California’s FY2025-26 Budget Failed to Address the State’s Long-term Financial Risks

Politicians too often assume that California’s fiscal health is synonymous with the state of its annual budget. When revenue growth is strong, the state is allegedly in a sound fiscal position. It is only when revenue growth stagnates that worries over the budget arise.

Such a narrow view of fiscal health ignores the state’s longer-term financial troubles. California has amassed an excessive level of debt that is funding low value projects and helping to drive total state spending to unaffordable levels.

Proposition 1A exemplifies the low returns problem. Passed in 2008, Prop 1A authorized approximately $10 billion in general obligation bonds to fund the bullet train and related rail improvements. Ideally, the bullet train would haveenabled faster and better travel between San Francisco and Los Angeles for $33 billion including federal funds.

Such is the false optimism of government budgeting. The train will now only connect Merced to Bakersfield, and not until 2033. The projected costs have skyrocketed to $135 billion, and even this figure is likely an underestimate of the final costs. In other words, the train is a cost boondoggle that will not appreciably improve the state’s transportation infrastructure and fails to provide an adequate return to taxpayers.  

In addition to funding unwise investments, the state also inappropriately uses bonds to simply expand total state spending. Take Prop 4. Passed in November 2024, Prop 4 authorized $10 billion in general obligation bonds to address climate-related initiatives. These bonds will fund some capital projects. As the history of the bullet train demonstrates, these projects will likely underperform expectations.

Prop 4 also funds spending that is more appropriately allocated through the annual appropriations process – such as spending $200 million on nature education and state park maintenance. Using debt to finance current spending allows the state to spend more money than otherwise but only in the short term. It’s akin to a family using its credit card to pay for an unaffordable vacation. Like the indebted family, the bill will eventually come due, and it will be financially painful when it does.

Excessive bond issuance is far from the only long-term burden on the state. California has also failed to fund public employees’ promised pension and other retirement benefits (e.g. healthcare). According to the Reason Foundation, California’s total unfunded liabilities for pension and other benefits was $285 billion at the end of 2023.

All these costs impose a tremendous burden on future taxpayers. Worse, these costs are in addition to the taxes future taxpayers will have to pay to fund the typical public services they will need such as police, fire, and road maintenance.

Documenting the total net burden from California’s longer-term fiscal mismanagement is a monumental task. Luckily, in a just released report, Truth in Accounting ran these numbers for all 50 states. Truth in Accounting estimated each state’s taxpayer burden, which they defined as the difference between the total bills that a state must pay, including state pension and other retirement benefits, and the total value of the assets that a state has amassed to pay these bills. The calculations exclude the value of longer-term assets, such as buildings, which can neither be reasonably nor readily liquidated to cover these bills.

According to the report, “in this year’s analysis, 5 states earned As, 20 received Bs, 7 received Cs, 13 received Ds, and 5 states received Fs.” Unsurprisingly, California received one of the Fs, which means that the state’s unfunded burden was more than $20,000 per taxpayer – Truth in Accounting estimated the burden to be $21,800.

In other words, there would be sufficient resources to pay for all the debts the state has incurred if every taxpayer coughed up $21,800 on top of all other taxes they would ordinarily pay. Of course, this would also require the state to sell off all its shorter-term and non-restricted assets too.

Expecting taxpayers to come up with such a large sum of money is infeasible, of course. As is expecting the state to liquidate the necessary assets. Therefore, fundamental  and timely reforms are required. Without them, California’s unsound finances will undermine our future prosperity.