By Anna Petrini

Staring down $340 billion in long-term costs, what should California lawmakers tackle first?

The California State Teachers’ Retirement System’s (CalSTRS) $73.7 billion unfunded liability, according to a May report from the state’s nonpartisan Legislative Analyst’s Office (LAO).

The report highlights certain liabilities that are already being addressed. According to the LAO, $140 billion worth of infrastructure debt and pension costs for general state employees can be eliminated without changes to current law and policy. That leaves two prime targets for legislative action: full funding for CalSTRS and prefunding for state employee retiree health benefits. 

CalSTRS is the second largest pension system in the U.S., administering retirement programs for 868,000 members—or about 2 percent of California’s population. Unlike other active pension systems in California, the Legislature sets contribution rates for CalSTRS in state statutes.

Though CalSTRS was fully funded for a brief period during the late 1990s, subsequent benefit increases, contribution reductions and large investment losses produced a growing unfunded liability. Despite annual investment returns topping 12 percent over the past three years, the system’s funded status continues on a downward trajectory. Without additional contributions, CalSTRS estimates that it will exhaust its assets by 2046.

To fully fund the system over a 30-year period, annual contributions from the state, teachers and school districts will likely need to increase by more than $5 billion, according to the report. “As difficult as this problem is now, the problem only grows more costly the longer we wait,” said Ryan Miller, LAO senior fiscal and policy analyst.

California Governor Jerry Brown’s revised budget, issued May 13, includes a proposal to shore up the teacher pension system, significantly ramping up contributions to eliminate the unfunded liability within 30 years.

Anna Petrini is a policy associate in NCSL's Fiscal Affairs Program.

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