MOORLACH UPDATE — Pension Note, SR 39 and RPS — June 9, 2017

We concluded the Budget Conference Committee a little after 11 p.m. last night. There were plenty of opposition votes by the four Republicans present (me, Senator Jim Nielsen, Assemblyman Jay Obernolte and Assemblyman Phillip Chen) on many items needing reconciliation between the Senate and the Assembly budget proposals. Although the four Republicans represented 40 percent of the vote, the Democrats voted their way, with many issues passing on a 3-to-2 vote. So, it will be the majority party’s budget. However, I felt that I did add value to the process in several crucial areas.

One item that was approved was the Governor’s proposed additional $6 billion payment to CalPERS. Last night I inquired if the CalPERS Board had been contacted and if they were willing to provide an incentive for the early payment. I was informed that this information was forthcoming. We are expected to convene on Tuesday of next week for a Senate Budget and Fiscal Review Committee meeting, on which I serve, but no specific time was provided. After the Budget is approved there, it will go to the Senate and Assembly Floors on Thursday morning, thus meeting constitutional deadline of June 15th.

California’s State Treasurer, John Chaing. invited me to do a joint editorial on the veracity and potential benefit of this simple, $6 billion cash flow transaction. The San Jose Mercury News provides our collaborative effort in the first piece below. The Bond Buyer, the national daily for municipal bond investors and sellers, provides its perspectives in the second piece below. (Also see MOORLACH UPDATE — Single-Payer — June 2, 2017 june 2, 2017 john moorlach and MOORLACH UPDATE — CalPERS and “C” Words — May 26, 2017 may 26, 2017 john moorlach).

Why am I comfortable with this proposal? Because I was involved in a similar strategy while serving as Orange County Treasurer-Tax Collector and Orange County Supervisor. It was a short-term pension obligation note, not a pension obligation bond (POB). If the Governor would utilize the strategy that I helped structure, California could benefit from significant savings (see MOORLACH UPDATE — Memories — May 27, 2013 may 27, 2013 john moorlach).

For a refresher course on the magnitude of this fiscal issue, see
MOORLACH UPDATE — Pension Hole — July 31, 2015 july 31, 2015 john moorlach.

Senate Resolutions usually go right to the Floor. However, if the Senate Rules Committee is not excited about the resolution, it refers it to a committee, hoping that it will be killed there. That’s what happened with SR 39 by Sen. Mike Morrell. For 39 years, Proposition 13 has protected homeowners from massive rising property taxes, yet the State Senate can’t pass a simple resolution honoring all that it has accomplished. The details are provided in the Highland Community News, the third piece below.

And the closer is a tutorial on the mandates that the monopoly party are placing on the utilities and the electricity users in California. Solar energy is great, during daylight hours. You get the drift. The San Diego Union Tribune provides a thorough treatise on Senate Bill 100 and the subject of RPS in the fourth and final piece below.

Opinion: Is Jerry Brown’s

pension-paydown plan a boon

or a boondoggle?

By JOHN CHIANG and JOHN MOORLACH

http://www.mercurynews.com/2017/06/08/opinion-is-jerry-browns-pension-paydown-plan-a-boon-or-a-boondoggle/

Albert Einstein purportedly called the compounding interest earned on investments the “eighth wonder of the world.”

Whether this is fact or legend, you do not need to be a financial genius to figure out it makes sense to pay down the state’s high cost pension liabilities with idle funds that earn very little interest.

The same reasoning that says it is smart to pay off a high-interest personal credit card with a low-interest one applies to government.

That is why the governor’s budget proposal presents a prudent opportunity to reduce the state’s unfunded pension liability by more than $11 billion over the next 20 years.

Shrinking the unfunded liability, now at $59 billion, frees up money down the road that can be used to invest in public safety, environmental protection, health care and other vital, public programs.

All this can be accomplished without reaching deeper into the pockets of taxpayers or the public workforce that serves them.

This plan works by having the state make an extra $6 billion payment to the California Public Employees’ Retirement System using monies not immediately needed for state operations.

These idle funds currently earn less than 1 percent. Given that pension debt costs the state 7 percent, this proposal is just as fiscally prudent as a family deciding to use some of its discretionary cash to pay off an expensive credit card or make an extra mortgage payment.

These idle funds will be paid back in 12 years – and hopefully sooner – at an interest rate based on two-year U.S. Treasuries.

