An $18 billion hole in the budget is a feature of the pension spiral

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OPINION – The nonpartisan Legislative Analyst’s Office dropped its November 2025 Fiscal Outlook like a subpoena on a quiet Friday.

California stares down an $18 billion budget problem for 2026–27, $5 billion larger than the Newsom administration admitted last June. Revenue gains from the AI boom? Almost entirely erased by Proposition 98 education mandates and Proposition 2 debt payments. Structural deficits are on track to hit $35 billion annually by 2027–28.

That is not a rough patch. That is a cliff, and Sacramento is handing out skateboards.

Thirty-plus years running hedge funds and private equity, now serving as outsourced CIO to ultra-high-net-worth family offices, taught me one ironclad rule: fiduciary duty is not optional. Cook the books, and you get fired or sued.

In Sacramento, they call it budget management. Every California family gets hosed by a public-pension black hole that grows regardless of how much tax revenue we shovel in. This is not a glitch. It is the deliberate output of single-party governance that turned the upbeat California I arrived in during 1990 into today’s fiscal death spiral.

Here is how the math works. The LAO found that $11 billion in higher revenue projections were almost entirely wiped out – $7 billion consumed by Prop 98 school mandates, another $3.4 billion by Prop 2 debt service, $6 billion in higher program costs, and $1.3 billion from H.R. 1 federal cost-shifts driving Medi-Cal higher.

Net improvement: zero. Revenue up, hole unchanged.

Only in Sacramento does that qualify as progress.

I lived the contrast. In 1990, a New England kid shaking off Boston winters, I arrived in a California that felt unstoppable. Today, the state carries total unfunded pension liabilities exceeding $265 billion – the largest pension debt burden in the nation, ahead of Illinois.

CalPERS alone carries $166 billion in unfunded liabilities, still banking on a 6.8% annual return – in perpetuity.

That is not an investment strategy. That is faith-based accounting.

My family-office clients and Orange County neighbors vote with their feet, heading to Texas and Florida where the math still holds. The U.S. Census Bureau confirms California shed nearly 240,000 net domestic residents in a single year.

Treat taxpayers like an ATM that never runs dry, and eventually the machine breaks. The people left holding the bag are those who cannot afford to leave.

Critics will blame the stock market or Trump tariffs for the gap. That framing is convenient but misses the structural point. The LAO’s own numbers show spending mandates outrun revenue growth even in good years. Every new dollar arrives pre-spent on constitutionally protected programs.

I have fired portfolio managers for less creative accounting than Sacramento’s pension true-up games.

The fix is not another Band-Aid. Shift new public hires to defined contribution plans. Retire the return assumptions. Impose hard caps on spending growth.

Real reform begins with one honest admission: the model is broken by design, and no AI-driven tax surge will outrun the commitments already baked in.

Reagan warned that freedom is never more than one generation from extinction. In California, we are one budget cycle from insolvency. The pension death spiral does not laugh last. It laughs all the way to the next taxpayer bailout, unless someone finally says enough.

Elections are coming, its time for a change.

Jay Rogers is a financial professional with more than 30 years of experience in private equity, private credit, hedge funds, and wealth management.