Opinion

Greek debt and California debt: so very different

California's total debt may rival Greece's, but the state's vastly larger economy makes any comparison silly

The Times' editorial Tuesday about Greek voters rebelling against the austerity measures demanded by international authorities led several readers to liken Greece's budget problems to those closer to home.

"The benefits of a democracy in voting to continue living vicariously off of the socialist system with other people's money. Kind of looks like California," wrote one pseudonymous commenter.

"Every time Greece appears in the news, I see California," wrote another.

The editorial didn't make any such comparison because it's, well, ridiculous.

The simplest measure of Greece's troubles is the ratio of its outstanding debt -- about $427 billion -- to its gross domestic product -- about $240 billion. That works out to roughly 175%, more than twice the U.S. government's debt-to-GDP ratio as calculated by the Congressional Budget Office.

By contrast, total state government debt in California, according to the Brown administration and Treasurer John Chiang's office, is about $263 billion, and the state's GDP is $2.2 trillion. That translates to a debt-to-GDP ratio of 12%.

Of course, the official numbers sit at the low end of the estimates. They leave out $66 billion in deferred maintenance on infrastructure, $31 billion worth of bonds that have been authorized but not yet issued and roughly $10 billion owed to the federal government for unemployment insurance benefits (although the latter debt is gradually being paid off by California businesses through higher taxes).

Some critics also argue that the pension liabilities are grossly underestimated because they're based on projected investment returns that are unrealistically high. According to State Budget Solutions, a conservative advocacy group, the state's pension liability would be 10 times as great if calculated using risk-free rates of return.

Even using these worst-case-scenario numbers, though, the state's debt-to-GDP ratio is less than 50%, compared with 175% in Greece.

The ratio is important because the central issue with debt isn't the amount borrowed, it's the ability to repay. 

Granted, like Greece, California doesn't print its own money (unless you consider fame a form of currency), so it can't inflate its way out of a debt jam. And with its income, sales and corporate taxes already at or near the highest in the country, the state may be nearing the point where tax hikes become counterproductive. (Yes, the property tax rate is low, but trying to change Proposition 13 is the political equivalent of grasping a downed power line with both hands.)

Nevertheless, the bond market -- which is the best arbiter of a government's ability to handle its debt -- considers California to be a far better risk than Greece. In its most recent debt offering last year, the state paid 2% interest on 10-year bonds. Greece has to pay about 9% interest on its 10-year bonds. That's not so bad for Greece, which had to pay nearly 50% interest at the height of its debt crisis, but it would be horrible for California or any other state.

Another good metric is the percentage of the budget spent on interest payments. According to Gov. Jerry Brown's budget proposal, 5% of the state's general fund goes to debt service. That's comfortably below the 6% threshold often viewed as the limit for prudent borrowing.

Greece's ratio is even lower -- an estimated 2.6%, according to an analyst interviewed by the Financial Times. But that's because the country was bailed out by the European Central Bank and the International Monetary Fund, replacing market-rate debt with extremely low-interest loans.

The state's borrowing costs could rise once the Federal Reserve raises its target for short-term interest rates. And the state's pension funds will inevitably have bad years again. The bigger those losses are, the greater the unfunded liability that state and local governments will face.

Even that risk pales in comparison, though, to the challenges facing Greece, whose economy is about a tenth the size of California's. That's the main reason the comparisons aren't apt. And the gap between the two has been steadily growing, with California's economy emerging from the recession in 2009 while Greece's continued to contract until mid-2014.

Let's fact it, anyone working on Greece's budget would trade places with their counterparts in Sacramento in a heartbeat, even if they'd been to Sacramento in the summer. The worst-case scenario here looks like a walk in the park compared to the reality on the ground in Athens.

Follow Healey's intermittent Twitter feed: @jcahealey

 

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