Jerry Brown’s Big Skim
David Crane

My erstwhile colleague David Crane is nothing if not well-prepared and well briefed. Which is why his statements above are so perplexing, in that they suggest an uncharacteristic misunderstanding of how the state pays for public employee pensions.

Some brief background: In May, Governor Brown proposed a $6 billion supplemental payment to CalPERS to pay down the state’s unfunded liability and reduce state costs over the next 20 years. The supplemental payment will be loaned from the state’s Surplus Money Investment Fund, where monies collected by the state (taxes, fees, and other receipts) are deposited, invested, and generally remain liquid, functioning like the state’s checking account.

David dismisses this $6 billion supplemental payment as a “scheme” that somehow takes funds away from government services by borrowing from the surplus fund. But he apparently fails to understand that these fund sources are already tapped to make pension payments, assessed every month on the paychecks of the more than 260,000 state employees who perform government services.

Today, when CalPERS sends the state a bill for pension costs — totaling nearly $6 billion annually — the state doesn’t simply send a check to CalPERS. Instead, that bill is converted into an employer contribution rate that’s applied to every state employee’s paycheck each month — similar to an employer payroll tax like Social Security or Medicare. That payroll comes out of more than 300 fund sources that receive revenue from taxes and fees that pay for and run state government. This includes everything from the $120 billion-plus General Fund (prisons, health and social service programs, California State University) to the motor vehicle fund (DMV and Highway Patrol), to far smaller accounts like the State Optometry Fund and the Physical Therapy Fund that support licensing of business and professional groups at the Department of Consumer Affairs.

Under the governor’s plan, these funds — as well as the General Fund — all will repay the $6 billion over time. By making an advance payment, and triggering a long-term reduction in pension contributions, these funds will also have more cash available in the future — not less. Instead of “skimming” the funds to pay back the loan, as David argues, these fund balances will be far better off than if the state sat by idly while pension contributions continue to increase and squeeze or “crowd out” spending on education, infrastructure, and other investment priorities. Indeed, this supplemental payment is projected to generate General Fund savings of more than $600 million over the next three years through reduced annual PERS contributions.

Calling the repayment of this obligation a “fig leaf”, rather than a constitutional requirement that the state must spend billions of dollars to pay down debts and liabilities under Proposition 2, fundamentally mischaracterizes the issue. That voter-approved measure established a dedicated revenue stream, separate from the state’s Rainy Day Fund, which can be used only to pay down debt and other long-term liabilities that are now explicitly defined in the Constitution. Under current projections, the debt incurred from past budget borrowing is scheduled to be fully paid off within the next six years — leaving the majority of this constitutionally dedicated revenue stream for debt repayment available to repay the General Fund portion of this supplemental payment well before the required repayment date in 13 years.

One thing is certain: left unaddressed, pension contributions are scheduled to nearly double over the next 10 years, meaning those same fund sources will be on the hook to make increasing pension payments for years to come. Progress has been made, and continues to be made, to address the state’s pension costs. The Brown Administration has successfully implemented benefit reductions, secured more honest actuarial and funding policies at CalPERS, and is committed to paying down unfunded liabilities faster. It’s a jumpstart on a problem that took years to accumulate, and will take decades to truly fix. These are real, tangible accomplishments that benefit not just the state employees who rely on pensions for retirement security, but the California citizens who depend on government services now and in the future.

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