When California Governor Jerry Brown unveiled his latest state budget, he explained that as the budget begins to generate surpluses, the state will finally begin to dismantle the “Wall of Debt” that has been accumulating. Whether or not Gov. Brown’s budget will generate surpluses, this year or any time soon, is an open question. But just how much debt is there?

The first thing to remember when considering California’s debt is that the only meaningful number is the combination of state and local government debt. Because some states have relatively centralized government functions, and others devolve most government services to the localities. California is one of those states that has a relatively decentralized system of state and local governance, and Gov. Brown’s actions – such as his transferring responsibility for tens of thousands of state prison inmates to County correctional institutions – increase this tendency.

For example, in a recent study released by the California Public Policy Center (CPPC) entitled “The California Budget Crisis – Causes and Recommendations,” there is a chart that amalgamates all state and local government spending (chart 2). This chart shows that in the last fiscal year, only $47.5 billion was retained by the state government for direct expenditures. Everything else flowed through to cities, counties, and local agencies. These local expenditures totaled $242 billion, more than five times as much.

Another vital consideration when calculating debt is to correctly define it. Because the number Brown used, 34.7 billion (ref. California Budget Plan Introduction, Figure 3), only referred to short term borrowing by the state. “Deferred payments to schools,” “Loans from Special Funds,” “Unpaid costs to local governments,” “Borrowing from local government,” “Deferred Medi-Cal Costs,” “Deferral of state payroll costs,” “Deferred payments to CalPERS,” “Borrowing from transportation funds,” etc.

This is not the whole “Wall of Debt.” This is just the short-term payables incurred by the state government. What about bonds? Isn’t that money owed by taxpayers? Again referring to the recent CPPC study, on chart 9 there is a listing of known state and local debt. The primary components are State General Obligation Bonds totaling $80.7 billion, Local General Obligation Bonds totaling $177.6 billion, and Trust Fund Loans of $28 billion. In all, this long-term borrowing adds another $286.3 billion to California’s Wall of Debt.

Further adding to California’s Wall of Debt are the “unfunded” retirement pension and health care liabilities. One may argue that the entire future pension and health care liability is not truly debt, because future revenues will fund future obligations. But by any generally accepted accounting principle, the unfunded portion is debt. This is because to the extent the liability incurred for future pension payments is for work already performed – i.e., to the extent these future pensions have already been earned – there must be sufficient funds invested to cover 100% of the eventual payments due. And using the state’s own numbers (ref. California Budget Plan Introduction, Figure 4), the unfunded pension and health care liability adds another $181.2 billion to California’s Wall of Debt. But it’s likely much more.

First of all, the $181.2 billion of debt recognized in Brown’s budget plan does not include unfunded pension and health care debt incurred by any of California’s cities or counties who do not participate in either CalPERS or CalSTRS. Since these two biggest pension funds only cover about two-thirds of California’s state and local government workers, you have to increase this officially recognized unfunded amount by 50%, which adds another $90 billion to the tab. Next, as exhaustively analyzed in a 2011 study authored by Stanford Professor (and former Assemblymember) Joe Nation, entitled “PENSION MATH: How California’s Retirement Spending is Squeezing the State Budget,” if the rate of return on investment currently used by the major pension funds is dropped from 7.5% to 5.5% or even 4.5%, the size of these unfunded liabilities could increase by another $200 to $300 billion.

To summarize, here a very rough estimate of the real “Wall of Debt” confronting California’s taxpayers:

  • $34.7 billion for short-term borrowing by the state
  • $30 billion for short-term borrowing by local cities, counties and agencies (very rough estimate, probably conservative)
  • $80.7 billion for State General Obligation Bonds
  • $177.6 billion for Local General Obligation Bonds
  • $28 billion for Trust Fund Loans
  • $181.2 billion for unfunded retirement and health care liabilities – CalPERS & CalSTRS participants only
  • $90 billion for unfunded retirement and health care liabilities – independent pension plan participants
  • $250 billion – impact of lower investment returns on retirement pension funds (quite likely a conservative estimate)

Grand total:   $872 billion, or $23,000 per California resident, or $87,000 per California household.

It is important to emphasize that even using official estimates, about half of the total state and local government debt in California is to fund retirement benefits to government workers. And for anyone who is skeptical that it may be necessary to recognize (and eventually pay) an additional $250 billion in unfunded retirement health care and pension liabilities for California’s state and local government workers, please review the new GASB accounting regulations and the new Moody’s credit rating criteria, both set to take effect in 2014.

When Gov. Jerry Brown suggests that California’s state government is positioning itself to eliminate the so-called “Wall of Debt,” he’d be well advised to consider just how big that wall really is – especially when you remember that the only meaningful calculation of how much California state taxpayers owe must also include the amounts they owe its local governments.