Money to repay the $6 billion comes from a portion of the rainy-day fund created by voters in 2014 when they passed Proposition 2. One of the two intended purposes of the ballot measure was to pay down certain debts, such as this proposed $6 billion internal loan of surplus funds.

It is important to emphasize that the proposal is a world away from being, as some claim, a “pension obligation bond,” which is money borrowed from Wall Street to use for investment purposes. With this proposal, the state is borrowing from itself.

The upshot is a classic win-win situation. CalPERS’ staggering unfunded pension liabilities are reduced, saving the state billions of dollars. And, the state’s surplus money fund earns higher rates of return than it receives on its typical short-term investments.

So, if there is a steep downturn in the economy, will this plan pencil out?

The fact is that the state must deal with an existing $59 billion unfunded pension liability regardless of whether this pension pay-down plan happens or not. The taxpayers of California are already on the hook to pay this bill.

If the interest rate gap between CalPERS’ investment returns and the $6 billion cash loan narrows, the savings may be less, but the scale of savings should still be significant. Based on 30 years of historic data, it is highly unlikely that the state would lose money.

What is more, nothing in this pension stabilization plan limits the state’s ability to exit the strategy early if required by changing circumstances.

Bottom line, this is an opportunity to make real progress toward reducing pension obligations. This prudent plan gives Californians a path toward easing the burden on future generations.

John Chiang is California’s state treasurer. John Moorlach is Republican state senator representing Costa Mesa. They wrote this for The Mercury News.

Questions raised about Jerry Brown’s California pension payment plan

By Kyle Glazier

https://www.bondbuyer.com/news/questions-raised-about-jerry-browns-california-pension-payment-plan

California Gov. Jerry Brown’s plan to use a short-term state investment fund to make a $6 billion supplemental payment to its largest pension fund met with skepticism from some observers, who view the strategy as functionally the same as a pension obligation debt issuance.

The proposal, released in Brown’s May state budget proposal, enjoys support on both sides of the aisle. But pension liability hawks are not convinced of the plan’s wisdom, and analysts also cite risk inherent in the approach.

The payment to the California Public Employees’ Retirement System would be financed with a loan from the state’s Surplus Money Investment Fund. The state would repay the loan over 12 years, beginning with a $427 million payment funded from its $1.78 billion Proposition 2 liability.

Proposition 2 is a state constitutional amendment passed in 2014 requiring that from 2015-2016 fiscal year until the 2029-2030 fiscal year, 50% of revenues that would have otherwise been deposited into a rainy day fund must be used to pay down debt obligations.

Brown and other top state officials believe the move makes sense because California’s annually required contribution to CalPERS is on track to rise sharply in the coming years.

An analysis by S&P Global Ratings’ Gabriel Petek from data provided by the state Department of Finance noted that California’s general fund contributions to CalPERS are projected to increase to $5.3 billion in fiscal 2024 from $3.4 billion in fiscal 2018, and that under the plan the increase would be only $4.9 billion.

“Assuming CalPERS achieved its investment return target (7%), the DOF estimates that the transaction would yield savings of $11 billion, net of the interest cost on the loan, over 20 years,” Petek wrote.

Pension liabilities are becoming increasingly front and center in the minds of bond investors and analysts, who have noted that pensioners have consistently won out over bondholders in Chapter 9 bankruptcy cases such as those in Detroit and Stockton, Calif. and who say rising pension costs are likely to pressure state and local finances more and more in coming years.

Brown, a Democrat, appears to have found a reasonably bipartisan approach with the prepayment plan. Democratic leaders such as Senate President Pro Tempore Kevin de Leon and Senate Budget Committee chair Holly Mitchell released statements positive about the revision noting the savings it could net.

State Sen. John Moorlach of Orange County, a Republican and former county treasurer who has consistently argued for California to take action on its pension liabilities, also supports the plan and has urged colleagues to support it as well. Moorlach said the plan appears to be bipartisan enough to pass, though it remains a bit of a question whether it will ultimately be included in the budget that the legislature must constitutionally pass by June 15th.

“I think the outlook is reasonably bright,” Moorlach said. “I’m excited that it’s at least being discussed.”

Moorlach said that when he was Orange County treasurer, he oversaw the issuance of a successful pension obligation note issuance that saved millions of dollars for the county and sees a similar opportunity here.

