For the fiscal year ended June 30, 2025, CalPERS reported an overall funded ratio of approximately 79 percent, an improvement from 75 percent a year earlier. A 79 percent funded ratio means that only 79 cents have been set aside for every dollar of promised pension benefits, based on actuarial calculations and assuming that all assets—particularly private and alternative investments—are accurately valued (i.e., not overvalued).
This improvement should be viewed in historical context.
In 2006, CalPERS reported a funded ratio in excess of 100 percent, only to see that figure collapse to approximately 61 percent during the Great Recession. The experience demonstrates the system’s high sensitivity to market downturns, which is far greater today due to its growing reliance on volatile and illiquid alternative assets.
Although public pensions like CalPERS are not governed by ERISA, the federal Pension Protection Act of 2006 provides a useful and widely understood benchmark for assessing pension health. Under the Pension Protection Act, multiemployer pension plans are classified annually into three categories or zones based on funded status:
• Green Zone (Healthy): Funding ratio above 80 percent
• Yellow Zone (Endangered): Funding ratio between 65 percent and 79 percent
• Red Zone (Critical): Funding ratio below 65 percent
Plans in the Yellow Zone are required to adopt a funding improvement plan, while Red Zone plans must adopt a rehabilitation plan designed to restore solvency within a defined time frame. Participants and employers must be formally notified of the plan’s status.
Applying this federal framework by analogy, CalPERS—at 79 percent funded—would fall squarely into the Yellow Zone (Endangered) and would be required to implement a formal funding improvement plan aimed at increasing its funded ratio.
Because investment earnings account for most of the long-term revenue for a typical public pension fund—61 percent, with the remainder from employer/employee contributions—the degree of accuracy of the investment return assumption over time has a major effect on a plan’s cost and actuarial funding level. Because the investment return assumption for most public plans also serves as the discount rate used to determine the present value of the plan’s liabilities, an investment return assumption that is set too low will overstate liabilities and costs, causing current taxpayers to be overcharged and future taxpayers to be undercharged. A rate set too high will understate liabilities, undercharging current taxpayers at the expense of future taxpayers. An assumption that is significantly wrong in either direction will cause a misallocation of resources and unfairly distribute costs among generations of taxpayers.
Since 2011, CalPERS has reduced its assumed investment rate of return from 7.75 percent to 7.5 percent, to 7 percent, to 6.8 percent in July 2021. Each reduction followed actuarial reviews intended to balance funding discipline against employer contribution volatility. While these changes reflect improved realism, they also underscore the difficulty CalPERS has had achieving its own performance targets over extended periods.
While these changes reflect improved realism, they also underscore the difficulty CalPERS has had achieving its own performance targets over extended periods.
According to a June 2025 survey of 131 public funds by the National Association of State Retirement Administrators (NASRA), the average investment return assumption of funds has declined from 7.95 percent in 2007 to 6.91 percent today. Both nationally and at CalPERS, the downward shift in assumptions reflects recognition that the high-returns of the 1980s–1990s are unlikely to recur. By lowering assumptions, funds are making their liability projections more realistic. Forcing higher contributions today, hopefully reduces the risk of future underfunding. NASRA’s survey shows the national average assumed return has drifted down nearly a full percentage point since 2007. CalPERS has tracked closely with that trend—and today sits a little more conservative than the average, at 6.80 percent versus the national 6.91 percent.
According to a recent study by the Reason Foundation, from 2001 to 2023, the most recent period with complete data available, 99 percent of public pension funds failed to meet their average assumed rates of return.
99 percent of public pension funds failed to meet their average assumed rates of return.
The average investment return for public pension systems during this period was 6.5 percent, well below the average assumed rate of 7.59 percent.
… most public pension systems have experienced unsatisfactory investment return results. For example, the California Public Employees’ Retirement System, or CalPERS, the largest public pension system in the nation, and Chicago’s largest pension fund have a historical performance that falls short of their targets by 1.98% and 2.05% (~200 basis points) annually on average, respectively.
A shortfall of approximately 200 basis points annually, when compounded over decades, is devastating to pension solvency.
The Pew Charitable Trusts observes that “By 2021, the average state pension plan was assuming that future returns will be around 7 percent.” However, “with recent projections showing that future pension plan returns are likely to be closer to 6% than 7% over the next 20 years, below both historical averages and what most state pension plans continue to rely on, policymakers will need to find ways to further reduce investment expectations.” Pew cautions that unless assumptions are further reduced or funding policies strengthened, underfunding risks will continue to grow.
In 2024, CalPERS unfunded actuarial liability was $168 billion. If the net pension liability were calculated using a discount rate which is one percentage point lower than the current assumption—i.e., the more realistic 5.8 percent rate estimated by Pew—the current underfunding would soar to the $235 billion-$270 billion range (estimated).
If CalPERS’ net pension liability were calculated using a discount rate one percentage point lower than the current assumption, the current underfunding would soar to the $235 billion-$270 billion range.
