The California pension crisis is the growing gap between what the state’s public retirement systems have promised their workers and what they actually have on hand to pay. CalPERS, the largest of these funds, held $563 billion in assets as of mid-2025 and was 79% funded, meaning roughly one dollar out of every five it owes current and future retirees is backed only by the expectation that taxpayers will make up the difference.1CalPERS. CalPERS Announces Preliminary 11.6% Return for 2024-25 Fiscal Year Multiply that shortfall across dozens of pension systems statewide and you get the pressure that is now reshaping state and local budgets.
How Big the Gap Is
Two numbers describe a pension fund’s health. The funded ratio is the share of promised benefits the fund can cover with current assets and expected future contributions. A fully funded plan sits at 100%. The unfunded liability is the dollar gap between promises and resources. CalPERS reported an estimated $168 billion unfunded actuarial liability as of June 30, 2024, before the following year’s investment gains.
CalPERS serves nearly 2.4 million members, including state employees, local government workers, and non-teaching school staff.2CalPERS. 7 Things to Know About Our Financial Report CalSTRS, which covers public school teachers and community college educators, reported a funded ratio of 76.7% as of June 30, 2024.3CalSTRS. 2025 Summary Report to Members Beyond those two, California has more than 100 additional local, special district, and other plans, and funding health varies plan to plan.4Public Policy Institute of California. Public Pensions in California
Both numbers hinge on the discount rate, the long-term annual investment return a fund assumes it will earn. CalPERS currently uses 6.8%, down from 7.5% a decade ago.1CalPERS. CalPERS Announces Preliminary 11.6% Return for 2024-25 Fiscal Year Lower the assumed return and the present value of all future benefits immediately jumps, making the gap look bigger even when nothing else has changed. That is why honest accounting hurts in the short term.
What Caused It
Benefit Enhancements Without Matching Funding
The most cited cause is Senate Bill 400, signed in 1999. SB 400 raised retirement formulas across most CalPERS member categories. Public safety employees got a “3% at 50” formula, letting a worker retire at 50 with 3% of final pay for every year of service. A 30-year safety employee retiring at 50 could collect 90% of final salary for life.5California Legislative Information. SB 400 – Public Employees Retirement System Benefits The legislation was sold partly on the assumption that strong stock market returns would cover the extra cost. Many local governments adopted similar formulas. When markets turned, the bill came due.
Investment Returns That Fell Short
For decades, California’s pension funds assumed they could earn roughly 7.5% annually. The dot-com bust of 2000–2002 and the 2008 financial crisis wiped out years of gains. Every year the actual return fell below the assumed rate, the unfunded liability grew and employers had to make up the difference.
Longer Retirements
People are living longer. A retiree who collects benefits for 25 or 30 years costs far more than actuaries originally projected. Early retirement provisions amplified the effect. A safety employee who retires at 50 and lives to 85 draws benefits for 35 years on a career that may have lasted 25 to 30.
Skipped Payments
During the late 1990s bull market, some local governments took contribution holidays, reducing or skipping required pension payments because the funds looked flush. That saved money in good years and left plans dangerously underfunded when markets dropped.
Why It’s So Hard to Fix
The Vested Rights Doctrine
California courts have long treated public pension benefits as deferred compensation protected by the contract clauses of the state and federal constitutions. Under cases like Allen v. City of Long Beach (1955), once an employee accepts a government job, the pension terms in place at that time become a contractual right. Benefits already earned cannot be reduced, and the benefits a worker is eligible to earn in the future through continued service generally cannot be cut either.6Senate Public Employment and Retirement Committee. Vested Rights of CalPERS Members
Modifications are allowed only under narrow conditions: a change must bear a material relation to the pension system’s successful operation, and any disadvantage to the employee must be offset by a comparable new advantage. Courts have consistently rejected attempts to cut benefits simply to fix budget problems. That is why reform in California has focused almost entirely on new hires: existing employees keep their formulas, and the savings take decades to show up.
