As Sacramento kicks off its yearly scramble to pass a state budget, lawmakers have yet to agree whether one controversial provision will make the cut: an untested $6 billion scheme that the governor says could save the state billions more but that some analysts warn has received too little scrutiny.
As part of his revised budget proposal issued earlier this month, Gov. Jerry Brown introduced a novel plan to make an early, super-sized payment on the state’s public pension obligations by borrowing from a little-known government account. State and local agencies currently face a $359 billion shortfall on pension and health benefits for public 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 evidence or analysis to back up its claims that the proposal will generate $11 billion in taxpayer savings. Moreover, the LAO said in a report last week, by introducing the proposal mere weeks before the drop-dead budget deadline of June 15, the governor “puts the Legislature in a difficult position,” with little time to vet the plan or weigh the potential consequences.
With such large sums involved, acting too quickly may mean signing on to a deal that, if its assumptions are wrong, could leave the state strapped for cash.
Last week, the Senate budget subcommittee evaluating the proposal decided to pause and give the plan a longer look.
Sen. Nancy Skinner, a Berkeley Democrat who chairs that subcommittee, stressed at a hearing that the decision to hold off was “not an expression that we are opposed to investing in bringing down debt, by no means, 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.
It is unclear whether lawmakers will want more time then to give the complex plan further consideration, as the LAO suggested.
“Our point is not that this won’t work,” said Ann Hollingshead, one of the analysts who wrote the report and predicts the state is likely to come out ahead with the plan. “Our point is that we need to think about all of these things before we do it.”
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. Make it work for you.
In this case, the state’s “checking account” is the Pooled Money Investment Account (PMIA), 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 as announced, 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 a broad group of supporters, including the advocacy organization Californians for Retirement Security, a coalition of public employee unions and Republican state Sen. John Moorlach of Costa Mesa.
Moorlach said the Legislature should do its due diligence, then act as soon as possible to get the most value from taxpayer dollars. “I’m not an immediate ‘No.’ I’m a ‘Yes—but,’” he said. “Let’s get the details and see if it make sense.”
There are plenty of details to consider. For starters, though the PMIA 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?
And there are legal issues to iron out. Never has so much money been borrowed from the cash account over such a long period. Would that violate the state’s constitutional debt limit? Might this loan encourage lawmakers to raid the fund for day-to-day expenditures in the future?
“We got into trouble as a state doing that under past administrations,” noted Chris Hoene, director of the California Policy & Budget Center, who generally supports the governor’s proposal.
The LAO says the plan, for all its ambiguity, would probably put the state’s finances on a better footing in the long run. But it urges the Legislature to take its time, pore over the numbers, consult lawyers and actuaries and then make a more informed decision.
“Pensions’ unfunded liabilities are addressed over a span of decades, so there is no reason we need to decide this over the next two weeks,” said Hollingshead.