LOS ANGELES - California lawmakers approved a plan to borrow up to $6 billion to prepay pension obligations.

Senate Bill 84 passed the California Senate by a 24-13 vote Monday after clearing the Assembly by a comfortable 69-4 margin June 22. The bill requires the Department of Finance to establish a schedule of payments in 2017-18 to borrow up to $6 billion from the state’s Surplus Money Investment Funds and make a supplemental employer contribution to the Public Employees’ Retirement Fund. The plan is designed to help reduce the underfunding of the California Public Employees’ Retirement System, but drew the ire of critics who said the plan resembles pension obligation loans that have hurt localities in the past.

One of the initiatives would prevent lawmakers in Sacramento from passing another gas tax increase without voter approval.
One of the initiatives would prevent lawmakers in Sacramento from passing another gas tax increase without voter approval.

The bill needed 21 votes to pass the Senate, and got mostly Democratic support. Some Republicans who had indicated that they supported the plan, such as Orange County Sen. John Moorlach, ended up voting against it. While analysis of the loan said that it would reduce the state general fund’s required contributions to CalPERS by hundreds of millions of dollars annually over the next twenty years, and it was strongly backed by Gov. Jerry Brown and Treasurer John Chiang, critics derided it as a “gimmick.”

Much of the criticism hinged on the fact that the plan works much the same way as a pension obligation bond issuance. Funds deposited in the higher-earnings CalPERS investment accounts theoretically out-earn the interest owed on the loan, but the plan relies on good performance from the pension investments. Such transactions have played major roles in municipal bankruptcies such as Stockton, and the Government Finance Officers Association now advises against such actions. CalPERS supported the plan.

David Crane, a scholar and public policy expert critical of the pension loan wrote on his blog June 23 that he was concerned that legislators may not have been made aware that CalPERS is not a fiduciary to the state or the taxpayers, but rather to its members. Crane also warned that positive analysis from rating agencies such as Moody’s Investors Service only means that the plan may be beneficial for owners of California bonds, not necessarily the state and its citizens.

“If Moody’s represented the interests of citizens or taxpayers its opinion might matter," Crane wrote. “But it does not.”

The bill is on its way to Brown’s desk, and he is expected to sign it.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is a reporter covering market trends, infrastructure, and the Far West region for The Bond Buyer.