No Federal Safety Net
Private-sector pensions are governed by the Employee Retirement Income Security Act (ERISA), which sets funding rules and provides a federal insurance backstop through the Pension Benefit Guaranty Corporation. Public pension plans are explicitly exempt from ERISA.7Office of the Law Revision Counsel. 29 U.S. Code 1003 – Coverage Congress carved out government plans in 1974, assuming governments with taxing power could not go broke the way private companies could. Without ERISA’s funding requirements, public plans have more flexibility to defer contributions, and there is no federal insurer if a plan runs dry. The California Constitution assigns pension boards sole fiduciary responsibility over fund assets, but that protection governs how money is invested, not whether enough money goes in.8Justia Law. California Constitution Article XVI Section 17
Bankruptcy Hasn’t Been a Way Out
When Stockton and San Bernardino filed for Chapter 9 bankruptcy in 2012, a bankruptcy judge in the Stockton case ruled that pensions could theoretically be cut like other debts. In practice, neither city chose to reduce pension payments. Stockton exited bankruptcy in 2015 with pensions intact, and Vallejo, which filed in 2008, did the same. The legal authority may exist; the political willingness to cut retirement checks to former police officers and firefighters has not.
What It Costs Californians
The most direct effect is the employer contribution rate, which comes out of tax revenue. For fiscal year 2025–26, CalPERS requires state agencies to contribute 31.32% of payroll for miscellaneous employees, 49.36% for peace officers and firefighters, and 69.29% for California Highway Patrol members.9CalPERS. 2025-26 State Employer and Employee Contribution Rates For every dollar a CHP officer earns in salary, the state must set aside nearly 70 cents more for pension costs. Two decades ago those rates were a fraction of current levels.
Cities and counties face the same pressure with less flexibility. Research from Stanford’s Institute for Economic Policy Research found that California municipalities squeezed by pension spending have reduced funding for recreation, libraries, and in some cases public safety. Taxpayers pay the cost indirectly through fewer services and directly when local governments raise taxes or fees. Some cities have placed pension-related sales tax measures on the ballot specifically to keep services running while pension bills climb.
What Reform Has Done So Far
PEPRA
The California Public Employees’ Pension Reform Act of 2013, known as PEPRA, applies to employees hired on or after January 1, 2013, and leaves existing workers’ benefits alone. New miscellaneous employees receive a “2% at 62” formula instead of the older “2% at 55.” New safety employees receive reduced formulas with a maximum benefit factor at age 57.10CalPERS. Public Employees Pension Reform Act (PEPRA) Benefits must be calculated using the highest average pay over three consecutive years rather than a single final year, and overtime, bonuses, and unused vacation payouts are excluded from the calculation. New employees must pay at least 50% of the pension’s normal cost rate, and pensionable salary is capped at a figure indexed to the Social Security contribution base.11CalPERS. Summary of Public Employees Pension Reform Act of 2013
PEPRA was meaningful, but its savings are back-loaded. Pre-2013 employees still earn benefits under the older formulas, and the full financial effect won’t be felt until the last pre-PEPRA workers retire. In the meantime, the old obligations keep growing.
Lower Return Assumptions
CalPERS has gradually cut its assumed rate of return from 7.5% to 6.8%.1CalPERS. CalPERS Announces Preliminary 11.6% Return for 2024-25 Fiscal Year A lower assumption gives a more honest picture of what the fund owes, but it immediately raises employer contribution rates because less of the future benefit is expected to come from investment gains.
Pension Obligation Bonds
Some California cities and counties have issued pension obligation bonds, borrowing at a relatively low interest rate, depositing the proceeds into the pension fund, and hoping investment returns beat the cost of borrowing. If the bet pays off, the government saves money. If it doesn’t, the government carries both the original pension debt and new bond debt on top of it. Stockton and San Bernardino both issued pension obligation bonds before filing for bankruptcy. Tulare County and La Verne have issued POBs at lower interest rates and may come out ahead. Research from the University of Minnesota’s Heller-Hurwicz Economics Institute concluded that POBs generally reduce welfare for both taxpayers and beneficiaries absent fundamental governance reforms.
Where Things Stand Now
Recent investment performance has offered some breathing room. CalPERS posted an 11.6% return for the fiscal year ending June 30, 2025, pushing its funded ratio from roughly 75% to 79%.1CalPERS. CalPERS Announces Preliminary 11.6% Return for 2024-25 Fiscal Year CalSTRS reached 76.7% funded as of mid-2024.3CalSTRS. 2025 Summary Report to Members S&P Global Ratings estimates that average state and local pension funding ratios nationally have climbed above 80%, helped by strong equity markets.
Good investment years don’t solve the structural problem. A single market downturn can erase years of gains, as 2008 showed. Pre-PEPRA benefit obligations still dominate the liabilities and will for years. Employer contribution rates remain at historically elevated levels, and the vested rights doctrine prevents retroactive changes to existing workers’ benefits. The crisis is not a single event with a resolution date. It is a slow fiscal pressure California will manage, and pay for, for at least another generation.