California’s costs for state workers’ pension expected to drop in coming years
.JPG "The California Public Employees’ Retirement System, or CalPERS, headquarters buildings in downtown Sacramento are photographed on Sept. 16, 2021.")
The cost of pensions for California’s state employees is expected to decrease in the coming years, after several years of strong investment returns, according to a result analysis by the California Public Employees’ Retirement System.
The good financial news is a result of strong investment returns over the past two years, which will enable the state to pay comparatively less for workers’ pensions. That’s if, CalPERS keeps meeting its investment goals over the coming years.
Aside from the state’s payments, workers’ contributions and CalPERS’ investment returns are the other two funding sources for pensions. Most state employees’ contributions are established through collective bargaining.
For the largest category of state employees, the state is currently paying 31 cents toward workers’ pensions for every dollar paid in wages to those employees — or a 31% contribution rate.
But by fiscal year 2030-31, the contribution rate is expected to drop to 29% for the “miscellaneous” category of state workers, which is composed of non-public safety related classifications. As of 2024, CalPERS had over 189,000 active members who fall into this category.
The primary driver of this rate decrease, which is expected to begin in fiscal year 2028-29, is CalPERS phasing in its investment gains from 2024 and 2025, said Nina Ramsey, an actuary supervisor. The other factor is the benefits awarded to retirees is changing, from a more generous to less generous pension.
“Included in these projections, we are accounting for turnover from classic members to PEPRA members who have a lower normal cost. So we think that the normal cost for these plans, as the PEPRA population grows, will continue to decrease,” Ramsey said, referring to the Public Employees’ Pension Reform Act, which reduced pension benefits for CalPERS members who joined in 2013 or later.
For other groups of state employees, the contribution rate is expected to drop even more than 2 percentage points. For state firefighters and peace officers, the contribution rate is expected to decrease from 49% to 43% between 2026 and 2032.
The rates for five different categories of state employees, which includes California highway patrol officers, correctional staff and non-public safety related workers, are slated to increase until fiscal year 2027-28 before California’s pension costs are estimated to decrease over the subsequent four years. Ramsey told CalPERS board members last week that this is because fiscal year 2027-28 will be the final year that the investment loss of 2022 “will be fully ramped in.”
Between 2021 and 2022, CalPERS’ funded status dropped from 81% to 70% due to volatile global markets that resulted in poor investment returns. Since then, CalPERS funded status has increased. In January, the pension fund reported that it has 84% of money needed to pay for current and future financial liabilities.
Ramsey said that after fiscal year 2027-28, the rates will begin to decline as a result of CalPERS recent investment gains. In 2024, CalPERS reported an overall investment return of 9.3%. In 2025, the fund reported an 11.6% return.
The contribution rates are expected to continue falling over the subsequent three years as long as CalPERS continues to hit its target of 6.8% for investment returns.
In the upcoming fiscal year, California expects to contribute $9.8 billion to CalPERS, according to the governor’s January budget proposal. The total cost of pensions may not necessarily decrease as the contribution rate decreases because the state’s payroll costs are likely to increase in the coming years.
For example, the contribution rate for California Highway Patrol officers is expected to decrease significantly between the current fiscal year and the next year, but the total amount the state contributed to those officers’ pensions is roughly the same. Ramsey explained that CHP’s recent hiring spree resulted in the state needing to contribute less money per officer because more employees are paying into the system, but the state’s overall cost for these workers’ retirement plans has stayed the same.
Asked how likely this trend is expected to hold, Ramsey said, “It is highly dependent on that investment return. So if we don’t hit that 6.8% these could go the other direction.”
