Mr Schwarzenegger wants a "defined contribution" (DC) pension scheme to replace the current "defined benefit" (DB) scheme for all new recruits to teaching, nursing, the firefighters and police. DB workers know what they will get in retirement. DC workers only know what they are paying in.
For months, protesters dogged the governor as he tried to whip up support for his 2006 re-election campaign. They won an interim victory in April when he announced he was temporarily shelving his pension plans.
Most teachers in California are covered by the state retirement system.
Those retiring at 60 receive 150th of final salary for every year worked, with those lasting until 63 getting 142nd. To earn this, though, they pay 8 per cent of salary into their pension scheme, compared with 6 per cent for UK teachers.
Governor Schwarzenegger says he has been forced to act because California's pension obligations have risen from $160 million (pound;85m) in 2000 to $2.6 billion this year. Unless agreement is reached, he is threatening to put the issue to the voters.
California is not alone in attempting to rein in its rising public-sector pension costs, sparked by increased life expectancy and lower investment returns. A survey in March found that the issue is on the agenda across Europe, Asia and North America - 14 countries intend to tackle the problem.
In Australia and Italy, public-sector pensions are already on a DC basis for most new employees, according to Watson Wyatt, the financial consultants who carried out the survey.
Stephen Yeo, a partner with the firm, said: "Pressure to cut pensions is less in countries such as Switzerland and Canada where it is common for employees to share in any increase in costs of pensions due to greater longevity or lower investment returns.
"Some countries, including France and Germany, have completed, or are proposing, reforms that would retain the defined benefit formula but with less generous benefits and higher employee contributions."