Dear Legislators:

In my essay the other day I provided an alternative to Governor Brown’s pension loan — actually pay down pension debt.

You could do that by offering to redeem future pension payments for cash today. Provided the amount you pay is no greater than the present value of those future pension payments using the discount rate CalPERS uses to present value those payments, then you would actually pay off debt. If you wanted to save the citizens you serve even more money, you could start by offering less than present value.

Ideally such a pay-down would not be paid for with borrowed funds but if you insist on borrowing, then at least swap the floating rate loan from the special fund into a fixed rate loan so you actually know your cost and don’t subject citizens to floating rate loan risk. Together with the redemption outlined above, a fixed rate would lock in savings equal to the difference between the loan rate and the discount rate.

You should understand that the path proposed by Governor Brown and embraced by Treasurer Chiang and Senator Moorlach–a path you are about to embrace–is no different than the path mortgage lenders induced borrowers to take before 2008: i.e., a “teaser” low interest floating rate loan the proceeds of which are invested in assets (houses in that case) expected to grow at a higher rate and earn big profits for borrowers. Just see the stunning language from Brown’s budget below. That language goes beyond representations made by mortgage brokers and is eerily similar to assertions made by the state when it enacted SB 400 in 1999 (eg, “will not cost a dime”).

Public officials should not lead citizens down similar paths. You should actually pay down pension debt or you should not proceed with the current proposal.

David Crane

From page 7 of Governor Brown’s May Revision: “The May Revision proposes a $6 billion supplemental payment to CalPERS through a loan from the Surplus Money Investment Fund. This payment is expected to earn a 7 percent return from CalPERS, compared to the less than 1 percent currently earned from the fund. Over the next two decades, this supplemental payment will save an estimated $11 billion . . ..”