State of CA "Bonding" With CalPERS, CalSTRS

January 24, 2003 ( - California Governor Gray Davis has proposed selling $1.5 billion in state bonds to make an annual payment to the state's two largest pension funds.

The latest proposal calls for the state to use the proceeds from a taxable debt offering to pay the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS)  the expense of additional benefits earned by public employees enrolled in the pension funds .  This is a n 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 Reuters report.

But desperate times call for desperate measures, as the state struggles to find ways to plug a behemoth budget gap.   California’s general fund is estimated to have a shortfall of between $26 billion to $35 billion over the next 18 months, said Department of Finance spokeswoman Anita Gore.

The Department of Finance says the state’s budget directly affects how the state will cover its share of the approximately $2.5 billion in added benefit underfunding. With about $1 billion coming from federal and special funds, the state is planning on turning to the bond issue for the difference.

However, the atypical move is not without pitfalls and is one of two solutions Davis has proposed.   Because the legislature would have to change state law to sell the bonds, the governor has also proposed borrowing the money directly from the pension funds and repaying the money with interest.

But, while speaking with Reuters, spokeswoman Gore said the debt offering is the best solution to the problem.   The state is committed to make this only a one-time fix and show that officials are serious about addressing the huge deficit, she said.

Citing credit analysts and California finance officials, the Reuters report said 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.