Questions over pension gamble
State lawmakers consider Brown’s plan to make large early payment
SACRAMENTO — As California lawmakers kick off their yearly scramble to pass a state budget, they have yet to agree on whether one controversial provision will make the cut: an untested $6 billion scheme that the governor says could save the state billions but that some analysts warn has received too little scrutiny.
As part of his revised budget proposal this month, Gov. Jerry Brown introduced a plan to make an early, supersize payment on the state’s public pension obligations by borrowing from a little-known government account. State and local agencies face a $359 billion shortfall on pension and health benefits for public sector retirees, and this one-time payment would effectively double Sacramento’s scheduled contribution.
But the nonpartisan Legislative Analyst’s Office, which advises lawmakers on fiscal matters, says the administration has not provided enough analysis to back up its argument that the proposal will generate $11 billion in taxpayer savings. By introducing the proposal just weeks before the drop-dead budget deadline of June 15, the office said, Brown “puts the Legislature in a difficult position,” with little time to vet the plan.
Acting too quickly may mean signing on to a deal that, if the governor’s assumptions are wrong, could leave the state strapped for cash. The Senate budget subcommittee evaluating the proposal decided to pause and give the plan a longer look. State Sen. Nancy Skinner, the Berkeley Democrat who chairs the subcommittee, stressed at a hearing that holding off was “not an expression that we are opposed to investing in bringing down debt ... but rather that we may want to see some additional analysis.”
Meanwhile, the Assembly’s full budget committee has approved the proposal. The plan’s place in the state spending blueprint may not be decided until the two legislative bodies meet in conference committee in coming weeks.
Brown’s bid, backed by state Treasurer and gubernatorial candidate John Chiang, is based on a sound financial principle: If you have extra money sitting around, don’t park it all in your checking account.
In this case, the state’s “checking account” is the Pooled Money Investment Account, a fund that holds surplus cash for hundreds of state agencies. Because the cash is supposed to be available on demand, it is invested in only the safest, and thus lowest-yielding, assets.
Currently, the fund is growing at an anemic 0.88 percent. But the fund is flush. According to Chiang’s office, the average balance of the state’s portion hovers at a historically high $50 billion.
By taking $6 billion from the stash and investing it with CalPERS, the state’s largest public pension fund, the administration hopes to earn a 7 percent return over 20 years. The state would pay back the loan over the next decade, mostly by drawing on money reserved for debt reduction, at what it projects as a lower rate, tied to the federal government’s short-term borrowing costs.
The proposal assumes this rate will increase over the next few years and then plateau around 3.5 percent. If it works, the move could reduce future state contributions by $12 billion, while increasing costs by only $1 billion in interest charges.
That logic has won over the advocacy organization Californians for Retirement Security, a coalition of public employee unions and Republican state Sen. John Moorlach of Costa Mesa (Orange County). Moorlach said the Legislature should do its due diligence, then act as soon as possible to get the most value from taxpayer dollars.
There are plenty of details to consider. For starters, though the Pooled Money Investment Account is flush at the moment, what if an agency were to suddenly find itself strapped and need cash — say, to pay employees? Would it have to cut services, raise fees, borrow? How much would that cost?
There are also questions about how much the investment would earn and how much the loan would cost. There’s plenty of wiggle room between the state’s 7 percent earnings projection and the 3.5 percent it expects to pay. But if interest rates spiked, would the state be forced to divert money from other debt-reduction plans? How big a market meltdown would have to occur for the state to lose money on this deal?