PD Editorial: Pension loan needs more scrutiny

In the late 1990s, California’s state and local lawmakers bet that a booming stock market would cover the cost of enhanced retirement benefits for public employees.

But the tech bubble burst, with the Great Recession following about a decade later.

Today, the state’s major retirement fund has less than two-thirds of the assets needed to fulfill its obligations, and its unfunded liabilities are counted in tens of billions of dollars.

Reducing retirement benefits and increasing payroll contributions for employees hired since 2012 produced some marginal savings, but a recession of any significant magnitude and duration would be devastating for the California Public Employees Retirement System.

Against that backdrop, Gov. Jerry Brown and state Treasurer John Chiang are proposing a pension wager of their own in the upcoming state budget.

They want to borrow $6 billion from one of the state’s reserve accounts to make a one-time, advance payment on the state’s pension obligations - a maneuver that has been likened to a homeowner making an extra mortgage payment to reduce the outstanding principle.

The loan would be repaid over eight to 12 years at an interest rate slightly higher than the current return on money in the pooled investment fund. The fund holds surplus cash as the state tends to get infusions of revenue on a quarterly or annual basis while expenditures are spread more evenly across the calendar.

By making the advance payment, Brown and Chiang estimate that the state would save $11 billion on its pension obligations over 30 years.

That’s where the gamble comes. The estimate assumes that CalPERS would earn money by investing the advance payment and that interest rates don’t drive up the cost of borrowing from the pooled-money funds.

A sharp correction in the market, or a sustained recession, could upend the projections.

So is this a bad idea? Not necessarily. The state still needs to pursue additional pension reform, and this mechanism isn’t a substitute. But the state is legally obligated to cover its unfunded liabilities, which almost certainly will require making additional payments into the fund. Some cities, most notably Newport Beach, already are taking steps to cut their unfunded liabilities with extra payments.

But the governor’s proposal needs more scrutiny than it’s likely to get in the run up to the June 15 deadline to complete the state budget for 2017-18.

And, as the state’s nonpartisan legislative analyst pointed out in an analysis of the proposal, there isn’t any reason why a decision must be made prior to the budget deadline.

The analyst’s report described the proposal as promising, but it also identified several issues that require careful consideration, including the legality of borrowing without voter approval, the precedent that would be set by the loan and whether it would be consistent with the fiduciary duty of the pooled money investment fund.

Legislators should take whatever time is required to explore each of those issues in order to make an informed decision. If this mechanism would save the money in the long run, and it wouldn’t violate other laws and duties, it would still be a viable option after the state completes its due diligence.