Out of Control Policy Blog

Victory over pension bonds

Last year California's leaders made the absurd decision to float bonds to pay for obiligated payments into the state pension fund. Yes, borrowing to pay operating costs--in this case for pension investments. Kinda like using your credit card to pay for buying stocks. This stupidity is widespread at the state and local level in recent years (see here).

Today the Pacific Legal Foundation announced the courts invalidated the bonds because the state consitution requires a public vote for large bond issues, and Gov. Schwarzenegger tried to skirt around that. The court did not call bullshit on the idea of pension bonds themselves--not their purview.

The court ruling here.

The pension bond item in the 2005 California budget here.

Hat tip to PensionTsunami.com.

PLF's press release

Pacific Legal Foundation
November 17, 2005

Court Invalidates California State Pension Bonds
Government Borrowing Scheme Violates State Constitution

SACRAMENTO -- The Pacific Legal Foundation (PLF) announced today that
a Sacramento judge has struck down more than half-a-billion dollars in
pension bonds that California lawmakers included in the 2005 state
budget. The court ruled in response to a legal challenge brought by
PLF on behalf of the Fullerton Association of Concerned Taxpayers

At issue were "pension obligation bonds" intended to help cover the
state's contribution to the public-employee pension system for 2005.
When the bond plan was first unveiled late last year, it was for
nearly $1 billion. After PLF and FACT filed their legal challenge, the
state reduced the proposed bond amount to about $550 million.

PLF argued that the pension bonds violate Article XVI, Section 1, of the
California Constitution, which forbids state borrowing in excess of
$300,000 without a vote of the people. Judge Raymond M. Cadei of the
Sacramento County Superior Court agreed, ruling: "The statutes
authorizing the present bonds, and the present bonds themselves, are
therefore invalid under Article 16, Section 1."

"This decision is a victory for all Californians against spendthrift
practices in the state legislature," said Pacific Legal Foundation
attorney Harold Johnson. "Today's court ruling should make it clear to
lawmakers that they can't run California on credit cards."

"This is a huge win for California's future," said Fullerton businessman
Thomas Babcock, president of FACT. "California lawmakers can no longer
get away with borrowing billions on the backs of our children because
they lack the fiscal discipline to live within their means."

"The case also highlights the spiraling cost of public pensions in
California," added PLF's Johnson. "The state's annual payment to the
public employee retirement system has ballooned from about $160 million
five years ago to more than $2.6 billion this year."

The state contribution to the pension system is an ordinary, ongoing
cost of government, a yearly line-item in the budget. With the bonds,
the state proposed to borrow money over 20 years to pay part of the
pension contribution for 2005.

"That's like a homeowner getting a 20-year bank loan to cover a single
mortgage payment, or a car buyer putting a single car payment on a
credit card," said Johnson. "It amounts to reckless reliance on debt,
and if the state had gotten away with it this time, the precedent could
have encouraged more and more borrowing to pay a larger and larger share
of the costs of government."

PLF brought another legal challenge on behalf of FACT in 2003,
challenging the proposed $11 billion in "deficit-reduction bonds"
enacted under former Gov. Gray Davis without voter approval. PLF's legal
challenge prompted state officials to shift course and introduce
Proposition 57, an alternative deficit-bond plan that was
constitutionally valid because it was submitted to voters and received
their approval.

Adrian Moore is Vice President, Policy

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