Davis Signs CA Pension Bond Bill

May 6, 2003 (PLANSPONSOR.com) - California Governor Gray Davis has signed into law a measure authorizing the issuance of pension obligation bonds to pay for the state's $2.2. billion pension obligation for 2003 and 2004.

The pension bond bill was part of a package of six pieces of budget legislation making a total of $3.6 billion in cuts to state programs, according to a Dow Jones news report. If the bond bill hadn’t been signed by Monday, the state would have had to make a $650-million pension payment due in October out of the general fund instead of using bond proceeds.

The legislative package comes as the governor and the legislature work toward trimming a record $35 billion shortfall. A spokesman for California Treasurer Phil Angelides said the treasurer’s office anticipates having the financing completed in time to make the October 1 pension payment. Senior manager for the financing will be UBS PaineWebber, the spokesman said.

Davis first proposed the bond sale in January to fund the state’s payments to the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). This is an unusual move, since these bonds are typically used to help pension funds cover their unfunded existing liabilities caused by a plan’s assets falling below its long-term obligations.

According to a January Reuters report, which cited credit analysts and California finance officials, New York and New Jersey are the only other states that have issued this kind of debt before in order to cover this type of pension expense (See State of CA “Bonding” With CalPERS, CalSTRS ).