Somewhere around seven in every 10 Americans have at least one credit card. Credit and debt are just part of the consumer’s average life, borrowing and then paying off. It’s just how it goes.
But what about when a state borrows to pay off one of its debts?
That is exactly what California did recently.
According to The Orange County Register, the state of California, under the approval of Gov. Jerry Brown, borrowed $6 billion from a state savings account. This borrowed money has an interest rate of 1.5% to 3.5% and was invested in the CalPERS, the state’s pension investment fund.
Gov. Brown is hoping that the funds will make at least a 7% return on investment.
However, as the article mentions, the state’s CalPERS does not have the best track record of returning on its investments, especially to the level that Gov. Brown hopes for.
The year 2014 had CalPERS giving a return of 2.4%, instead of the 7.8% that was expected, and 2015 had a 0.61% return. The last year was the most profitable, with a 5.8% return, which is amongst the highest returns in the last decade but still below the 7% that Gov. Brown desires.
Gov. Brown is aware of this risk, as he stated during the proposal of the borrowing that it is “an economic recovery that won’t last forever.”
The plan is to use the borrowed money to generate interest to “reduce unfunded liabilities and stabilize the state contribution rates.” However, given the sheer scale of the unfunded liabilities that the state possesses, this will hardly make a dent.
The estimates are far ranging, anywhere from $242 billion to $767 billion, but California’s unfunded pension liabilities are vast. Even if the money did give what Gov. Brown hopes, $11 billion, it would only equal 0.045% of the total obligations that California possesses.
And that’s using the lowest estimate for the liabilities owed.