Time to Tear Up California's Credit Cards!

Rich man full of debt

Suppose your household found itself with more credit card debt than you could handle.  That is a scenario not unfamiliar to most households that experience sudden increases in spending, such as college tuition or medical expenses.  Now suppose you took action.  You refinanced your mortgage to include pay down of most of your credit card debt and successfully convinced your boss to give you a substantial raise.  Would your household be better off financially?  Sure – for a while.  In the long run you might be in the same spot you were before, if your coveted salary increase placed you in a higher tax bracket and your expenses remained the same or increased under illusions created by your higher salary.

These days government at all levels practices this kick-the-can-of-reckoning-down-the-road strategy.  California Governor Jerry Brown runs hot and cold regarding debt.  He frets over California’s “wall of debt” but signs debt increases into law.  Witness the bond proposals in the “affordable housing package” recently enacted.  

How about California’s huge gross state product or GDP?  Like the household example above, the relevant question is how much real total debt as a percentage of earnings you have.  If you are flush with assets that you purchased with debt, you might find yourself in sad straights should suddenly your circumstances change.  Remember those sudden medical expenses you had.  Or remember the dot-com bust, or the sub-prime crisis?

And what do we mean by “real” debt?  Certainly not the debt Jerry Brown and other legislators quote.  Real debt includes hidden liabilities such as retirement pensions and health care that public-sector employees are promised.  Here are figures from a California Policy Center article dated January 10, 2017, estimating real debt as of fiscal year ending June 30, 2015.

State and local bonds, loans, and other contractual debt: $574 Billion
Underfunded pensions official estimate:   $258 Billion                            
Additional underfunding used by Moody’s:  $455 Billion

Total State and local debt:   $1,287 Billion

Gross State Product (GDP):   $2,481 Billion

Real Debt to GDP:  52%

This whopping 52% real debt as a percentage of GDP of course does not include the plethora of bonds approved after June 30, 2015.  Neither does it include the tsunami of debt proposed by legislators to finance the September 2017 "affordable housing package." All this debt needs “servicing,” taxpayer funds going to pay interest and support huge administrative bureaucracies. Is there any wonder why in spite of California’s tax increases during the last few years, you are still fuming over potholes?