Yes, California is in debt, and heavily so. The state carries roughly $79 billion in outstanding bonds, pension shortfalls topping $100 billion across its two main retirement systems, and more than $80 billion in promised retiree healthcare that is not fully funded. Add recurring annual budget gaps driven by a tax system that swings with the stock market, and the obligations shape every budget cycle. None of this puts California at risk of insolvency, but the scale affects what the state can spend on services, what public employees are promised, and what residents and businesses end up paying in taxes.
Bond Debt the State Has Already Sold
California funds much of its infrastructure by selling bonds, borrowing from investors and repaying them over decades with interest. General obligation bonds, which voters must approve at statewide elections, make up most of the balance. According to the Legislative Analyst’s Office, the state has about $79 billion in total outstanding bond debt.1Legislative Analyst’s Office. Overview of State Bond Debt Service
Another roughly $30 billion in bonds has been authorized by voters or the Legislature but not yet issued, meaning the bond total will grow as the state funds approved projects for schools, transportation, water, and housing.1Legislative Analyst’s Office. Overview of State Bond Debt Service A smaller slice, around $8 billion, consists of lease revenue bonds. Those are backed by lease payments on specific state-built facilities rather than general tax revenue, and they do not require voter approval.
Servicing all of this bond debt costs the state close to $8 billion a year in principal and interest. That works out to about 3.2 percent of General Fund expenditures, below the 6 percent threshold fiscal analysts treat as a warning sign.1Legislative Analyst’s Office. Overview of State Bond Debt Service Credit ratings matter here. A one-notch downgrade adds up quickly across billions in new borrowing.
Pension and Retiree Healthcare Promises
The state’s obligations to current and retired public employees dwarf its bond debt. Two retirement systems carry most of the weight. CalPERS covers most state and local government workers, and CalSTRS covers public school teachers. Both depend on employer contributions, employee contributions, and investment returns. When returns fall short or contributions lag, the gap between what has been promised and what has been set aside grows.
CalPERS reported a funded status of 79 percent as of June 30, 2025, up from 71.4 percent two years earlier, driven mostly by strong investment returns.2CalPERS PERSpective. What Is CalPERS Funded Status – A Look at Our Financial Health The remaining 21 percent gap still translates to an unfunded liability in the neighborhood of $180 billion, a figure that moves with markets. CalSTRS reached a funded ratio of 76.7 percent as of June 30, 2024, with its unfunded liability estimated at over $100 billion in recent years.3CalSTRS. Funded Status Rises Again; Contribution Rates Remain the Same
California law protects these benefits from being reduced for current employees and retirees. Taxpayers backstop the promises regardless of how the budget looks in any given year, which is why pension costs tend to crowd out other spending when returns disappoint. Employer contribution rates for schools and local agencies have climbed steadily, with a portion of each payment going specifically to pay down the unfunded liability. Every dollar servicing past promises is a dollar not available for current hiring or facilities.
Retiree healthcare sits on top of that. Known as Other Post-Employment Benefits, these obligations were paid strictly as costs came due until California began pre-funding them through collective bargaining agreements starting in January 2010. Even with pre-funding, the state’s net liability for retiree health and dental benefits stood at $82.41 billion in the most recent State Controller report, down from $95.51 billion the year before.4California State Controller. Controller Cohen Updates State Retiree Health Care Liability
Why California Keeps Running Annual Deficits
Alongside those long-term debts, California faces a short-term problem that recurs almost every cycle. The personal income tax provides more than two-thirds of General Fund revenue, and because capital gains are taxed at the same rate as ordinary income, a stock market dip can open a budget hole almost overnight. When tech stocks cooled in 2022, the state moved from a record surplus to a record deficit inside a single fiscal year.
The 2024–25 cycle made the volatility clear. The Legislative Analyst’s Office estimated a $68 billion shortfall; the Governor’s Department of Finance projected $38 billion using different assumptions.5Legislative Analyst’s Office. The 2024-25 Budget – California’s Fiscal Outlook The 2025–26 budget closed a roughly $12 billion gap through internal borrowing, reserve withdrawals, and program freezes.
