Gov. Jerry Brown says his latest plan for California’s unfunded pension liabilities could save the state billions of dollars. Lawmakers and the nonpartisan Legislative Analyst’s Office aren’t so sure.
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.
Brown’s plan is being backed by state Treasurer John Chiang. It would take the $6 billion out of what is known as the Pooled Money Investment Account (PMIA) -- a depository for surplus funds for hundreds of state agencies -- and invest it with CalPERS.
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 in 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.
If all goes as planned, the state could cut its future contributions by more than $11 billion. But that’s a big if. And some lawmakers are already signaling apprehension.
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.
Brown and Chiang’s proposal may be complex, but it isn’t without precedent. Newport Beach is embarking on a similar path right now. In fact, some believe Brown and Chiang may have gotten the idea from a presentation by Newport Beach Finance Director Dan Matusiewicz at the CalPERS education forum last year.
“We believe this is the best way to handle the debt, is to pay it down… as quickly as you can,” said Mayor Kevin Muldoon of the city's plan. “If we do this in a disciplined manner, we’ll protect our city from escalating debt for many more years.”
Will that formula work for the state? It remains to be seen. For now, proceed with caution.