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    26 Responses to How Big is California’s “Wall of Debt”?

    1. Huh says:

      CA has a long and glorious history of over estimating revenue and under estimating expenses. Yet somehow this time around the fantasy is being floated that Moonbeam has it all under control. I supposed when the Prop 13 axe falls later this year or next, Californians might come to their senses. Or perhaps not. This is a state with a lot of delusional folks who live in al alternate reality and simply have no idea how the books are balanced in most other states.

    2. BOPRN says:

      No matter how much of Schwarfailure’s mess Brown fixes, the right will never be happy.

      • Editor says:

        Boprn: Your comment suggests that this editorial comes from a “right-wing” perspective, when in fact it does not. While many of the topics covered on UnionWatch are associated with right-wing ideology, this association is promoted by opponents of fiscal reform (and good government reform) in order to discredit the messenger. Nothing in this editorial denies that Governor Brown has made some tough decisions, and occasionally has disappointed his public sector union patrons. But Governor Brown, and all Californians, whether they are right-wing, left-wing, or wingless, are going to need to confront the fact that borrowing is nothing more than a deferred tax. California’s state and local governments are nowhere near getting their borrowing addiction under control, much less beginning to meaningfully reduce their levels of debt.

        One of the decidedly nonpartisan perspectives of UnionWatch is to recognize that the financial sector benefits when governments spend more than they collect and have to borrow. Bond issuers collect billions in fees. Similarly, the financial sector benefits when pension benefits are enhanced, and guaranteed by taxpayers, since fund managers collect billions in fees, and invest the money with no moral hazard. The alliance between the financial sector (typically associated with the ideological right), and the public sector unions (typically associated with the ideological left), is one of the biggest unreported political dynamics of our time. And they’d like to keep it that way, wouldn’t they?

        To recognize that the pecuniary interests of Wall Street Bankers and public sector union bosses are aligned complicates the entire notion of right and left. To trumpet that point of view, repeatedly, as we have endeavored to do, certainly does not endear us to either side. So perhaps it’s time for liberals and good government Democrats to recognize this complexity as well, and begin to confront the possibility that public sector unions do NOT generally operate in the public interest.

        • BOPRN says:

          Editor,

          First, ‘wingless’ was a nice touch.

          While I agree with much of what you say, there was not that much of an outrage when Schwarzfailure plunged the state of California into the borrowing hole. There was not much outrage when he cut VLF by 2/3 and supported that cut with borrowing. There was not much outrage when he handed over the prison system to the feds, and created a fiscal nightmare for California by his refusal to do proper oversight. Not much outrage when all this stuff happened under the Republican watch.

          Now that a Democrat(s) is making an earnest effort to repair the state finances and economy left by a Republican Governor and a failed two term Republican President – well, there is outrage now.

          Where was all that outrage back then? Guess those were more understanding times?

          • Shelby says:

            BOPRN…..You were not watching the events of the time. Governors of both parties have had trouble controlling the left and the unions in California. The philosophical left is now at war with the union left now that they (the philosophicals) realize that the outrageous compensation the union left is demanding is crowding out the programs the philosophicals hold dear. The war that will rage will have the right and philosophical left on one side against the union left.

          • Tough Love says:

            Quoting …”Now that a Democrat(s) is making an earnest effort to repair the state finances … ”

            “Earnest” ? Moonbeam’s efforts are more akin to treating rabies with an aspirin.

      • Tough Love says:

        No much REAL “fixin” going on .. is there now ?

    3. BOPRN says:

      Shelby,

      Actually I was ‘watching’ events, and was witness to events. The damage Republican ‘leadership’ has done to this state is beyond what most people have the ability to grasp. Schwarzenegger fed Wall-Street bonds, openly invested in companies he planned to turn state infrastructure over to, told the feds ‘why don’t you take it over’ in regard to the prison system (which has cost billions and billions of dollars, cut VLF while borrowing to do it (bought his way into office with that one). The list goes on, but you get the point. The taxpayers are stuck with the bill now PLUS interest/fees. As for the over paid public employees – most are not. Some are for sure, but funny thing is most of the over paid employees with the state are a direct result of the prison receivership, which is in turn a direct result of Schwarzenegger’s failure to grow a brain. The problem I have is that when Schwazfailure was doing all this running up of the credit card – no problem. Right wing rags had no problem with it. Hardly anything was mentioned. Now that a Democrat is in there trying to fix the mess – he ain’t doing it fast enough. GIVE ME A BREAK. So you know – I’m not for the Democrats, and used to believe in Republican values (which they have long since been abandoned), so its not that I’m taking sides based on political views, just tired of the rhetoric.

      • Tough Love says:

        Harping on the little Schwarzenegger did is simply your way of distracting the discussion from how little Moonbeam is really doing.

