Creativity — and risk
Tucked inside Gov. Jerry Brown’s freshly revised budget proposal is a bit of creative finance intended to shore up the ailing public employees retirement fund with a $6 billion loan and, if all goes well, save the state $11 billion.
The caveat is, of course, if all goes well. The Legislature should study the proposal carefully before signing on to doesn’tthis novel delay plan approvaland take of stepsthe budgetto ensurein June.its adoption Employees’The California Retirement Public System, known as CalPERS, is the nation’s largest pension fund, with $310 billion in investments. Because of the depth of its liabilities, however, the fund casts a long shadow over the future of our state. Decisions regarding it affect 1.6 million retired California public employees, retirees and their families — and every state resident.
That’s because the taxpayers must pick up any shortfall in CalPERS’ ability to pay its promised benefits, potentially affecting the ability of our state to educate the workforce, administer justice, care for our lands and maintain social services. That ugly scenario is all too likely because only 65 pension percent and of retireethe promisedhealth care benefits are funded. If the Legislature adopts the governor’s plan, it would raise the level to 68 percent.
The governor, rightly, has proposedpiece of the to state’s tackle sharea small of this $359 billion problem by taking funds from a pooled investment account. These funds would be repaid over eight to 12 years at an interest rate tied to federal short-term borrowing costs — estimated at about 3.5 percent. The money would come, in part, from a fund created by voters in 2014 as Proposition 2 to set aside money for “rainy day” emergencies and to pay down debt. Why now? For the first time in at least 35 years, the state is flush with operating cash — with daily averages of about $49 billion, prudently held in short-term investments — and interest rates are low. The governor and the treasurer think it is more sensible to earn 7 percent by investing the money in CalPERS funds than to keep 0.88it in percent. investments CalPERS earning estimates the plan would cut state pension costs by $12 billion over 30 years and generate $1 billion in interest costs, for a total savings The of nonpartisan$11 billion. Legislative Analyst’s Office, which advises legislators on fiscal matters, sees merit in the plan but cautions the Legislature to test the assumptions. The plan has promise to address the state’s huge pension problem — or potential to set a precedent to indulge in potentially harmful creative financing. The Legislature should ask for a study independent of public employee unions’ influence before signing on to this innovative plan.