GOP Deals Setback to Budget Plan

A proposal to use $2.2 billion in pension funds to pay off part of state government’s budget shortfall hit a roadblock in the Legislature on Thursday when Republican lawmakers balked.

The effort stalled as top state finance officials -- who have taken no position on the pension issue -- warned that delaying action could cost $656 million in potential budget savings.

Money that would normally fuel the pensions of state employees and teachers would have been borrowed, according to plans first submitted by Gov. Gray Davis, and then replaced by a bond issue to be paid back by investors over the next five years.

Senate passage would require a two-thirds vote, so Republicans were able to block the move because Democrats don’t hold a large enough majority.

As the measure stalled, the state treasurer’s office warned in a letter to Department of Finance Director Steve Peace that the Legislature’s failure to authorize the pension bonds within the next few weeks would result in lost savings.

California faces a budget shortfall of as much as $35 billion over the next 16 months. The use of pension bonds is a substantial part of Davis’ plan to bridge that gap.

Wall Street analysts, however, warned that using pension bonds in such a way is akin to using one credit card to pay off another, and the nonpartisan Legislative Analyst’s Office said the proposal is “poor fiscal policy.”

After expressing some support, Republicans held back their votes when the proposal came before the Senate because it was not part of a comprehensive plan that would balance the budget without tax increases.

“If this is part of a bipartisan package that balances the budget without taxes, I will be happy to vote for it,” said Senate Republican leader Jim Brulte of Rancho Cucamonga. “Outside of that, this is simply one more delay in coming to grips with the fact that we are overspending.

“This takes an obligation we have to make on an annual basis and punts it into future years,” Brulte said. “In and of itself, it is nothing but an irresponsible measure.”

Senate Democrats approved a scaled-down version of the bill with a simple majority vote, but a bill that would achieve the savings sought by Davis would require Republican support.

The GOP position places the entire bond proposal in jeopardy as the window to enact it begins to close. Democrats said they won’t make any decisions on an overall budget plan until at least mid-May. They also said that any package they support will include tax increases.

They expressed frustration with the Republican position.

“It is going to be very difficult to have any kind of budget unless we continually do things to narrow the scope of the deficit,” said Senate President Pro Tem John Burton (D-San Francisco). “This is one way to do it.”

The pension bond plan would carry a hefty price. It would cost taxpayers at least $200 million in interest payments. And there are questions about whether borrowing the funds from the pension system is legal. Some unions are discussing a possible lawsuit.

California Teachers Assn. President Wayne Johnson said he is working with the governor’s office to ensure that payments to the pension fund will continue to be made on time. So far, he is not convinced they will.

“We’re hoping for a compromise and an agreement,” he said. “So far, we don’t have one.... If they just don’t send the money, they are looking at a lawsuit.”

Officials with the Howard Jarvis Taxpayers Assn. said they may try to stop the proposal in court unless it is approved as part of a plan that balances the budget without tax increases.

According to the legislative analyst, no state has used pension bonds to pay off debt in the way the governor has proposed. “Incurring years of debt to avoid an annual operating expense as a budget-balancing tool is poor fiscal policy,” the analyst’s office wrote in a report.

Hilary McLean, a spokeswoman for Davis, defended the proposal as “actuarially sound.”

“It’s going to help us get through a very difficult year in a responsible way,” she said.

But Wall Street bond raters are wary. “I don’t think it is ever considered prudent fiscal policy when you do these kind of deficit bonds,” said Raymond Murphy, an analyst at Moody’s Investors Service. “You are giving up future fiscal flexibility, yet you are realizing relief only in the current or budget year.”

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Times staff writers Carl Ingram and Jeffrey L. Rabin contributed to this report.