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

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.

Union Reforms From Multiple Places Including US Supreme Court

At long last unions are on the run and losing battles in multiple places at once. Let’s take a look at some dates and headlines.

June 7, 2012 LA Times: 2 big cities OK cuts to worker pension costs

Landslide victories on ballot measures to cut pension costs in two major California cities emboldened reform advocates, who said they expect a flurry of copycat initiatives and increased support for Gov. Jerry Brown’s long-stalled push to curb the state’s obligations to its employees.

In San Jose, nearly 70% of voters Tuesday approved a plan that gives workers the choice between increasing their pension contribution to 13% of their pay, currently 5% to 11%, or switching to a lower-cost plan with reduced benefits. It also steeply cuts benefits for new hires and tightens rules for disability retirements.

In San Diego, where pension cuts already have been implemented, voters opted to eliminate pensions for new workers. By a 66% to 34% margin, voters Tuesday endorsed Proposition B, which provides newly hired city employees with a 401(k) program, but preserves traditional pensions for new police officers.

The San Diego measure also calls for a five-year freeze on “pensionable” pay levels and removes elected leaders’ ability to improve retirement packages without a popular vote. Leaders in both cities say voters were echoing a point that reform advocates have made for years.

June 7, 2012 Washington Times: Labor unions feel pain of pension reform votes in San Diego, San Jose

“San Diego’s victory isn’t just a win for San Diego taxpayers. It marks the beginning of the pension reform movement for our country,” declared Lani Lutar, president and CEO of the San Diego County Taxpayers Association. “Tuesday the voters sent a very clear message to elected officials: Put the taxpayers first. Use our money prudently, and stop giving away benefits we can’t afford.”

Pension reform advocates call it a crushing defeat, a rising trend, and just the beginning. According to the California Foundation for Fiscal Responsibility, with the victories on Tuesday 18 of 20 pension reform measures have now passed in California since 2010. They have won with an average of two-thirds of the vote, even in more liberal cities like San Francisco.

July 6, 2012 Mercury News: State will not override local pension votes, Senate leader Darrell Steinberg says

“I would not favor doing anything that would affect the voter-approved initiatives,” the Senate president pro tem told reporters Thursday, a day before the Legislature breaks for its summer recess. A spokesman for the Sacramento Democrat had said earlier that his boss “respects the will of the voters. … It is presumed that any local initiative passed this year will be grandfathered-in to the eventual pension-reform legislation.”

July 5, 2012 Union Watch – Steve Greenhut: US Supreme Court Slaps Down California SEIU Union Dues Collection Scheme

In Knox v. Service Employees International Union Local 1000, by a 7-2 vote, the high court slapped down the local – California’s largest state-employee union – for deducting money from employees’ paychecks and using it to fight against California campaign initiatives – without giving its covered nonmembers a chance to opt out of these political campaign contributions.

July 3, 2012 Town Hall – Gina Loudon: Labor Unions Suffer Defeat on Taxpayer Revolt

While the unions treat lawmakers in Sacramento, and most of the large cities like LA, San Francisco and Oakland like their concubines, having their way with them anytime they want, voters in the hinterlands, led by San Diego are not so compliant. In fact, voters in little El Cajon (pop. barely 100,000) showed big time el cajones by also becoming a charter city. A charter city differs from a general law city in that many of the day to day law making gets pulled from Sacramento to the local city council. Those laws include labor union laws. To date, voters in fully 122 California cities have voted to give Sacramento the bird.

The City of Vista passed their charter in 2007 on the prediction that taxpayers could save million of dollars on planned construction of two fire houses and other projects as charter cities could avoid being forced to pay Sacramento government-mandated wages or so-called “prevailing wages” on these projects. The measure passed by an overwhelming margin, but what did the unions do? Right. They sued. Today they lost.

In the matter of the State Building and Construction Trades Council of California (“Big Labor”) v. The City of Vista (“Little Taxpayers”), the California Supreme Court ruled today in favor of the taxpayers. Taxpayers in every charter city in California now have the ability to squeeze out from under the oppressive Sacramento mandated “prevailing wages” under which a plumber in San Francisco makes over $100 per hour in total compensation. The taxpayers in Vista will be able to have their fire houses and have millions left over to build more parks or other amenities. The alternative would have been millions of dollars to prop up insolvent union pensions. That is the real issue here.

With their losing streak running from Wisconsin to San Jose to San Diego, big labor should realize that the peasants are revolting. The animals on Orwell’s Animal Farm have seen that the pigs are their now masters, and they have met the new boss, who looks the same as the old boss. Their fate runs through Vista. So as the ink dries on the Vista decision, and more cities undoubtedly are contemplating enacting charters of their own, Sacramento lawmakers would be well-advised to make themselves scarce when big labor comes demanding more favors. Before Sacramento lawmakers try to do the unions’ bidding and pass special laws to harm charter cities, they may take a vista at the cajones of the voters that are in full rebellion.

July 6, 2012 Town Hall – John Ransom: Teachers’ Union Expelled from School District

The Douglas County School District, a suburban community south of Denver, Colorado, has decided to part ways with their teachers’ union in the absence of progress on a new contract which expired June 30th, 2012.

“The Board of Education finds and declares that the Collective Bargaining Agreements between the District and the Unions,” said the district on July 3rd in its formal resolution dissolving the bonds between the union and the district, “which had been effective from July 1, 2011 through and including June 30, 2012, are now expired and of no legal effect whatsoever.”

The dissolution between the district and the union is unprecedented and sources close to the union tell me that unions are pensively watching, worried that other districts around Colorado and the country could take the same action as Douglas County has.

