California’s total long-term debt, between state and local governments, has quietly increased to more than half a trillion dollars, making it the most indebted state in the country. The state’s debt problem is largely due to rapid growth in unfunded liabilities for pension and health care benefits already promised to public employees.

If California does not act quickly to bring that debt down to more sustainable levels, it risks being forced to raise taxes – potentially wiping out an already burdensome tax base – or cut services like roads. , education and the police.

The state’s debt ratio is also significant, given the size of California’s economy and population. The debt ratio compares a state’s liabilities to its assets and revenues. In 2022, California had the fifth worst debt rate in the country, at 106%, meaning the state owes more money than it receives. The next two most populous states, Texas and Florida, had much lower debt rates, 46.52% and 30.26%. , respectively.

Thanks primarily to federal aid to state and local governments during the COVID-19 pandemic, California’s debt rate has decreased by 11% since 2020. However, other states have managed to wipe out far more than debts. Texas and Florida reduced their debt ratios by about 30% each between 2020 and 2022.

At the state employer level, California has $273 billion in non-current liabilities (debts not due within the next year). Unfunded obligations of public employees represent 56% of California’s noncurrent liabilities. About two-thirds of these debts come from unfunded retiree health benefits, with unfunded public pension benefits making up most of the remainder.

From 2012 to 2022, the unfunded debt of California public employees increased by 710%, from $19 billion to $154 billion. Unfunded obligations represent the gap between the retirement benefits the government has promised to public employees and the funds that have been set aside to meet those commitments. Increases in unfunded liabilities may result from lower-than-expected investment returns or inadequate annual contributions from the government and plan participants.

However, $273 billion represents only long-term debt held by the state itself. Local authorities have approximately the same amount of debt. In an analysis of California’s largest cities, counties and school districts, the Reason Foundation found that these local entities add at least $238 billion in additional debt, bringing the state’s total long-term debt local governments in California worth more than $510 billion. For example, Los Angeles County has $46 billion in debt, the City of Los Angeles has $47 billion in debt, and the Los Angeles Unified School District has $27 billion.

California cities have particularly struggled to manage rising pension costs, with some, like San Bernardino, forced to declare bankruptcy due to financial difficulties. Other cities avoided bankruptcy but still had to tighten their budgetary belts. San Diego, for example, chose to make only a portion of the pension contributions required to contain its short-term budget deficit, while deferring the cost of pensions into the future.