CalPERS loan just latest budget-balancing gimmick

In the ongoing budget stalemate, Democrats refuse to accept devastating cuts while Republicans reject new taxes. Nobody is budging.

The longer this drags out, the more likely it is that Gov. Arnold Schwarzenegger and lawmakers will resort to a well-worn playbook of accounting shifts, borrowing and asset sales to close out the rest of the budget.

In the past, this has included paying state workers one day later and trying to sell the quasi-public state workers' compensation insurance fund.

Such one-time budget tricks delay political backlash but contribute to California's long-term financial instability. They avoid taxes, so Republicans are happy. They provide money to sustain programs, so Democrats are satisfied.

"There's consensus on gimmicks, because it's the least dangerous option – at least for the people in office," said Joe Mathews, a New America Foundation senior fellow and co-author of "California Crackup: How Reform Broke the Golden State and How We Can Fix It."

"The consequences are that programs aren't on a stable funding base, businesses are uncertain where the state is heading, and we push costs onto future generations."

California is so broke that there is no hope for recovery without a complete economic catastrophy being realised first.

CalPers would be idiots to loan the state one dime no matter how high the interest is. It won’t be able to pay it back so why even consider it.

We can not allow the state to bankrupt the retirement of millions just so it can temporarily put off it’s default.

Enough is enough.

The problem is that a simple majority of Californians are liberal idiots who insist on foisting their unaffordable ideological policies on all Californians. At the same time, there is a simple majority of Californians who do not want to pay for those policies. This necessarily means that some liberals are looking both ways on the subject, but probably will not admit it, so deception rules the day and a solution cannot be found.

Regrettably it will need a consumate politician (which Arnie was absolutely not) to square this circle and unravel the often criminal deception, playing the voting public, the politicians, and the unions off against each other.

California is on a course to de facto bankruptcy, when it will run out of cash to pay its bills. It’s just a matter of time unless the legislature enacts structural budget reforms and brings the cost of government down to match the tax revenues that residents are willing to pay (before they move to another state.) California bonds are starting to turn into a Ponzi scheme where cash from new investors is used to pay the interest on existing bonds. That can’t continue much longer because investors will soon see an unacceptable risk of taking a haircut on principle repayment and will stop buying CA bonds at any kind of reasonable interest rate. My view is that CA muni bonds are already junk bonds and should have been downgraded below investment grade by now.

I know that the state’s constitution says that interest and principle on bonds has to be paid first before all other priorities, but in a de facto bankruptcy I think there is a real possibility that teacher’s unions and other groups could sue in federal court to invalidate that part of the CA constitution. Proposition 8 is now part of the CA constitution (if I recall correctly), and it was just struck down by a federal judge, so why couldn’t a liberal federal judge also invalidate the language in the constitution that says bond payments must be made first? I think that’s possible in our crazy legal system—all it takes is a liberal judge to say that paying those rich bond holders first is too much of a hardship on the school children and state workers.

I wouldn’t invest a dime in California muni bonds now. I’d much rather buy lower-rated corporate bonds that should actually be rated above CA munis. This fiscal disaster in CA is a classic example of numerous groups of people putting their short-term political and economic interests ahead of the long-term economic health of their state. Salaries, wages, and benefits for state and municipal workers and the numbers of those workers all have to be reduced to balance the budget. If that doesn’t happen the state will eventually reach de facto bankruptcy and be unable to keep schools and other basic services running and that’s when the middle class flight out of California will really shift into high gear, resulting in a complete economic collapse in CA. The governor would then have to deploy the national guard to maintain order and CA would probably become a ward of the federal government as Washington would finally be forced to step in and fund basic services (utilities, police, and fire fighters) while finally trimming back the bloated cost of state and local government. I’d hate to see that happen but this is the course that California is on right now.

“Regrettably it will need a consumate politician (which Arnie was absolutely not) to square this circle and unravel the often criminal deception, playing the voting public, the politicians, and the unions off against each other.”

One of the biggest problems in CA is that all of those groups (voting public, politicians, and unions) still don’t accept the reality that the state is moving steadily towards de facto bankruptcy. Everyone is in denial about that possibility, in the same way so many people thought that a collapse in housing prices could never happen in California. I don’t know what more it can take to convince all the interest groups that CA can run out of cash and be forced to at least partially shut down schools and basic services when the state is unable to borrow more money at reasonable interest rates. I think all the interest groups are also in denial about the amount of middle-class flight out of CA that would result from a shut-down of basic services and what that departure of taxpayers would do to the state’s already disastrous fiscal situation.

How is borrowing from that proportion which has already been prefunded going to help this problem?

You have to change your perspective. You are thinking like a private citizen looking for the a solution to a long term problem. Our representatives are not looking at it that way. Their goal is to say the problem is fixed. Many want to be able to go home with a budget that works for today so they can start campaigning for re-election.

The reward for the legislature is not set up to reward long term solutions. Heck, they will even be termed-out in the long term under California's term limit law. And they will have their pension.

Bad writing. I had to read down to paragraph 7 to find the statement relevant to the headline (and it is a whopper so I can see why it's buried):

Sources close to budget negotiations told The Bee that Schwarzenegger has proposed borrowing $2 billion from the state's pension system to help balance the budget, by taking an advance on savings from long-term pension reductions.

I anticipate no raise next year, for one thing. CalPERS is also under corruption investigation for its top staff receiving inappropriate gifts of luxury travel from clients eager for more business, i.e., government contracts.

The pension reductions will only affect future hirees. It cannot affect existing employees as that is considered part of their contracted compensation for employment. The amounts contributed for future retirees will be less. There is no savings in the pension accounts to borrow from. It will be in the reduction in upfront contributions and reflected in the reduced line item allocated in the budget. It won’t be much for many years until older workers are replaced by the new tier workers. These guys are borrowing on thin air.

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