There's absolutely nothing wrong, per se, with incurring debt, whether it's by families, businesses or governments. A functional credit market is absolutely vital to a modern economy.
"Functional," however, means not taking on debt beyond a reasonable capacity to repay. We just experienced a wrenching example of dysfunctional borrowing.
Mortgage bankers loaned too much money to too many unqualified homebuyers. California was hit especially hard by the inevitable meltdown, suffering the worst recession since the Great Depression.
Given that experience, we should be particularly leery of debt. But California's state and local governments have amassed an immense amount of debt in recent years. Two cities have already sought bankruptcy protection because of debts they ran up during the go-go days before the housing bubble burst.
The California Public Policy Center, a conservative policy think tank, recently issued a comprehensive report on state and local debt – not only formal bonds, but borrowing from special funds to cover budget deficits, borrowing from the federal government for unemployment benefits and, most important, unfunded liabilities for retiree pensions and health care.
Its total from official records is $648 billion, closely approximating what yours truly also had calculated earlier.
It includes about $265 billion in unfunded pension and retiree health care obligations. But those official estimates assume that pension trust funds will earn more than 7 percent a year – a "discount rate" that has been questioned by many authorities as unrealistically high.
Lowering it by several points would add several hundred billion dollars to the debt total, raising it to or even above $1 trillion.
That higher potential figure is the equivalent to $25,000-plus for every Californian and half the state's annual economic output.
Bankruptcy filings by Stockton and San Bernardino have drawn much-needed attention to the ticking debt time bomb, as has the California Public Employees' Retirement System's 50 percent rate hike, and the California State Teachers' Retirement System's need for $4.5 billion more a year to maintain solvency. CalSTRS' plea, however, is being ignored, while Capitol politicians seem bent on piling up more debt.
Gov. Jerry Brown makes much of the "wall of debt," a relatively paltry $30 billion in accumulated budget deficits. Yet he wants to borrow nearly $10 billion for a questionable bullet train project, he and other politicians are writing a new water bond issue, and school groups seek a big bond issue for their projects.
The city of Sacramento, meanwhile, wants to hock its parking revenues for a new basketball arena.
How much debt is too much? It's high time that question was asked – and answered.