California carries nearly $497 billion in state liabilities, the largest total debt of any state in the nation, according to a new study from the Reason Foundation. The report identifies three financial red flags that threaten taxpayers and financial stability across all levels of government: the state owes more than it owns, has committed to $249 billion beyond what it holds in unrestricted funds, and each Californian's portion of the liabilities totals $12,565. For years, the state has borrowed more money and expanded programs and public-sector retirement benefits without fully funding them, rather than working to reduce overall debt.
At the local level, the financial red flags paint an alarming picture. Anaheim received three financial red flags: its unrestricted net position shows it has promised to pay more than it can after accounting for restrictions on some assets, its cash as a percentage of assets reveals how little of its holdings are liquid, and its solvency ratio compares its debt to a year's tax revenue. Long Beach also got 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 for per capita liabilities and the solvency ratio, while Los Angeles County received three: a debt ratio showing it owes more than it owns, a negative unrestricted net position, and spending that exceeded revenue.
School districts may represent California taxpayers' biggest long-term concern, since mounting debt pressures budgets and leaves less money for students, the report finds. The Los Angeles Unified School District received four financial red flags and carries $69,512 in liabilities for every student. Long Beach Unified has two red flags and holds $51,686 in liabilities per student, while Corona-Norco Unified in Riverside carries $26,665 per student. San Diego Unified School District has $83,762 in debt per student—the highest of any California school district examined. When the district's per-student debt is combined with 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 LAUSD's per-student share is included, that figure jumps to $103,000 per capita.
The report explains that when lawmakers don't pay for public pension benefits and government programs as they go, interest and bills grow larger for taxpayers. To address these financial warning signs 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. Bonded debt issued by school districts will become particularly problematic because birth rates have declined and public-school enrollment in most California school districts has fallen since the pandemic, which means schools will receive less total funding as they serve 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.
The report warns that California can't keep raising taxes and shifting costs onto future generations indefinitely. The bills are coming due and forcing governments to redirect 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.