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Victory over pension bonds

Adrian Moore
November 17, 2005, 10:15am

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 (FACT). 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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