Pensions devour California city budgets —
and it’s likely to get worse
by John Seiler | September 15, 2026
In July, the California Public Employees’ Retirement System announced a preliminary 14.8% return for fiscal year 2025-26, the 12-month period that ended June 30. It boasted, “The 2025-26 fiscal year return exceeded both last year’s 11.6% performance and the assumed 6.8% rate of return set by the CalPERS Board of Administration.”
The rise in funding status also was impressive. CalPERS was 68% funded when CEO Marcie Frost took over in October 2016, rose to 79% for 2024-25, then to 85% for 2025-26. And the fund’s assets increased to $637.1 billion. But the good news must be tempered with three reality checks.
First, the problems begin with the 85% funding status. Since I began writing about California pensions almost four decades ago, a myth has been passed around that anything above 80% is acceptable. That was refuted in an October 2021 brief by the American Academy of Actuaries: “A plan’s funding strategy should have a built-in mechanism for achieving the target of at least 100% funding over a reasonable period of time.”
Second is the effect of Assembly Bill 1383. Final passage came by overwhelming bipartisan majorities on August 30. Gov. Gavin Newsom has until September 30 to sign it, but has not indicated what he will do. AB 1383 would unwind Gov. Jerry Brown’s modest pension reforms enacted after the 2011 budget crisis. The Public Employees’ Pension Reform Act (PEPRA), which took effect in January 2013, reduced pension formulas for new hires. If Newsom signs it, AB 1383’s damage to CalPERS’ financial soundness only will be unveiled in future years.
Third, lawmakers assume that the current rate of growth in the pension fund will continue, which means they aren’t preparing for a downturn. I remember this happened before when the original pension spiking occurred, especially Senate Bill 400, which was passed in 1999 and began a statewide pension-increasing frenzy that led to the PEPRA reform.
That was during the dot-com boom, which people actually said was a “new” economy that couldn’t go down. I regularly wrote in Orange County Register editorials of the day using the phrase, “The business cycle has not been repealed.” Sure enough, the dot-com bust hit, and by October 2002, the NASDAQ had dropped 78%.
I’m not predicting the current AI boom will crash. But AB 1383 makes the same Pollyanna assumptions we saw 26 years ago. What percentage of a city’s general fund going to pensions is considered safe? The latest study I could find was from 2018, “League of California Cities Retirement System Sustainability Study and Findings.” It found:
In FY 2006–07, the average city spent 8.3% of its general fund budget on CalPERS pension costs. That average increased to 11.2% in FY 2017–18 and it is anticipated to increase to 15.8% in FY 2024–25. In FY 2024–25, 25% of cities are anticipated to spend more than 18% of their general fund on CalPERS pension costs with 10% anticipated to spend 21.5% or more.
The study didn’t give a specific percentage threshold for a city entering a danger zone. But it did say, “The results of this study provide additional evidence that pension costs for cities are approaching unsustainable levels.” The cities covered below have entered that danger zone.
Sacramento
City Manager Maraskesia S. Smith’s April 29, 2026 budget message noted the fiscal year 2026-27 general fund budget is projected to be $898.3 million. Of that, the CalPERS contribution will be $170 million, or 18.9%. (It’s $195 million for all funds, but we are considering only general fund amounts here.) Smith said, “For PEPRA members, the cost sharing of the normal cost as well as the benefit changes has resulted in a reduced financial burden for the city.” If PEPRA is gutted, those cost savings will start to be reversed.
Long Beach
On July 3, 2026, for fiscal year 2026-27, Long Beach proposed $737.2 million in recurring general fund spending and another $1.4 million in one-time expenditures. Combined general fund budget: $738.6 million. Of that amount, $149.3 million is budgeted for pensions, or 20.2%.
Santa Ana
Santa Ana’s accounting is more complicated than most cities’ because the city issued pension obligation bonds in 2021. In its mammoth, 740-page budget document of June 16, 2026, the city proposed spending approximately $66.5 million in general fund money on pension-related costs. That included $16 million in normal employer pension contributions, $31.56 million toward CalPERS unfunded liabilities and $17.44 million for pension obligation bond payments. Plus a $1.5 million contribution to the Pension Stabilization Account. Measured against Santa Ana’s $435 million general fund budget, pension costs would consume 15.3% of spending.
San Jose: A Non-CalPERS City
San Jose operates its own retirement systems. But pensions burden its budget about as heavily as they do with the CalPERS cities above. According to its Proposed Operating Budget from May 1, 2026, for fiscal year 2026-27 the city projects $405.1 million in general fund retirement costs. Of that, $354.6 million will go to pensions. That means pension costs will consume 20.7% of the city’s $1.7 billion general fund budget.
On June 2, city voters passed Measure A, which increased the general fund part of the transient occupancy tax from 4% to 6%, “for general fund services, including police, fire, homelessness response, and park maintenance.” The full tax rose from 10% to 12%. In doing so, voters avoided large service cutbacks, but this essentially was a pension tax. Furthermore, the city had previously issued pension-obligation bonds, which were upheld by the California Supreme Court last year after a challenge by a taxpayer group.
According to Orrick’s report on the San Jose decision, “A California Debt and Investment Advisory Commission report indicates 333 unique [pension obligation bonds] and Other Post-Employment Benefits transactions worth over $34 billion have been issued by public agencies in California from 1985 through April 2022.”
The financial problem is obvious: It’s like a family using one credit card to pay down another. Too many cities already dedicate about a fifth of their budgets to pensions. And that’s before Newsom potentially signs AB 1383 into law.
My warning of a quarter century ago still holds: The business cycle has not been repealed. A major recession would, again, damage pension systems and imperil taxpayers.
John Seiler is on the Editorial Board of the Southern California News Group.