        And quoting …”The taxpayers are stuck with the bill now PLUS interest/fees. As for the over paid public employees – most are not.”

        I really doubt that bill will be paid in full (perhaps 25-50% of it). As to most public sector workers not being over-paid, while that may technically be true if only “cash pay” is considered, but when “Total Compensation” (cash pay plus pensions plus benefits are considered, they are ALL grossly over-compensated.

    4. Shelby says:

      Arnold was a boob. You think Davis was better? I think not. Davis gave the unions the unsustainable retirement formulas we have today(3%@50,etc.). Brown has displayed no leadership on the fight that is inevitable to force current workers to accept a reduced retirement plan for work not yet done. If Brown and the left controlled legislator would show leadership they could save cities that can not afford these benefits (Stockton, San Bernardino,etc.).

    5. BOPRN says:

      Shelby -

      I don’t think Davis was better, and the media was hard on him. The media was not hard on Schwarzenegger. That is my point – be equal in the treatment.

      As far as Brown showing leadership on pensions, new employees have gone from 3% @ 50 to 2.5% @ 55, contribution rates have been raised from 9% to 11% (for the same class of employee). The people I know work primary in safety, and those are fairly big changes. So to say Brown hasn’t done anything is beyond naive.

      As far as the cities/counties – the formulas they use are up to the local officials. Not sure how you connect Brown to that. Perhaps you are so dedicated to believing the party line that the truth, no matter how apparent, can’t sway you?

      Remember to follow the bouncing ball of debt, and who it enriches. That was done by the Republican administration in California.

      • Shelby says:

        BOPRN….

        At least get your facts close to correct. New hire safety is now (1/1/2013) 2.7%@57 which does little to solve the budget disasters that are today’s local and state budgets. These changes to future employees will save a fraction of what is necessary and will do little until current employees retire decades from now. Many cities are paying very close to 50% of payroll for your “GREEDY” safety friends, making them cost 100K cash, 50K CalPERS payment, 12K medical, and for many up to 50K overtime for a education requiring a GED or high school education. That is well over 200K then they still get to retire as young as 50 years old with 90% of pay each and every year for the rest or their lives.
        You are the naive one to believe the very minor changes that have occurred will save the day.

        Oh….I think there is not a dimes worth of difference, all politicians spend to much.

        • Shelby says:

          BOPRN…

          As far as cities/counties- When the industry standard is a 3%@50 retirement formula, poor cities like Stockton and San Bernardino feel compelled to offer this benefit. Otherwise they are preceived as a substandard city/county offering substandard benefits. These poor cities/countys also know they are trying to attract the best people to a difficult(crime infested) environment. The best retirement should not be the one that only rich cities/counties can afford. It needs to be sustainable, and not so expensive that it crowds out other services. It should also be commensurate with the work, risk and education.

          • BOPRN says:

            Shelby says: “When the industry standard is a 3%@50 retirement formula, poor cities like Stockton and San Bernardino feel compelled to offer this benefit.”

            The county I live in maintained the 2%@55 formula for safety employees and never had an issue filling jobs. So, it is not the State’s fault that cities/counties changed their retirement plans – it is each city/county’s administrations fault. A wise man once said “politics is the business of shifting blame,” and it would appear you are playing politics?

            You also said: “These poor cities/counties also know they are trying to attract the best people to a difficult(crime infested) environment.”

            Agreed!! The question is why are these cities/counties poor. Why would nobody want to work in the police department or be a teacher/whatever else. We all know the answer – but don’t want to say it.

        • BOPRN says:

          Shelby says: “At least get your facts close to correct. New hire safety is now(1/1/2013) 2.7%@57 which does little to solve the budget disasters that are todays local and state budgets.”

          I will be sure to inform those I know that you are correct, and their CalPERS statements are wrong. They all will be quite relieved to find out they have been duped!!!

          But wait, there is more!! 2.5% @ 55 IS THE SAME PLAN AS 2.7% @ 57. There was some tweaking done from the 2.5@55 to make it 2.7@57…but the 2.7@57 still yields 2.5@55….

          Guess the venom you spewed was wasted?

          So sorry I did have my facts correct!!

          As far as “GREEDY” – some guy fills out an application, gets hired, goes to work – and you call him greedy? That is pathetic.

          • Shelby says:

            BOPRN…

            Sounds like you live in one rich County, that is in the enviable position it does not have to offer the best retirement available. Kudos to your supervisors for not being duped.

            The 2%@57 is also 2%@50, 2.1%@51, 2.2@52, 2.3%@53, 2.4@54, and as you correctly point out 2.5%@55, 2.6%@56, and finally 2.7%@57. The people who are honest rightly refer to it as the most generous or 2%@57.

