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California's Pension Crisis: $265 Billion Unfunded

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  Published in Stocks and Investing on Thursday, February 12th 2026 at 1:26 GMT by Orange County Register
      Locales: California, UNITED STATES

SACRAMENTO - California's public pension systems continue to grapple with a substantial $265 billion in unfunded liabilities, a crisis decades in the making that poses a significant and growing threat to the state and local government budgets. Despite recent market gains offering a temporary reprieve, experts warn that these gains mask underlying systemic issues that demand long-term solutions. The problem isn't just about the sheer size of the debt; it's the unsustainable trajectory it's on, fueled by optimistic projections and demographic shifts.

The California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) collectively manage over $669 billion in assets for more than 1.6 million active employees and retirees. However, this substantial asset base is overshadowed by the $320 billion in combined unfunded liabilities ($203 billion for CalPERS and $117 billion for CalSTRS as of February 2026). This means that current assets are insufficient to cover future pension obligations, creating a debt that will ultimately be borne by taxpayers and potentially impact vital public services.

A History of Optimism and Demographic Headwinds

The current crisis isn't a sudden development. It's the result of a gradual accumulation of factors, primarily overly optimistic assumptions regarding investment returns. For years, CalPERS and CalSTRS projected average annual returns of 7-8%, allowing them to minimize contributions from employers and employees. While these returns were achievable in the past, recent economic realities and market volatility have made consistently hitting these targets increasingly difficult. Mark Zakhary, a pension consultant, explains, "The funds historically operated under return assumptions that were significantly higher than what the market consistently delivers. This created a funding gap that has steadily widened over time."

Compounding the issue is a shifting demographic landscape. California's workforce is aging, meaning fewer active employees are contributing to the pension system for every retiree receiving benefits. This increasing ratio of beneficiaries to contributors places further strain on the system's ability to meet its obligations. Chris Vanocur, a political strategist, emphasizes, "We're facing a demographic cliff. More people are retiring, drawing benefits, while the pool of active workers making contributions is shrinking. This isn't mathematically sustainable in the long run."

Impact on State and Local Budgets

The $265 billion debt represents a significant drain on California's fiscal resources. State and local governments are obligated to make annual contributions to CalPERS and CalSTRS, diverting funds that could otherwise be allocated to education, infrastructure, or other essential public services. As the debt grows, these contributions will inevitably increase, potentially forcing difficult choices regarding program funding and taxation. Cities and counties, already facing budget constraints, will be particularly vulnerable.

Potential Solutions and Political Challenges

Lawmakers have explored several potential solutions to address the pension crisis, but each carries significant political challenges. Adjusting benefits for current employees or retirees is often met with strong opposition from unions and employee groups, who argue that such changes violate vested rights. Increasing contributions from employers and employees, while potentially more palatable, could also face resistance due to concerns about affordability and economic impact.

Some proposals include:

• Risk Pooling: Exploring options for consolidating or pooling pension systems to achieve economies of scale and improve investment diversification.
• Tiered Benefits: Implementing different benefit structures for new hires, reducing future liabilities.
• Increased Contributions: Gradually increasing contributions from both employers and employees, though this requires careful consideration of affordability.
• Conservative Investment Strategies: Adopting more conservative investment strategies with lower expected returns but reduced risk.

However, Zakhary points out the difficulty in enacting meaningful change: "Modifying pension benefits is incredibly complex and politically sensitive. People understandably resist changes to their retirement security." Vanocur adds a sense of urgency: "We can't kick the can down the road any longer. Ignoring this problem will only exacerbate it, leading to a more severe crisis in the future."

The situation demands a comprehensive and politically courageous approach. Without addressing the underlying issues of unrealistic assumptions and demographic imbalances, California's pension crisis will continue to loom as a major fiscal threat, jeopardizing the state's financial stability and the retirement security of millions of public employees.