California’s Public Employees’ Pension Reform Act, known as PEPRA, took effect on January 1, 2013 and rewrote the rules for anyone hired into a California public pension system on or after that date. It requires new employees to pay at least half the normal cost of their pension, caps the salary that can count toward a retirement benefit, and strips out the kinds of pay that used to be used to inflate final pensions. For 2026, the pensionable compensation cap sits at $159,733 for employees enrolled in Social Security and $191,679 for those who are not.1CalPERS. 2026 Compensation Limits for Classic and PEPRA Members
What PEPRA Changed for New Hires
PEPRA came out of Assembly Bill 340 in 2012 and applies to public employees first hired on or after January 1, 2013. Employees hired before that date are usually called “classic” members and keep the benefit formulas and contribution structures that applied at their hire.2California Legislative Information. California Assembly Bill 340 – Public Employees Retirement
Three PEPRA provisions do most of the work.
Fifty percent employee cost share. PEPRA members must contribute at least half of the total normal cost of their pension benefits, and employers cannot pay that share on the employee’s behalf. Actual employee rates move each year with CalPERS actuarial valuations, but the 50 percent floor is fixed by statute.3CalPERS. Public Agency PEPRA Member Contribution Rates FAQs
Pensionable compensation cap. The cap limits the salary that counts toward a PEPRA member’s benefit. It is $159,733 for 2026 for members who also participate in Social Security and $191,679 for those who do not, adjusted every January based on the Consumer Price Index.4California Legislative Information. California Government Code 7522.10 Pay above the cap does not enter the pension formula at all. Employers who need to compete for high-earning positions typically respond with supplemental savings vehicles or higher cash compensation rather than trying to route more salary through the pension.
Anti-spiking rules. Only regular, recurring pay earned during normal working hours is pensionable for PEPRA members. Payments for unused vacation, unused sick leave, overtime beyond normal hours, severance, housing allowances, and similar items are excluded from the pension calculation.5California Legislative Information. AB 340 Assembly Bill Analysis This closed off the practice of loading up final-year pay to drive up the pension.
Employer Contribution Rates Under the Reformed System
PEPRA cut long-term liability growth, but it did not erase the unfunded liability that already existed. Employer rates reflect that. For fiscal year 2025–26, CalPERS set the total employer contribution rate for state miscellaneous employees at 31.42 percent of payroll, essentially flat against the 31.39 percent rate for 2024–25.6CalPERS. CalPERS Circular Letter 200-025-25 – 2025-26 State Employer and Employee Contribution Rates7CalPERS. 2024-25 State Employer Contribution Rates Public agency rates vary by employer and plan tier.
CalSTRS employer contributions for school districts and community college districts reached an effective 19.1 percent of payroll for 2025–26.8Legislative Analyst’s Office. Contributions to CalSTRS For school districts, every point of that rate competes directly with classroom spending.
Senate Bill 90, enacted in 2019, authorized a $2.5 billion supplemental state contribution to CalPERS aimed specifically at paying down unfunded liabilities and slowing the future rate curve.9California Public Employees’ Retirement System. State Valuation and Employer/Employee Contribution Rates It helped. It did not close the gap, and employers should plan on elevated rates for the foreseeable future.
Compensation Reporting: Where Employers Get Burned
CalPERS audits regularly turn up reporting mistakes that lead to retroactive corrections, additional billings, and administrative penalties. Most of the trouble comes from a handful of recurring errors.
Special compensation must be reported separately from base pay and categorized under the correct type. Rolling special pay into base pay, or treating something earned over time as a one-time payment, are common miscategorizations.10CalPERS. Compliance in Compensation Reporting Every item of special compensation also has to be backed by a written labor policy or agreement that matches CalPERS’s regulatory definitions. If the paperwork does not exist or does not match what was reported, CalPERS will disallow the amount.
Recurring traps include:
- On-call pay. Compensation for being on call is not reportable because it is not for work performed during normal working hours.
- Top-of-range bonuses. A special compensation item available only to whoever sits at the top step is not available to a group or class; a single employee is not a group.
- Executive employment contracts. An individual contract covering one position is not a pay schedule, even if publicly posted. CalPERS treats these as a “group or class of one,” which generally disqualifies the pay from special reporting.
- Overly broad pay ranges. A single wide range covering multiple positions with different duties can be rejected on audit.
Membership enrollments reported more than 90 days late trigger a $500 administrative fee per late enrollment on top of back contributions from both the employer and employee. Late payroll reporting brings automatic penalties and interest, though CalPERS considers waivers case-by-case through its dispute process. If you find a misreport internally, self-reporting usually produces a better outcome than waiting for an audit to surface it.
What You Can and Cannot Bargain
Pension benefits are negotiated through collective bargaining. The Meyers-Milias-Brown Act governs local agencies; the Ralph C. Dills Act covers state employees.11California Legislative Information. California Government Code Chapter 10.3 – Ralph C. Dills Act Retirement benefits are within scope, but PEPRA sharply limits what can actually be bargained for post-2013 hires. The 50 percent employee cost share is a floor, and employers cannot use impasse procedures to push contributions above it. Anything above the floor requires mutual agreement.
When bargaining reaches impasse, Meyers-Milias-Brown requires fact-finding before an employer can impose its last, best, and final offer. AB 646 extended that requirement to any bargainable issue at impasse, not only comprehensive MOUs, so decisions with pension implications, such as layoffs or changes to compensation structures, can trigger it.
Beyond contribution rates, negotiations often turn on retiree healthcare subsidies, cost-of-living adjustments, and the definition of pensionable compensation. Reducing or tiering COLAs draws frequent union challenges as violations of existing agreements, and those disputes end up in arbitration or court often enough that any change on that front should be planned with litigation in mind.
How Recent Court Decisions Changed the Playing Field
California’s courts apply the “California Rule” to public pension changes: employees gain vested contractual rights to their pension benefits at hire, and any modification that disadvantages them must be offset by comparable new advantages. The rule was established in Allen v. City of Long Beach (1955) and reaffirmed in Betts v. Board of Administration (1978).12Supreme Court of California. Allen v City of Long Beach13Justia Law. Betts v Board of Administration
Two recent decisions narrowed that rule without overturning it. In Cal Fire Local 2881 v. CalPERS (2019), the California Supreme Court upheld PEPRA’s elimination of “airtime” purchases, holding that the chance to buy additional service credit was a statutory benefit rather than a vested contractual right, and the legislature could eliminate it without providing an offset.14Justia Law. Cal Fire Local 2881 v California Public Employees Retirement System In Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Association (2020), the court upheld PEPRA’s tightening of what compensation counts toward benefits under the County Employees Retirement Law of 1937, finding no express contractual right to have pensions calculated using the inflated methods PEPRA removed.15Justia Law. Alameda County Deputy Sheriffs Assn v Alameda County Employees Retirement Assn
The practical takeaway: peripheral pension features are now easier to modify than they were, but core benefit formulas remain protected. Expect continued litigation testing where that line sits.
Alternative Retirement Formulas Within PEPRA
Rising costs have pushed some agencies to look at hybrid designs that pair a smaller defined benefit with a defined contribution component, along with cash balance plans and 457(b) supplemental savings plans. Deferred retirement option plans, which freeze the pension benefit while an eligible employee keeps working and accumulates the frozen amount in a separate account, can help retain staff in hard-to-fill roles without adding to pension accrual.
PEPRA constrains the design of any alternative formula for new members, and any plan an employer offers still has to comply with CalPERS or CalSTRS rules if the agency participates in one of those systems. Structural reform beyond that would require legislative action.