California uses one state credit card to pay off another
When one finds themselves buckling under unaffordable credit card debt, most financial planners would recommend against using another credit card to pay off those debts. Yet that is exactly what Gov. Jerry Brown did when he signed California’s new budget into law last month.
Contained within the budget is a plan worked up by Gov. Brown and State Treasurer John Chiang that greenlights the state to borrow reserve cash from state government accounts and to plow the proceeds into the California’s pension investment fund.
The idea is that the higher yielding pension fund will earn more than enough to cover both interest on the new debt and pay down some of the state’s pension obligations. Over the past two decades, several states and localities tried very similar schemes to deal with their own pension problems, but the practice is fraught with risk, and it has backfired spectacularly on more than a few occasions.
The city of Oakland, for instance, lost $250 million on a similar borrow-and-invest pension funding scheme when projected returns did not pan out. When New Jersey tried borrowing to cover pension obligations, it ended up being charged with securities fraud.
These risks do not seem to bother Gov. Brown, whose pension proposal — released as part of his “May Revision” budget and signed into law on June 27 — calls for borrowing $6 billion from a state savings account at 1.5 to 3.5 percent interest rates and investing that money in CalPERS, the state’s pension investment fund, which Brown is counting on to make 7 percent returns.
If all goes according to the governor’s plan, that $6 billion investment will be enough to save $11 billion in pension costs and pay back the state savings account. But that’s a pretty big “if,” especially given CalPERS’ recent track record.
In 2014 CalPERS had a […]