The California State Teachers' Retirement System reported a 13.9% investment return for the year ending June 30, 2026, and called it meaningful progress toward eliminating its funding shortfall, according to an August analysis by the California Policy Center. Yet the same report reveals that CalSTRS owes $82.0 billion more than it holds in assets, up from a $73.7 billion gap in 2013, despite a 2014 rescue plan that doubled the money flowing into the system and despite a decade of investment performance that met or exceeded the plan's 7% target. The analysis, authored by senior fellow Mark Moses, argues that the pension fund's reported 79.3% funding level masks deeper structural problems and governance decisions that have expanded the debt while contribution rates climbed.
School district payments into CalSTRS jumped from 8.25% of payroll in 2013 to 19.1% today, while teacher contributions rose from 8% to 10.25% and state payments increased from 3.041% to 8.328% of payroll, the report shows. Those rate hikes were frozen for more than a generation before the 2014 legislation: districts had paid 8.25% since 1986, teachers 8% since 1972. More than half the current district rate now covers obligations for work already completed rather than teaching happening today, according to the analysis. CalSTRS delivered five-, ten-, twenty- and thirty-year returns that all matched or beat its 7% benchmark, with ten-year performance reaching 9.4%. The plan holds $415.4 billion in total assets as of June 30, 2026, measured against $395.5 billion in calculated obligations.
The report identifies two causes for the widening gap: the funding plan was designed to fall behind during its first eight years, with payments coming in below what CalSTRS' own actuary said was necessary just to prevent the debt from growing, adding roughly $29 billion to the shortfall; and the board changed how the gap is measured through shifts in actuarial assumptions, adding about $17.6 billion. According to Moses, a 2017 board decision to lower the investment return assumption from 7.5% to 7.0% increased the reported unfunded obligation by billions of dollars overnight, even though the same assets and the same benefit promises hadn't changed. In April 2017, CalSTRS disclosed that the identical June 30, 2016 measurement showed a $96.7 billion gap at a 7.25% assumption but a $105.1 billion gap at 7.0%, a difference of $8.4 billion from a quarter-percentage-point shift. The report notes that when the 2014 rescue legislation passed, CalSTRS reported itself 66.5% funded using a 7.5% assumption; four years later, with contribution rates rising annually, the plan stood at 62.6% funded—worse than when the rescue began—because the board had altered its yardstick.
The core issue, Moses writes, is that the board controls both the investment target and the method used to value pension promises decades into the future: actuaries calculate how much must be set aside today to cover a future payment by assuming it grows at 7% annually, so if the board assumes faster growth, less money appears needed and the reported gap shrinks without any actual change in assets or liabilities. CalSTRS hired a second actuarial firm, Segal, to review its assumptions in 2024; Segal calculated a 53.2% confidence level for the 7% investment assumption, meaning a barely-better-than-even chance that earnings will match or beat 7% over the fifteen-year period that approximates the plan's obligations. Segal told the board that 7% "does not include much margin for future adverse deviation" and recommended 6.75%, but the board has kept 7% for two years since. The 79.3% funded ratio is a calculation assuming the 7% return holds, not a confidence level that it will, the report emphasizes. In December 2010, CalSTRS' outside actuarial firm told the board that even a 7.5% assumption "would still only result in about a 50 percent chance of achieving the earning target," yet the board adopted 7.75% at the urging of the California Teachers Association's retirement committee, a number the actuary had never studied.
The report concludes that if current assumptions fail to hold, CalSTRS' own analysis states that "contributions would have to increase for the state, for employers and possibly for CalSTRS 2% at 62 members." Employers currently owe $78.4 billion of the $82.0 billion shortfall, with payments scheduled to continue until 2043; the employer rate stands at 19.1% against a statutory ceiling of 20.25%, leaving limited room for further increases. Moses contrasts this with a defined contribution plan, where the employer's obligation ends the moment the contribution is deposited: no votes on assumed returns, no estimates revised years later, no leftover risk passed to future taxpayers. In a defined benefit system, he writes, teachers already shoulder risk through contribution increases with no improved benefit, while a defined contribution participant owns an account balance trackable in real time rather than a promise measured at 79% on an assumption rated 53.2% likely. The only way for taxpayers to avoid the structural problems of a public employee defined benefit plan like CalSTRS, the report argues, is not to offer one.