California’s public retirement systems carry roughly $300 billion in unfunded pension liabilities, the largest public pension shortfall of any state in the country by dollar amount.1Equable. Unfunded Liabilities for State Pension Plans in 2023 Two systems account for almost all of it: CalPERS, which covers most state and local government workers, and CalSTRS, which covers public school teachers. The gap exists because promises made to current and future retirees exceed what the funds currently hold plus what their investments are projected to earn. Closing it falls to employers, employees, and ultimately taxpayers.
What an Unfunded Pension Liability Is
California’s public pensions use a defined benefit model. Your retirement check is calculated from a formula based on your salary and years of service, not from whatever happens to be in an individual account. Actuaries project those payments decades into the future, then calculate the pile of money that, invested today, would cover them all.
The unfunded liability is the gap between that calculated obligation and the assets the system actually holds. When investment returns miss their target or retirees live longer than projected, the gap widens. Someone has to close it.
The single most consequential number in the math is the discount rate — the annual return the system assumes it will earn on its investments. A higher assumption makes future obligations look cheaper to fund today; a lower one makes them look more expensive. CalPERS currently uses 6.8%, lowered from 7.5% over the past decade. CalSTRS uses 7.10%.2CalSTRS. CalSTRS Earns 8.5 Percent Net Return in Fiscal Year 2024-25 Some economists argue that guaranteed public pension promises should instead be discounted using something closer to U.S. Treasury yields of roughly 4–5%, which would make the reported liability dramatically larger. Pension systems counter that their long investment horizons justify assuming a higher return. Each reduction in the assumed rate increases the reported liability and pushes up what employers owe.
How Big the Shortfall Is
Across all California state and local public retirement systems, unfunded pension liabilities totaled about $300.4 billion as of 2023, with an overall funded ratio near 79%.1Equable. Unfunded Liabilities for State Pension Plans in 2023 For every dollar of future benefits owed, California’s funds collectively hold about 79 cents.
CalPERS
The California Public Employees’ Retirement System is the largest public pension fund in the United States. In its most recent actuarial valuation on June 30, 2023, CalPERS reported an unfunded liability of $186.3 billion across its Public Employees’ Retirement Fund, with a funded ratio of 71.4%.3California Public Employees’ Retirement System. Annual Comprehensive Financial Report Fiscal Year Ended June 30, 2024 The system serves nearly 2.4 million members across active workers, retirees, and inactive vested members, with roughly 715,000 retirees currently drawing benefits and about 983,000 active employees.4CalPERS. Facts at a Glance – Retirement Plan Members FY 2024-25 CalPERS contracts individually with nearly 3,000 state agencies, school districts, and local public agencies.5CalPERS. Facts at a Glance – CalPERS Organization FY 2024-25
CalSTRS
The California State Teachers’ Retirement System covers public school educators from kindergarten through community college. It reported a net pension liability of $67.2 billion as of June 30, 2024.6CalSTRS. Financial Statements FY 2024-25 Unlike CalPERS, where each contracting employer negotiates its own arrangement, the California legislature sets teacher contribution rates and benefit levels by statute. That centralized authority is what made the CalSTRS Funding Plan possible: a legislated contribution schedule that targets full elimination of the system’s unfunded obligation by 2046.7CalSTRS. Funding Plan Fact Sheet
What Caused the Gap
Investment Returns That Missed
The biggest driver is years when investment returns fell short of the assumed rate. When a fund assumes 6.8% and earns 5%, the shortfall on a portfolio measured in the hundreds of billions is enormous, and it compounds. A single bad year reduces the base from which future returns are calculated, so the system has to earn above average just to get back on schedule. The 2008 financial crisis wiped out roughly a quarter of CalPERS’ portfolio value, and because those losses were amortized over decades, they are still showing up in today’s employer contribution rates.
A Riskier Investment Mix
Chasing higher returns has pushed public pension funds further into volatile assets. As of June 30, 2024, CalPERS held about 42% of its portfolio in public equities, 15.5% in private equity, and 13.2% in real assets like real estate and infrastructure, with only around 19% in traditional fixed-income securities.8CalPERS. Trust Level Review as of June 30, 2024 That allocation may deliver better long-run averages, but it also produces sharper swings, and sharp swings create sudden spikes in unfunded liabilities and the contribution rates employers owe.
