Okay. This is a new problem caused by a gem update. Calling bundle update breaks my rails application. Here are the gems that changed:
# Gemfile.lock -
Removing compass from my gemfile (remember bundle install) and then using the new sprockets beta fixed it for me.
bundle install
gem "sprockets", "~>3.0.0.beta" in gemfile. Then bundle update sprockets.
gem "sprockets", "~>3.0.0.beta"
bundle update sprockets
Enjoy :)