For 2026–27, the Governor’s May Revision claims a balanced budget with no projected deficit through July 2028, backed by $1.8 billion in General Fund spending reductions and $9.7 billion deposited into a surplus holding account.6Governor of California. Governor Newsom Announces Revised Budget That Eliminates California’s Deficit The Legislative Analyst’s Office is less convinced. Its review found the budget balances only by relying on roughly $20 billion in reserve withdrawals and suspended deposits plus $4 billion in borrowing, and warned that “the existence of any operating deficits during a revenue boom of this magnitude is itself a warning sign.”7Legislative Analyst’s Office. The 2026-27 Budget – Initial Comments on the Governor’s May Revision
Capital gains revenue is projected to decline 13 percent in 2026 from elevated 2025 levels, which means the personal income tax strength propping up the current budget may not carry forward.8California Department of Finance. Revenue Estimates This is the structural tension at the center of California’s finances. The tax base generates extraordinary revenue in booms and leaves large holes in corrections.
What Keeps the Debt From Spiraling
California’s constitution puts two separate limits on the state’s finances. Article IV, Section 12 requires a balanced budget. The Legislature cannot send the Governor a spending plan where General Fund appropriations exceed estimated revenues for the fiscal year, and the budget deadline is June 15 each year.9Justia. California Constitution Article IV Section 12 – Legislative In practice, “balanced” involves a fair amount of creative accounting, but the floor prevents simply spending more than the state takes in and deferring the bill.
Article XVI, Section 1 constrains long-term borrowing. The Legislature cannot create debt exceeding $300,000 unless the proposal clears both chambers by a two-thirds vote and then wins majority approval from voters at a general election or primary.10Justia. California Constitution Article XVI Section 1 – Public Finance Any such law must identify the project, specify a repayment plan that does not rely on new loans, and discharge the debt within 50 years. That is why every major bond measure appears on the ballot.
The Rainy Day Fund
Proposition 2, passed by voters in 2014, restructured the Budget Stabilization Account. It requires automatic deposits based on a formula tied to capital gains revenue, with at least half earmarked for paying down state debts, including pension and retiree healthcare liabilities. For the first 15 years, the state must spend a minimum of 0.75 percent of General Fund revenues annually on those debts, on top of payments already required by law.11Legislative Analyst’s Office. Proposition 2
Withdrawals are limited. The Governor must declare a budget emergency, either a natural disaster or a revenue shortfall that would push spending below the highest level of the past three years, adjusted for population and inflation. Even then, the state can withdraw only what the emergency requires, and in the first year, no more than half the fund can come out.11Legislative Analyst’s Office. Proposition 2
As of the 2026–27 May Revision, the state holds nearly $30 billion in combined reserves, with the Budget Stabilization Account projected to reach $15.1 billion.12California Department of Finance. May Revision – California Budget A substantial cushion, but a single bad year can open a deficit above $60 billion.
How California Compares to Other States
In raw dollars, California and New York consistently carry the highest total state debt in the country, which tracks with having the largest economies and populations. The more revealing measure is debt per capita. On that basis, California falls outside the top tier: Connecticut, Massachusetts, and New Jersey carry heavier per-resident debt loads despite much smaller populations. Nationally, average state debt runs about $8,000 per person. California sits above that mark but below the most indebted northeastern states. Texas carries roughly $7,400 per capita; Florida reports about $3,300.
Where California stands apart is in the concentration of its obligations in unfunded pension and healthcare liabilities rather than traditional bond debt. Many states have pension shortfalls, but the combined scale of CalPERS, CalSTRS, and retiree healthcare is difficult to match. Those are effectively fixed costs that will consume a growing share of the budget for decades, regardless of who controls the Legislature or what the stock market does in any given year.