Over the last few decades, the once-straightforward process of fashioning a state budget devolved into duplicitous gimmickry. Governors and legislators would paper over gaps with off-the-books loans, creative bookkeeping and deliberate falsehoods.
When Jerry Brown resumed the governorship in 2011, he pledged to end fiscal hijinks and align the budget with reality, as harsh as it might be.
He identified a $30 billion “wall of debt” that had been accumulated to cover deficits, promised to pay it off, called for a “rainy day fund” as a hedge against economic dips and, finally, persuaded voters to raise taxes.
However, given the history and Brown’s linear leanings, one should look askance at a new proposal in his 2017-18 budget to borrow $6 billion from an obscure state fund and give it to the California Public Employees’ Retirement System to whittle down rapidly increasing state pension obligations.
The money would come from the Surplus Money Investment Fund, which makes short-term investments with money agencies don’t need at the moment, such as the new gas taxes just enacted for roadway repairs.
Brown’s theory is that prepaying the pension costs for state employees with a low-interest, long-term loan would save money in the long run – very similar to the “pension obligation bonds” that local governments have floated.
“This payment is expected to earn a 7 percent return from CalPERS, compared to the less than 1 percent currently earned from the fund,” Brown’s budget declares. “Over the next two decades, this supplemental payment will save an estimated $11 billion (after paying the costs of the loan).”
But those local pension bonds have sometimes backfired when their underlying assumptions collapsed.
Stockton’s largest single debt when it declared bankruptcy was a pension bond.
Moreover, tapping the SMIF for a long-term loan erodes its purpose and could be a dangerous precedent for future fiscal mischief.
The Legislature’s budget analyst, Mac Taylor, is leery and urges his bosses to go slowly.
“We think the plan would probably save the state money over the long run, although uncertainties remain about the likelihood and magnitude of this benefit,” he said. “However, the administration is asking the Legislature to approve a large commitment of public resources with insufficient consideration.”
David Crane, a wealthy investor who was an adviser to former Gov. Arnold Schwarzenegger and has become a one-man truth squad about fiscal flimflam, is also skeptical.
He notes, for example, that Brown is in essence making a $6 billion bet on CalPERS’ investment acumen when the huge pension fund has seen scant returns lately and when Brown is simultaneously warning that the economy is overdue for a downturn.
When local pension bonds have fallen short, Crane points out, borrowers then face double debts, one for the bond and the other for pensions.
As Taylor advises, this might work out, but before the state takes a major plunge into uncharted waters, Brown’s proposal should be fully vetted and not merely slipped into a budget trailer bill in the dead of night.