Longer Lifespans and Fewer Active Workers
Retirees are living longer than actuaries originally projected, so each pension pays out over more years than the system planned for. The ratio of active workers paying in to retirees drawing out has also been shrinking. Every time mortality assumptions get updated to reflect longer lives, total projected liability rises, and someone has to cover the difference. Longevity only moves in one direction.
Why California Can’t Just Cut Benefits
The reason pension reform in California almost always targets future hires rather than current workers is a legal doctrine known as the California Rule. Under this rule, a public employee’s pension benefits are treated as a contractual right protected by the contract clauses of the California and U.S. Constitutions. Once you start working, the benefit formula in place at that time cannot be reduced for your future service unless you receive a comparable new advantage in exchange.
The doctrine traces to the California Supreme Court’s 1955 decision in Allen v. City of Long Beach. In 2020, the Court reaffirmed the rule in Alameda County Deputy Sheriffs’ Association v. Alameda County Employees’ Retirement Association, stating that the test from Allen “remains the law of California.”9Justia Law. Alameda County Deputy Sheriffs Association v. Alameda County Employees Retirement Association The Court in Alameda did allow elimination of certain pension-spiking practices under PEPRA, but it did so within the existing framework rather than abandoning it.
The practical effect is that California governments cannot simply shrink benefits to close the funding gap. The available levers are higher contributions, better investment returns, or a less generous benefit structure for new employees.
What PEPRA Changed
The Public Employees’ Pension Reform Act of 2013 (PEPRA) took the third lever. It left benefits for existing workers alone and created a less generous structure for anyone hired into a California public retirement system on or after January 1, 2013.10CalPERS. Summary of Public Employees’ Pension Reform Act of 2013 For new non-safety employees, the formula is 2% of salary at age 62, with early retirement available at 52 and a maximum factor of 2.5% at age 67. New members must contribute at least half the total normal cost of their pension, and final compensation is averaged over 36 consecutive months rather than the shorter periods some pre-2013 “classic” members use.11CalPERS. 2025-26 State Employer and Employee Contribution Rates
PEPRA’s savings phase in slowly. Every classic member hired before 2013 keeps the more generous formula for an entire career, so full cost savings won’t appear until the last pre-PEPRA employee retires decades from now. The existing unfunded liability continues to grow on its own terms in the meantime.
What This Costs Cities, Schools, and Taxpayers
The fiscal weight of unfunded pension liabilities shows up in the contribution rates employers owe each year. California public employers must make actuarially determined contributions that cover both the normal cost of benefits earned in the current year and a payment toward the existing unfunded liability.12California Legislative Information. California Government Code 20814
For state employees in fiscal year 2025–26, CalPERS employer contribution rates range from 21.42% of payroll for State Industrial members up to 70.61% for the California Highway Patrol.11CalPERS. 2025-26 State Employer and Employee Contribution Rates For CalSTRS-covered school districts, the employer rate for 2025–26 is 19.10% of creditable earnings, plus a supplemental contribution. Every one of those percentage points is payroll money that cannot be spent on hiring, equipment, or services.
When pension contributions consume a growing share of a city or school district budget, something else gives. Researchers describe a “crowd-out” effect in which rising pension costs force cuts to other public services and infrastructure. A city that spent 8% of its budget on pension contributions a decade ago and now spends 15% has to find that additional 7% somewhere: higher taxes, thinner police and fire staffing, deferred road maintenance, or some combination of the three. By one estimate, at least a third of school districts nationally have experienced funding cuts linked to growing pension costs.
The pressure is self-reinforcing. Cities that cut services to fund pensions become less attractive places to live and work, which can erode the tax base, which makes the next round of pension payments harder to afford. That dynamic pushed Stockton and San Bernardino into bankruptcy earlier in the last decade. Conditions have improved since, but the underlying math has not fundamentally changed for the most stressed municipalities.
If you want to see how your own city, county, or school district is exposed, the number is now on the balance sheet. Since 2015, Governmental Accounting Standards Board Statement No. 68 has required every public employer in a defined benefit plan to report its share of the net pension liability directly in its annual financial statements, along with the assumptions used to calculate it.13GASB. Summary of Statement No. 68 Your local government’s annual comprehensive financial report will show the figure.