            Your “GREEDY” Safety friends would not be “GREEDY” if they did their job for say the average household income in California, 75K per year(total compensation).

      • Tough Love says:

        Changes only for NEW employees will save aquat for 25+ years until they begin to retire. That’s darn close to NOTHING in my opinion.

        The change should have applied to all CURRENT workers not ALREADY eligible to retire.

    6. Shelby says:

      The 2.7%@57 is also 2%@50, 2.1%@51, 2.2@52, 2.3%@53, 2.4@54, and as you correctly point out 2.5%@55, 2.6%@56, and finally 2.7%@57. The people who are honest rightly refer to it as the most generous or 2.7%@57.

      • Shelby says:

        Tough Love….

        I agree. To save the system current workers must take a reduced formula going forward(for workn not yet done). They can do this at the table or have it forced on them in bankruptcy. I hope they wait, their “GREED” will force them to get less than if they had negotiated with reasonable expectations. Unfortunately for them they listen to their “Union Bosses” and that will be their undoing. Ask the workers in San Bernardino.

        • BOPRN says:

          Shelby says: “To save the system current workers must take a reduced formula going forward(for workn not yet done).”

          Shelby, there is another way to do it – force employees to pay a higher percentage going forward. That has been done, the legislation has been passed. That said, I agree with you that future years should be looked at so long as CalPers is funded less than 80% based on a discount rate of 7.5% (some would argue with the discount rate). The issue the government runs into is that people have given up Social Security (safety employees), or given up other income to become vested in this system. In addition there are the difficulties of breaking the retirement contract, and the legalities involved with that. At the same time I agree with you that something needs to be done to get things properly funded. Perhaps getting rid of the welfare population, illegals, bi-lingual education, the Department of African Affairs (or whatever it is called), getting rid of bingo for inmates, and so on would be a good step in reconciling the budget. At least Brown is in the process of pulling the prison system away from the feds, and that alone will save billions per year. Small steps to fiscal sanity, rather than a gigantic swing of the pendulum is what will solve the problems for California. JMO…

          • Tough Love says:

            BOPRN, Just raising the percentage employees pay won’t work, because to have a meaningful impact they would need to pay AT LEAST an ADDITIONAL 10% of pay (and 15-20% for safety workers).

            YUP …. That’s how excessive their current pension formulas and provisions (e.g., COLAs, early full retirement ages, etc.) are.

            Then the employees would need to contribute and ADDITIONAL 5-10Z% of pay to help fund their retiree healthcare benefits.

            I’m sure these incremental %’s of pay “seem” ridiculous to you, but their not …… VERY VERY generous pensions and benefits are VERY VERY expensive.

    7. Shelby says:

      BOPRN…

      As you so rightly point out many things should be cut or eliminated. We should start with across the board 10% reductions to all budgets. The fact remains that all retirement formulas must be reduced for current workers going forward. Safety is the poster child for reform. Many cities are paying very close to 50% of payroll for your “GREEDY” safety friends, making them cost 100K cash, 50K CalPERS payment, 12K medical, and for many up to 50K overtime for an education requiring a GED or high school education. That is well over 200K then they still get to retire as young as 50 years old with 90% of pay each and every year for the rest or their lives. The laws and legal outcome is unsettled when the question is: WHAT CHANGES CAN BE MADE TO FUTURE COMPENSATION FOR FURURE WORK.

      • Tough Love says:

        Quoting Shelby …”The laws and legal outcome is unsettled when the question is: WHAT CHANGES CAN BE MADE TO FUTURE COMPENSATION FOR FUTURE WORK.”

        The law may be unsettled and Court challenges may ultimately be decided against formula reductions for current workers ……. but that won’t change reality or the math.

        Insolvency is bankruptcy (and not getting paid) just w/o the “B”.

    8. Tim Lee Doyle says:

      Which political party are unions in bed with?

      Republicans control 10 of 40 seats in the State Senate. Republicans haven’t had a majority in the State Senate since 1956.

      Republicans control 25 of 80 seats in the State Assembly. They haven’t had a majority in the State Assembly since 1996.

      No California Republicans hold a US Senate seat. Not since 1992.

      California Republicans hold 15 of 53 US House of Representative seats.

      Out of California’s ten largest cities only have 2 have Republican Mayors.

      Democrats currently CONTROL the State Senate, State Assembly, the Board of Equalization, and the Governorship giving them a super majority. Meaning…. Republicans control nothing!!!

      Tell me again why Californians should blame Republicans?

      • Tim Lee Doyle says:

        Thanks for writing a non-partisan article truly stating the facts about California’s debt. People will always blame others and make excuses. It’s a natural response from partisan people to attack the truth by assigning blame to a villain.

        We need leaders who will fix the problem, whether Democrat or Republican.

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