CalPERS and CalSTRS, which are controlled by public employee unions, to keep normal cost contributions artificially low. Here’s how that strategy works.

Say you run a social services nonprofit. In 2005, you promise a staff member a $500,000 lump-sum retirement payout in 2025. To fund it, you and the employee agree to evenly split an initial $112,000 contribution ($56,000 each). The money goes into an account managed by an investment firm named “CalPERS,” which projects that its returns will grow that $112,000 to the full $500,000 by 2025.

Fast forward to 2025. The account holds only $410,000, leaving a $90,000 shortfall. This gap exists because CalPERS failed to achieve the investment target it predicted in 2005. If CalPERS had predicted its 20-year investment returns accurately, the required initial contribution from both the employer and employee would have been $137,000 — just an extra $12,500 from each party. But CalPERS’s failure to secure a sufficient upfront investment in 2005 results directly in a $90,000 penalty to your nonprofit in 2025.

Those numbers aren’t invented for this example — they reflect CalPERS’ actual returns. The problem is not that CalPERS did not invest well. To the contrary, it earned a strong 6.7% annualized return over that 20-year period. The problem is that it based normal cost — the only cost borne by employees — on an expectation of an even greater return of 7.75%. By comparison, Warren Buffett expected a 6.4% annual return for his defined-benefit pension plans in 2005. CalPERS, in other words, assumed its investments would annually earn 21% more than the return expected by one of the country’s greatest investors. Compounded over 20 years, the difference between CalPERS’s unrealistic expected return of 7.75% and its actual return of 6.7% produced a huge shortfall that — no surprise — had to be covered only by taxpayers, with no contribution from employees. CalSTRS was even more unrealistic, basing normal cost in 2005 on an 8% annual return.

AB 1383 would throw kerosene on a pension fire that’s already consuming California budgets. It rolls back the pension reforms enacted in 2013 while still allowing CalPERS and CalSTRS to use inflated investment return assumptions in order to keep normal cost contributions artificially low. Marketed as a benefit for public safety employees, the bill would lower retirement ages, establish new retirement formulas, expand what counts as a pensionable benefit, and even allow negotiations that could do away with the 50% cost-sharing floor on normal cost.

This is bad policy. So long as CalPERS and CalSTRS boards are controlled by unions that seek to keep normal cost contributions artificially low, pension commitments should require one of two safeguards: normal cost contributions based on returns from secure assets like U.S. Treasuries, which would guarantee promised payouts without extra taxpayer funding, or an explicit guarantee that taxpayers be shielded from absorbing any financial shortfalls.

Unless AB 1383 is amended to include one of those safeguards — pre-funding with Treasury securities or guaranteed protection for taxpayers — the bill must not advance.