For years, California has struggled with substantial debt and deficits. Instead of working to reduce the state’s overall debt, policymakers have consistently borrowed more money and passed and expanded programs and public-sector retirement benefits without fully funding them.
California has the largest total debt of any state in the nation, nearly $497 billion in state liabilities. More worryingly, a new Reason Foundation study finds three financial red flags that pose serious risks to California taxpayers and financial stability at all levels of government.
California’s three most concerning red flags are its debt ratio, unrestricted net position, and liabilities per capita. In other words, the state owes more than it owns, has promised $249 billion beyond what it holds, and each Californian’s share of the liabilities comes to $12,565.
The report also examines financial red flags across the state in counties, cities, and school districts.
In Southern California, Anaheim got three financial red flags: its unrestricted net position, which means it has promised to pay more than it can after accounting for restrictions on the use of some assets; cash as a percentage of assets, indicating how little of its assets are liquid; and its solvency ratio, which compares its debt to a year’s tax revenue.
Long Beach also received three red flags: unrestricted net position, liabilities per person, and cash as a percentage of assets.
The city of Los Angeles received two financial red flags: per capita liabilities and the solvency ratio.
At the county level, Los Angeles County received three fiscal red flags: a debt ratio indicating it owes more than it owns, along with a negative unrestricted net position and spending that outpaced revenue.
School districts may be California taxpayers’ biggest long-term worry, since rising debt puts significant pressure on budgets and leaves less money for students. The Los Angeles Unified School District received four financial red flags in the Reason Foundation report. LAUSD carries $69,512 in liabilities for every student.
Long Beach Unified has two red flags and carries $51,686 in liabilities per student. Corona-Norco Unified in Riverside carries $26,665 in liabilities per student.
San Diego Unified School District has $83,762 in debt per student—the highest of any California school district in the Reason Foundation study. When the district’s per-student debt is added to the per-capita liabilities at the city, county and state level, the average taxpaying resident of San Diego owes more than $104,000, the highest in Southern California.
Each Los Angeles resident owes over $33,000 in city, county, and state debt. And if you include LAUSD’s per-student share, that number explodes to $103,000 per capita.
To address these financial red flags at all levels of government, policymakers can start by fully funding the retirement and health care benefits they provide to public workers and reducing borrowing. When lawmakers don’t pay for public pension benefits and government programs as they go, interest and bills grow larger for taxpayers.
Bonded debt issued by school districts will become particularly problematic. Birth rates have declined, and public-school enrollment in most California school districts has fallen since the pandemic, which means schools will get less total funding because they’re serving fewer students. School districts have largely borrowed money to build new facilities for students who may never arrive, and some districts will struggle to pay their bonds.
California can’t keep raising taxes and shifting costs onto future generations indefinitely. The bills are coming due and forcing governments to divert money from classrooms, public safety budgets, and needed infrastructure projects. If lawmakers don’t act, the financial red flags could eventually lead to the bankruptcy of more local governments and school districts.
Geoffrey Lawrence is research director at Reason Foundation