We can only hope.


This my friends is what’s called progress. As Ransom suggests, we hope to see a lot more of it. I have every expectation we will. Indeed, I would like someone to take the entire issue of collective bargaining of public unions as well as prevailing wage laws to the US Supreme Court.

It is time to end the insane grip public unions have on US taxpayers.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

Union Watch Highlights

AFL-CIO chief amplifies warning to Democrats
By Kevin Bogardus, June 7, 2011, The Hill
AFL-CIO President Richard Trumka amplified his call for a politically independent labor movement Tuesday and said unions too often are holding “a canceled check” after Election Day. Trumka rallied hundreds of nurses at a conference hosted by the National Nurses United. The nurses are in Washington this week to lobby lawmakers for a financial transactions tax that could help pay for social services. Trumka said unions want “an independent labor movement” that doesn’t support just one political party or candidate. Labor has often been unhappy with its traditional allies in the Democratic Party, and Trumka said friends of unions in Congress have often paid little heed to workers’ needs. “For too long, we have been left after Election Day holding a canceled check waving it about — ‘Remember us? Remember us? Remember us?’ — asking someone to pay a little attention to us. Well, I don’t know about you, but I’ve had a snootful of that s–t,” Trumka said to cheers. (read article)

The Pretense of Obama’s ‘Other’ Labor Board’s Investigation of Delta
Editorial, June 7th 2011, Labor Union Report
Let’s cut to the chase, shall we? Within the next several months (perhaps sooner), the odds are President Obama’s National Mediation Board will find that Delta Air committed unforgivable sins during multiple election campaigns last fall, causing the unions to lose the elections.  As a result, employees at Delta will be subjected to more union elections until they—in the minds of union bosses—vote the right way (to unionize). It doesn’t matter what the facts are—Delta’s conduct could have been as pure as virgin snow—the NMB will rule that (at least several) of the elections must be rerun. Why? Because that is the goal and has been the goal all along (at least since 2009). Following last November’s defeat of the Association of Flight Attendants (AFA-CWA) at Delta (the third union failure in ten years), the AFA-CWA filed “interference” charges against the airline, alleging the carrier improperly influenced flight attendants decision. The Machinists union (which is currently in a pitched battle against the AFA-CWA at United) also alleged interference in the elections it lost at Delta.  In all, unions lost at least nine known elections at Delta in 2009. (read article)

Even Massachusetts gets it about unions
Editorial, June 6, 2011, Orange County Register
In Massachusetts, liberal-leaning Democrats run the government. But to its credit, the Democratic-controlled Legislature has boldly acted to bring spending of taxpayer money under control by voting to curb collective bargaining rights on health care for municipal employees. These otherwise public union-friendly lawmakers are acknowledging taxpayers are not a bottomless pit of cash, and there are limits on how much government can dole out. The California Legislature, also controlled by liberal-leaning Democrats, would be wise to learn from their East Coast kindred spirits. Employee costs swallow the bulk of government budgets at all levels, here and in Massachusetts. One of the primary reasons is their collective bargaining power, giving them the ability to bend all manner of benefits policies and rules in their favor. (read article)

San Jose, California’s Public Employee Unions Protest Mayor’s Pension Reform Plan
By Tracy Seipel, June 6, 2011, Mercury News
San Jose’s director of employee relations on Monday apologized to union members who say they were caught off guard Friday when a meeting with his office touched on a different topic of pension reform than they were led to believe it would. “We’re sorry about that misunderstanding,” said Alex Gurza. “Whether we are talking about the ballot measure or broader retirement reforms, we would like to hear their ideas and we hope to get a meeting scheduled immediately to hear those ideas.” Members of three San Jose employee unions that were among the first to agree to cuts in salary and benefits with the city to help solve next year’s $115 million budget deficit said they felt duped by the move, and left Friday’s meeting. They wanted to discuss pension reform options that would be presented to the City Council before attempting to craft a ballot measure. (read article)

How Providence, Rhode Island’s Unions Helped Break the City Beginning in the 1980s
By Tom Mooney, June 5, 2011, Providence Journal
General Treasurer Gina M. Raimondo often says that politics are the culprit for the pension crisis — 30 years of elected officials extending benefits without putting aside money to pay for them. But one of the state’s most infamous eras of pension offerings –– what some say prompted “raids” on a system –– began in Providence during the 1980s and did not involve any politicians answerable to taxpayers. At least not initially. (read article)

Thank You, Illinois Taxpayers, for My Cushy Life
By David Rubinstein, May 30, 2011, The Weekly Standard
After 34 years of teaching sociology at the University of Illinois at Chicago, I recently retired at age 64 at 80 percent of my pay for life. This calculation was based on a salary spiked by summer teaching, and since I no longer pay into the retirement fund, I now receive significantly more than when I “worked.” But that’s not all: There’s a generous health insurance plan, a guaranteed 3 percent annual cost of living increase, and a few other perquisites. Having overinvested in my retirement annuity, I received a fat refund and—when it rains, it pours—another for unused sick leave. I was also offered the opportunity to teach as an emeritus for three years, receiving $8,000 per course, double the pay for adjuncts, which works out to over $200 an hour. Another going-away present was summer pay, one ninth of my salary, with no teaching obligation. (read article)

Jack Dean is editor of, formed to monitor developments in all three pension spheres nationwide — public employees, corporations and social security. PensionTsunami, like UnionWatch, is a project of the California Public Policy Center. Dean is a former newspaper editor and a past executive director of the Reason Foundation. He has been active in politics for more than three decades and currently serves as president of the Fullerton Association of Concerned Taxpayers.