California’s flimsy budget scheme doomed to fail

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.

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.

In case you missed it, in 2014 CalPERS had a return target of 7.8 percent. Instead, it brought in just 2.4 percent. That was bad but better than 2015’s 0.61 percent return. Last year saw returns jump to 5.8 percent, which is much better, but still far below what Brown needs.

Estimates range, but California is looking at anywhere from $242 billion to $767 billion in unfunded pension liabilities. Even if Brown’s $11 billion in savings does materialize, that could be just .045 percent of California’s unfunded pension obligations — and that’s using the lower estimate of liabilities.

Source: Press Enterprise

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One comment

  1. These risks do not seem to bother Gov. Brown, whose pension proposal —

    Thats because Jerry will be long gone OUT of OFFICE the poop hits the fan folks. He doesn’t care. he only has to get this budget over the finish line and leave it to Newsom.. Newsom will just raise taxes some more. That’s the easy democrat solution to everything.

    Liked by 1 person

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