California Elects Not to Pay Down Pension Debt

Yet Governor Brown promises savings

In a June 11 essay I suggested the state pay down pension debt rather than adopt Governor Brown’s proposal to borrow to boost pension contributions. A pay-down would lock in savings for citizens. But Brown and the legislature chose to stick with his proposal to borrow floating rate and bet that a state pension fund (CalPERS) can grow the proceeds at a higher rate. If that’s what actually happens, the state would indeed save future pension expense. But it’s not certain to happen. Still, the governor promises savings. In his May Revised Budget, he writes: “Over the next two decades, this supplemental payment will save an estimated $11 billion . . ..” State Treasurer Chiang went even further, sending out an email entitled $11 billion saved.” But neither assertion is true and both assertions would be prohibited if made in securities markets.

Brown’s leveraged bet is a bad idea for all kinds of reasons, as explained here and here. It’s like using “teaser-rate” loans to bet on houses. But now that it’s going to happen, the state should at least swap the floating rate loan into a fixed rate loan so that citizens are not subject to floating rate risk.

Brown has set a terrible precedent. No doubt his gambit — ie, politicians using citizen funds without citizen approval to make investment bets in order to cover up wealth transfers from citizens to employees — will be noticed by other elected officials.

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