Deep Dive: Will California Go Broke?

California has a $4.3T economy, more than almost every country in the world.

But the state’s finances depend heavily on a small number of people and a volatile source of income.

In 2023, just 176,000 tax returns, roughly 1% of filers, generated 37% of California’s resident personal income tax. Much of that income comes from selling assets, so revenue rises sharply when markets are strong and falls when they turn.

We can see that in the capital gains numbers. Californians realized $349 billion of gains in 2021, then $156 billion the following year. Revenue can move that quickly, while many of the state’s largest spending commitments cannot.

Schools have a constitutional funding guarantee, bondholders sit ahead of most other claims, and Medi-Cal and pension contributions come with legal and financial constraints. Together, those four categories account for roughly $150 billion of the $226.7 billion the General Fund expects to collect.

Across all state funds, California plans to spend $351.7 billion this year against $328.5 billion of expected revenue. Reserves, prior-year balances and other budget tools can close that gap, but another $302.4 billion of long-term obligations sits on the balance sheet, including bonds, pensions and retiree health care.

Bond debt is relatively manageable today. California spends less than four cents of every General Fund dollar servicing its bonds, the lowest share in two decades. Even if revenue were cut in half, those payments would still be covered.

During the financial crisis, California kept paying bondholders and pension contributions while furloughing workers, raising UC and Cal State fees 32%, deferring school payments and issuing $2.6 billion of IOUs.

California’s room to make those tradeoffs also depends on whether the tax base holds up. In 2023, the state lost a net 200,000 people and $11.9 billion of adjusted gross income to other states. Filers earning more than $200,000 were 15% of the people who left, but 58% of the income.

That puts three questions in front of us: How long can California’s reserves cover its recurring budget gap? Where does the pressure land when revenue falls? And how large is the pension shortfall once you change the assumptions?

We set out to answer those questions in the 105-page audit below. Here is what you will find inside:

You can also find my personal opinion on California’sfuture and what line must be crossed to get me to consider leaving the state.

Read it and let me know if you agree or disagree with the outlook.

Chamath