Meanwhile, as corporate America has scaled back retirement benefits in recent years, California has headed in the opposite direction, enhancing benefits through legislation and contract negotiations with public employee unions. The result is the most generous public pensions of any state.
Under former Gov. Gray Davis, who received millions in campaign donations from unions, retirement packages for state workers were sweetened.
Davis signed legislation that based the pensions for many California workers on the highest annual income they earn while government employees; other states use an average of the top three years of earnings.
In addition, the age at which some employees could begin collecting was dropped to 50, and annual retirement payments were increased substantially.
When Schwarzenegger ousted Davis in the 2003 recall election, he made changing the pension system a centerpiece of his agenda, highlighting what he characterized as runaway costs.
Yet the 18 labor contracts negotiated by his administration have left in place most of the benefits the governor said the state can't afford; the few concessions that union officials traded for pay increases did little to lower future retirement costs.
Long-serving state employees in California "can receive more annual income in retirement than when they worked," according to a legislative report released last year.
The report said that when Social Security payments are factored in, "It takes just 20 to 30 years of work (that is, less than a full career) to have retirement income ... equal to working pay."
A typical 55-year-old government employee who earns $60,000 and has worked for the state for 20 years is entitled to $25,000 a year, plus Social Security and lifelong healthcare benefits. In most other large states, the pension for the same employee, if eligible at 55, would be less than $15,000 a year -- thousands less in some states -- plus health benefits.
Defenders say the state is well positioned to cover these costs.
"Reasonable people disagree about what the markets can do long-term," said John Meier, a managing partner at Strategic Investment Solutions, a San Francisco firm that helps the state make projections.
Forecasts are made through a collaboration of actuaries, economists and investment experts from state government and private firms. They gauge the historical returns of various investment types, the outlook for growth in those places and the assumptions being used by other institutional investors.
"Our organization and a lot of other organizations believe that
Arizona and Virginia project an 8% return. Colorado and Pennsylvania anticipate 8.5%.
That's all fine, said Zvi Bodie, a professor at Boston University School of Management, but there are no guarantees -- and there's the rub. Some experts are predicting a period of long-term market instability, he notes, and the state can't afford to be off by a percentage point or two.
"Every study we have of stock market behavior says one thing we know for sure is: We don't know for sure," he said. "It is risky. There is no free lunch here."
Bodie says the pressure for state number-crunchers to project strong earnings indefinitely is intense.
Optimistic projections free lawmakers from having to pull billions of dollars out of other state programs to increase the taxpayer contribution to the pension funds.
Meanwhile, officials at the California State Teachers Retirement System announced at a recent meeting that they are poised to raise investment in such risky areas as high-tech start-ups by roughly 67%.
"If they lose money, someone is going to have to bear that risk," said Olivia S. Mitchell, executive director of the University of Pennsylvania Wharton School's Pension Research Council. "Politicians today have promised benefits without explaining what will happen down the road if the system runs short."
Times staff writer Dan Morain contributed to this report.