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CA’s knees tremble under the weight of a $443 billion debt

By   /   July 10, 2015  /   No Comments

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OVERDRAWN: With California’s real debt now passing the $443 billion mark, research shows the state will inevitably have to deal with economic shocks or a long-term fiscal crisis if it doesn’t take drastic measures.

By Alice Salles | Watchdog Arena

Federal unfunded pension liabilities are soaring. But as states deal with their own pension troubles, public services take a major hit.

Between 2008 and 2012, the state of California saw a 17 percent increase in local governments’ pension spending while tax revenue increased a meager four percent. As city officials scramble to handle the backlash from introducing pension reform ballot measures, few believe the effort will be met with enthusiasm. According to the Mercatus Center’s latest research on the fiscal condition of the states, California may not have all the time in the world before its downfall

The research points out factors like pension liabilities and other spending commitments linked to Medicaid and other health care benefits seem to present a heavy burden to taxpayers, and California is one of the 14 states without enough cash on hand to cover short-term liabilities.

In Gov. Jerry Brown’s 2014-15 budget, officials claimed the state’s ‘wall of debt’ amounted to $26.2 billion. Short-term debts account for most of the debt total, according to officials. Payments to community colleges, schools, and the state’s Medicaid program are named as those mainly responsible for said short-term debts.

But despite state officials’ claims, the actual amount of debt in California goes beyond Brown’s official assessment.

As the state struggles to cover retirement benefits, deferred infrastructure maintenance, outstanding general obligation bonds, unissued bonds, and lease revenue bonds, it also needs to find a way to cover the $8.8 billion it owes to the federal government after borrowing $10 billion to cover the state’s unemployment insurance fund.

With the state’s real debt now passing the $443 billion mark, the Mercatus research shows California will inevitably have to deal with economic shocks or a long-term fiscal crisis if it doesn’t take drastic measures.

One of California’ weaknesses pinpointed by Eileen Norcross, the author of the Mercatus report, includes low cash ratio.

According to the research, California does not have enough cash to pay bills due in the coming 30-to-60 day period. States in a worse shape than California include Illinois, Massachusetts, Connecticut and Maine. While these problems concern experts, the short-term financial issue is the least of California’s worries.

Unfortunately for taxpayers, California doesn’t seem capable of covering long-term liabilities either.

Without enough cash to meet long-term obligations, California, as well as other states such as New York, Rhode Island, Wisconsin, North Carolina, Vermont, and Maryland, may have to raise taxes considerably and cut basic programs to handle the crisis. But even those measures may not be enough.

Because the state’s unfunded pension obligations account for a large portion of Californians’ personal income, Norcross states, liabilities “represent a potential drain on future resources” and California economy.

According to K. Lloyd Billingsley’s recent report, pensions should be dealt with promptly if California is to work on its budgetary health.

This article was written by a contributor of Watchdog Arena, Franklin Center’s network of writers, bloggers, and citizen journalists.