Declining migration and falling birthrates have led to a drop in the number of children in California just as baby boomers reach retirement, creating an economic and demographic challenge for the nation's most populous state.

"After decades of burgeoning population and economic growth…the state now faces a very different prospect," said a report released Tuesday by the University of Southern California and the Lucile Packard Foundation. The report, "California's Diminishing Resource: Children," analyzed...