Californias total long-term debt, between the state and local governments, has quietly surged to over half a trillion dollars, making it the most indebted state in the nation. The states debt problem is largely due to rapid growth in unfunded liabilities for pension and health care retirement benefits already promised to public workers.

If California does not act quickly to reduce this debt to more sustainable levels, it risks being forced to raise taxes—potentially driving away an already burdened tax base—or cut services like roads, education, and policing.

The states debt ratio is also important, given Californias large economy and population. The debt ratio compares a states liabilities to its assets and revenues. As of 2022, California had the nations fifth worst debt ratio, at 106%—meaning the state owes more money than it takes in. The next two most populous states, Texas and Florida, had far lower debt ratios of 46.52% and 30.26%, respectively.

Thanks primarily to federal aid to state and local governments during the COVID-19 pandemic, Californias debt ratio has fallen by 11% since 2020. However, other states were able to wipe out far more debt. Texas and Florida reduced their debt ratios by about 30% each from 2020 to 2022.

At the state employer level, California has $273 billion in noncurrent liabilities (debts not due within the next year). Unfunded public employee obligations account for 56% of Californias noncurrent liabilities. Roughly two-thirds of these liabilities come from unfunded retiree health care benefits, with unfunded public pension benefits making up most of the rest.

From 2012 to 2022, Californias unfunded public employee debt increased by 710%, from $19 billion to $154 billion. Unfunded obligations represent the gap between the pension benefits that the government has promised to public employees and the funds that have been set aside to meet these commitments. Increases in unfunded liabilities can result from lower-than-expected investment returns or inadequate annual contributions by the government and plan members.

However, $273 billion is just the long-term debt held by the state itself. Local governments have nearly the same amount of debt. In an analysis of Californias largest cities, counties, and school districts, Reason Foundation found that these local entities add at least an additional $238 billion in debt, bringing Californias total state and local long-term debt to over $510 billion. For example, Los Angeles County has $46 billion in debt, the city of Los Angeles has $47 billion, and the Los Angeles Unified School District has $27 billion.

California cities have especially struggled to manage rising pension costs, with some, like San Bernardino, being forced to declare bankruptcy due to the financial strain. Other cities have avoided bankruptcy but have still had to tighten their fiscal belts. San Diego, for example, opted to make only part of the required pension contributions to contain its short-term budget deficit but push pension costs into the future.

Some cities that have continued making full pension contributions have made cuts elsewhere. Jim Reed, former mayor of Scotts Valley, explained, The single most important reason we have the fiscal crunch that we have today is that pensions—our pension liability—is impacting our ability to provide core services.

Californias state and local governments must focus on paying down debt rather than waiting until the only option is raising taxes. Spending cuts to balance budgets may be politically difficult but are necessary. Likewise, selling unneeded and underutilized property and assets, privatizing infrastructure like airports, and partnering with private sector companies on expensive megaprojects, like needed highway expansion and toll roads, can save or generate money to help pay down debt.

With over half a trillion dollars in total government debt, it is unclear how much longer Californias state government, cities, counties, and school districts can continue on this financial path without reducing spending or raising taxes.

Mariana Trujillo is a policy analyst with Reason Foundation and author of a forthcoming report on state and local government debt.