CommentsPERSPECTIVE--If your financial adviser suggested that you invest in an arbitrage arrangement but offered no information concerning the risks, would you?
That is exactly what State Treasurer John Chiang (photo: above left) and Governor Brown want us to do with $6 Billion of our money.
The plan to allow CalPERS to borrow from the state’s short-term investment pool to pre-pay the state’s contribution to the pension plan is inherently risky. It is a pig-in-a-poke without a thorough independent analysis. Did Chiang earn his degree from the Robert Rizzo School of Management?
According to the Legislative Analyst’s Office: “…the administration is asking the Legislature to approve a large commitment of public resources with insufficient consideration. The administration has provided few of the legal or quantitative analyses that the Legislature should expect when receiving a request of this magnitude and complexity.”
The LAO went on to state: “Instead, the administration plans to conduct this analysis after the Legislature has approved the loan.”
The budget deadline is fast approaching; it all but appears that the proposal is going to be forced through with scant analysis and even less time for the public to voice concerns to their legislators.
The governor is motivated by pure selfish politics, but there is no excuse for someone in Chiang’s position to advocate for its passage. He should know better.
It is possible the deal might not even be legal. It can be construed as the equivalent of a pension obligation bond, which would be unconstitutional based on a 2003 case.
The administration does not care. Meeting the June 15th budget deadline is all they care about … that, and papering over an unsustainable pension plan rather than negotiating for structural improvements requiring higher employee contributions.
To make matters worse, the rate the state wants to charge CalPERS smacks of a sweetheart deal. The duration of the loan will likely be eight years, yet a rate approximating short-term US Treasuries may be used (estimated by the LAO to be less than 1%) . Something approaching the 10-year yield of 2.25% would be a far better match.
But that would make Chiang’s optimism more suspect. He is anticipating a long-term savings of $11 Billion, provided CalPERS hits its targeted return of 7%, overwhelmingly considered way too high by the investment community.
A major market correction would completely destroy his assumptions and make the unfunded liability worse.
You don’t play games when guaranteed benefits are on the line. CalPERS is already doing just that. It takes an aggressive investment strategy to hit 7%, which translates to higher risk. Chiang and Brown would be raising the ante.
In other words, it is an attempt to bet their way out of the pension time bomb, just as gambling addicts double their bets in the face of a losing streak.
(Paul Hatfield is a CPA and serves as President of the Valley Village Homeowners Association. He blogs at Village to Village and contributes to CityWatch. The views presented are those of Mr. Hatfield and his alone and do not represent the opinions of Valley Village Homeowners Association or CityWatch. He can be reached at: [email protected].)
-cw
