California’s Budget Exceeds Available Funds by $250 Billion, Reveals a Recent Commitment
California, known for its vast wealth and economic prowess, has recently revealed a financial crisis of epic proportions. According to a report released by the State Controller’s Office on March 15, the state is facing more than $255 billion in unfunded liabilities, making it the largest deficit in the nation. The report, which was almost a year overdue, paints a grim picture of California’s financial health, attributing much of the shortfall to promises made to state workers and retirees.
Pension debt and other employee-related benefits account for over $150 billion, or 60.4 percent, of the liabilities. Another $64.6 billion is related to outstanding bond debt from past projects such as school buildings and other capital assets. The state’s largest pension plans, including the California Public Employee Retirement System, remain underfunded with only about 71 percent of liabilities funded.
The root of this financial crisis can be traced back to Senate Bill 400, passed in 1999, which changed the formula to calculate retirement benefits for state workers. This resulted in increased payments for many workers and added to the growing pension debt. Additionally, the decision to invest in the stock market instead of purchasing bonds at the market rate of 8 percent in 1999 has further exacerbated the problem.
What is most concerning about California’s financial situation is the lack of transparency surrounding pension debt and other liabilities. These debts are not disclosed on balance sheets, making it difficult to evaluate the true financial health of the state. Former state Senator John Moorlach, a certified public accountant, expressed his embarrassment for his profession and called it a “massive mistake” to bury the debt.
Furthermore, California is seeking forgiveness for $29 billion in unemployment loans and another $26 billion in other federal loans. While this may benefit California and other states looking to clean up their books, critics argue that it will burden federal taxpayers who will ultimately shoulder the cost.
The timing of the report’s release, coming after the primary election, has also raised concerns. Voters were not given a clear understanding of the state’s financial health when considering whether to approve Proposition 1, a $6 billion mental health bond package. Moorlach argues that voters would have been less likely to approve new debt if they knew about the state’s existing financial crisis.
The report’s delayed release is not a new issue for California. The state’s financial information system has been blamed for missed deadlines, and the Controller’s Office is working to expedite reporting and strengthen accounting processes. Additional funding provided by the state will allow the office to hire more employees and improve future reporting.
Despite these challenges, the report does highlight some positive aspects of California’s finances. Sales and use taxes increased by $3.7 billion, and corporate taxes spiked by $3.7 billion from the previous year. The general fund ended the fiscal year with $120.2 billion in cash, representing a $56.3 billion increase from the previous year. This strong cash position provides reserves for future fiscal years and offers some hope for California’s financial recovery.
However, these reserves alone may not be enough to resolve the state’s current fiscal dilemma. The Legislative Analyst’s Office estimates an additional $73 billion deficit on top of the already staggering unfunded liabilities. Budget discussions are underway to find a solution to this pressing issue that affects not only California but also the entire nation.
California’s financial crisis serves as a cautionary tale for other states and highlights the importance of responsible financial management. Transparency, accountability, and prudent decision-making are crucial to avoid falling into a deep hole of debt and unfunded liabilities. As California navigates these troubled waters, it remains to be seen how the state will address its financial challenges and regain its economic stability.
