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California Research Bureau plays role in California's retirement reform effort

Almost 80 years ago, in 1928, the California Commission on Pensions of State Employees recommended the establishment of a “prefunded” pension system in which an employee and employer would make contributions to a designated fund during the employee’s career that, together with the interest earned, would be sufficient to pay the entire cost of the employee’s pension benefits. The Commission warned that “any system which proposes to provide funds only as they are needed to [pay for benefits] is inviting disaster,” and that mounting debt from such a system could eventually “cause serious embarrassment to the state, forcing it either to make staggering appropriations, or to default in its obligations to members of the system.”

Today, most public employee pension plans in California are prefunded in the manner recommended by the 1928 Commission. As a result, California’s public retirement systems are substantially funded with the majority of pension costs paid by investment gains earned by pension plan trust funds rather than by employer and employee contributions. A recent California Research Bureau survey of the state’s public retirement systems found that even after the financial market downturn of the early 2000s, the state’s public retirement systems on the whole are better off financially than they were in the mid-1990s.

In contrast, it appears that the 1928 Commission’s predictions about mounting debt from retiree benefits that are not prefunded have come true with respect to retiree health benefits for public employees. Historically, the State and most public employers that provide health benefits to retirees have done so on a “pay-as-you-go” basis, paying for benefits as the costs come due with little or no money set aside to pay benefits in future years. New accounting rules now require governmental employers to report their liability for retiree health benefits as it accrues. Due to recent double-digit increases in the cost of medical care and longer life expectancies that will increase the amount of medical services that the typical retiree will receive, this liability has grown to an estimated $100 billion.

In response to ongoing concerns about the cost of providing pensions and health benefits for retired public employees in California, on December 28, 2006, Governor Arnold Schwarzenegger established, by Executive Order S-25-06, the Public Employee Post-Employment Benefits Commission to address unfunded obligations for promised post-employment benefits. The Commission will release its final report in January 2008, and will likely recommend that the State and local governments consider options for prefunding retiree health benefits as well as the establishment of mechanisms to increase the oversight of trust funds used to pay retiree benefits.

In February 2007, the Commission requested that Grant Boyken, Senior Research Specialist with the California Research Bureau (CRB) write a report to provide the Commission and members of the public with background on the issues. The report, titled “Funding the Golden Years in the Golden State” was released in March 2007 (

The Commission also asked Boyken to conduct a statewide survey to determine the current funding status of California’s 85 public retirement systems. He presented the results of the survey at a hearing in Burlingame in July. A summary of the survey and results is included in December 2007’s California Research Bureau Public Retirement System Survey.

Boyken has also prepared research briefs for the Commission and testified at hearings held throughout the state in 2007 on topics such as actuarial accounting practices for retiree benefits, governance and oversight of retiree benefit trusts, options for prefunding retiree health benefits, and strategies used in other states to address the costs of post-employment benefits.

For more information about the research or about the Commission’s work, please contact Grant Boyken, Senior Research Specialist in the California Research Bureau at the California State Library at (916) 651-9700 or via e-mail at The California Public Employee Post-Employment Benefits Commission also maintains a website at





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