This range illustrates how fragile the funded ratio remains and how dependent reported improvements are on optimistic investment assumptions and asset valuations.
In conclusion, while CalPERS has made incremental progress since the pandemic-era market shock, a 79 percent funded ratio, heavy reliance on investment returns, growing exposure to illiquid alternatives, and a long history of assumption shortfalls place the system in a structurally vulnerable position.
Finally, we note that CalPERS and other public pensions generally use more aggressive (higher) discount rates than corporate pensions governed by ERISA, which makes public pensions appear better funded than they would under ERISA-style rules.
Public pensions typically discount liabilities at 6.5 percent–7.5 percent (often equal to their assumed long-term investment return). Corporate ERISA pensions must discount liabilities at much lower, market-based rates tied to high-quality bond yields (often 4 percent–5 percent, sometimes lower). Higher discount rates dramatically reduce reported liabilities, which inflates funded ratios. If public pensions were valued under ERISA-style discounting, their unfunded liabilities would be much larger, and funded ratios materially lower.
If public pensions were valued under ERISA-style discounting, their unfunded liabilities would be much larger, and funded ratios materially lower.
Independent analysts (including Pew and Reason Foundation) consistently find that using lower, bond-like discount rates would increase public pension liabilities by hundreds of billions (nationally), push many plans well below 70 percent funded and reveal substantially larger unfunded liabilities. For a plan as large as CalPERS, this could mean hundreds of billions more in reported shortfalls, causing the pension to fall within ERISA’s Red Zone (Critical).
• Independent IG Can Improve Funding Credibility
An independent IG at CalPERS could not “fix” funding shortfalls by decree—but could materially improve the credibility, durability, and governance of the funded-ratio narrative by addressing the very faults that make a 79 percent funded ratio fragile and potentially misleading.
The 79 percent funded ratio assumes asset values—especially private/alternative assets—are accurate, returns are not overstated by missing fees or optimistic marks, and assumptions are reasonable over full cycles.
An IG can provide independent asset-valuation oversight by conducting valuation integrity reviews of private equity, real assets, and private credit and publishing a Valuation Sensitivity Statement indicating that “if private assets were marked X percent lower, the funded ratio would fall to Y percent.” This prevents a repeat of “illusory strength” where funded ratios look healthy until markets force reality.
An IG can also treat the fund’s 79 percent funded ratio as “Yellow Zone” risk—not as an indication of success. The IG could require a Funding Improvement Plan when the funded ratio fell below 80 percent, even if not legally required and require plain-English disclosure to members and taxpayers explaining why 79 percent is not healthy, what could push the plan backward, and what actions are being taken. These measures replace complacency with discipline—before markets do it brutally.
The IG can also stress-test the discount rate honestly (and publicly). This is important to restore credibility because investment returns drive the majority of long-term funding, CalPERS has repeatedly missed assumptions, and small assumption errors can create massive intergenerational inequity. The IG can require multi-rate disclosure every year showing the funded ratio at 6.8 percent (current), at 6.0 percent, at 5.8 percent (Pew-style estimate), and at ERISA-style bond rates. Also, the IG can publish a Return-Gap Report indicating the historical shortfall versus assumption and compounding the impact of the shortfall over 10, 20, 30 years. This stops the funded ratio from being treated as a single “truth” and exposes how assumption-sensitive it really is.
The IG can break the illusion aggressive public pension discounting creates which dramatically inflates funded ratios and makes public pensions look healthier than they would under market discipline. The IG can require CalPERS to publish an ERISA-style shadow funded ratio annually using the same assets, but a bond-based discount rate and no smoothing. This gives policymakers and the public a reality check and prevents false comfort.
Assumptions and valuations can drift quietly for years until a shock forces a correction—often all at once. The IG can guard against this by establishing an Early-Warning System with automatic alerts when actual returns trail assumptions for multi-year periods, private-market distributions stall, fee drag rises faster than gross returns, and funded ratio improvements depend disproportionately on assumptions. Early Warning alerts can shorten the time between problem emergence and governance response.
An independent IG can provide return-quality oversight to determine whether CalPERS is being compensated for the massive additional risks related to increasing its exposure to private equity and alternatives—or just taking more of it to hit an unrealistic return assumption.
Wrong assumptions undercharge current taxpayers, overcharge future taxpayers, misprice benefits, and undermine trust. The IG can restore intergenerational fairness through an Intergenerational Equity Review which quantifies who (i.e., current members, future members, taxpayers) bears the cost under different return assumptions and require the board to explicitly acknowledge trade-offs when setting assumptions. The Review forces honesty about who is really paying for optimism.
An independent IG could not promise higher returns. It would deliver something far more valuable, i.e., a funded ratio that reflects reality, not hope—and a governance process that reacts before the next collapse, not after. In short, the IG converts a fragile 79 percent funded ratio into a credible, governable, and defensible funding strategy—instead of another prelude to the next crisis.
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