STATE BUDGET PENSION FUNDS 'RAID' MAY BE THE WAY OUT.

Byline: Ralph E. Shaffer and Walter P. Coombs 

FACED with a staggering $30 billion-plus deficit, Gov. Gray Davis has chosen Steve Peace, a termed-out San Diego legislator, to head the state's finance department.

Recently bemoaning the proliferation of Indian casinos, which are largely untaxed, Peace admitted that ``clearly, we made a mistake. I don't know how to fix it.'' Earlier he took credit, as conference committee chairman, for California's utility deregulation law. That mistake will cost the state's taxpayers and ratepayers untold billions. Now the governor wants him to resolve a budget deficit that dwarfs both the other problems.

With Republicans balking at any tax increase that would touch business or the wealthy, and Democratic legislators unwilling to cut even questionable programs, we offer Peace a solution that ought to satisfy virtually everyone.

Two state agencies presently sit on net assets of about $230 billion that offer a reasonably painless way out of the current crisis, provided that voters keep their legislators under control. Our solution will only work if state government curtails its propensity to distribute largess in flush times. Conversely, those legislators who condemn every governmental social program should spend their vacations in a re-education camp for noncompassionate conservatives.

We propose what our critics might call a ``raid'' on the state's two large retirement funds, forcing them to sell some $30 billion now invested in the stock market. The California Public Employees Retirement System (CalPERS) held $75 billion in foreign and domestic equities on Oct. 31, 2002. STRS, its counterpart for teachers, has stock worth $60 billion. Under our plan, instead of massive tax increases during hard times or additional user fees that fall heavily on those with lower incomes, Sacramento will borrow money freed up by the sale of stock held by the two funds. The state will pay the funds the current rate for tax-free bonds, now around 5 percent. That is far better than what pension money has been earning the last few years in the bear market. In fact, both funds have lost substantial principal.

Teachers and retired state workers needn't fear the loss of pensions. They have defined-benefit programs that won't be touched by such loans. It doesn't matter to the workers or retirees whether their deposits are in the market or invested in bonds. They won't see any reward for gains in a bull market, for any profit is passed on in the form of reduced contributions from government employers - school districts, cities, etc. - and not in higher benefits to those retired.

This is not intended as a one-time bailout of California's debt. We believe that the pension funds should permanently increase their holdings in fixed-income assets, particularly government notes. CalPERS now invests only 28 percent of its money in ``fixed income,'' and some of that is in holdings outside government securities. By contrast, 62 percent of its assets are in stock. A dramatic increase in investment in state bonds by the pension funds would not only aid the funds, but would permit the state to quickly come to grips with the deficit, averting a financial crisis that threatens to lower the state's credit rating to that of junk bonds.

There is no reason why, in 2003, we should impose additional burdens on students (in the form of higher tuition or other educational fees), the working poor (reducing aid for health care) or the struggling middle class (through a rash of increased user fees).

On the other hand, if we let Steve Peace and the other Sacramento politicians have their way, we might be paying for this year's budget fiasco for decades to come, as with those utility bonds.