“I see minimal risk in doing it other than some massive market adjustment that occurs,” Moorlach said. “It’s not as if the state is taking a real cash flow risk.”

Moorlach said one thing that is missing for him is that he wishes CalPERS would come to the table with some kind of incentive to make it more worth the state’s while, but that he nonetheless likes the concept.

CalPERS itself is also on board, urging employers to also step up their contributions to the plan.

“We are encouraged by the proposal and support employers making additional contributions toward their unfunded liabilities,” said CalPERS spokesman John Osborn.

But outside the legislature and the pension fund leadership, some observers warily view Brown’s plan as functionally identical to pension obligation bonds, which played a major role in the Stockton bankruptcy and which the Government Finance Officers Association now advises issuers to avoid.

The use of POBs, or what skeptics say is California’s structurally similar strategy, rests on the assumption that the money invested with pension assets in higher-yielding asset classes will be able to achieve a rate of return that is greater than the interest rate owed on the borrowed money.

“In the event of poor investment performance," S&P’s Petek wrote, “the state could be left facing higher than projected pension contributions along with the liability related to the internal loan.”

Chuck Reed, the former San Jose mayor and an outspoken advocate for action to address unfunded pension liabilities, said that he was far from confident in the borrowing plan.

“It’s hardly ever a good idea,” Reed said of this kind of financial structure. “It’s better for the fund of course, because money is money. But they’re betting on arbitrage.

“Usually it’s a red flag for systems that are in trouble,” Reed added.

The payment to CalPERS is modest in the face of the amount of money it needs in the coming years, Reed said, adding that he believes that there is a long California tradition of “gimmicks” in which money is shifted from one place to another.

“It would be better if they used real money. What they need to do is put about $6 billion per year in for the next 20 or 30 years,” Reed said, conceding that to do that would be politically impossible.

California’s legislative leaders have said they plan to pass a budget bill by the June 15 deadline for approval by Brown by June 30. That new budget would have a July 1 effective date.

Sacramento Democrats Kill Morrell Measure to Reaffirm Commitment to Protecting Taxpayers

In Another Hit to Pocketbooks, Vote Signals Lack of Support for Lower Property Taxes

By Senator Mike Morrell

http://www.highlandnews.net/news/political/sacramento-democrats-kill-morrell-measure-to-reaffirm-commitment-to-protecting/article_11ecffd8-4c71-11e7-9aa6-8b0284580615.html

Today, Democrats on the Senate Governance and Finance Committee blocked Senate Resolution 39 by Senator Mike Morrell (R-Rancho Cucamonga), a measure that would have recognized the historic passage of Proposition 13 and its role in keeping property taxes low for homeowners. The committee’s rejection of this measure comes on the heels of the largest gas and car tax increase in California history and the Senate’s recent passage of a single-payer state-run health care bill estimated to cost $400 billion and that could increase personal tax bills by more than $9,200.

"It has become increasingly clear that Sacramento Democrats do not believe there should be any limits on the amount of money that can be taken from hardworking citizens to pay for growing government," said Morrell. "Proposition 13 has empowered seniors on fixed incomes to stay in their homes and made home ownership possible for millions of first-time buyers. Senate Resolution 39 would have recognized this fact and shown the people of California that this body is in strong support of the initiative almost four decades after voters passed it."

Proposition 13 was overwhelmingly approved by California voters in 1978 to lower property taxes. During a time of economic uncertainty, the law ushered in welcome tax stability and certainty. Today, Proposition 13 continues to save individual new homeowners and small businesses thousands of dollars annually in property tax payments. The initiative still remains popular with voters 39 years later.

"As we celebrate the 39th anniversary of Proposition 13, we can be thankful that property owners have saved hundreds of billions of dollars in property taxes," said David Wolfe of the Howard Jarvis Taxpayers Association in support of Senate Resolution 39. "The stability of Proposition 13’s one percent cap has been imperative to not only keep seniors in their homes and small businesses afloat, but also to allow millennials to overcome high home prices to be able to live out the American Dream."

"Only in the California legislature would standing up for a law that saves homeowners money and prevents them from being kicked off their property be considered controversial," continued Morrell. "Today’s vote should be a red flag to taxpayers, as it further reinforces the fact that Democrats want to see Californians pay even more of their well-earned money to the government."

Senate Resolution 39, supported by the Howard Jarvis Taxpayers Association, failed passage in the Senate Governance and Finance Committee by a final vote of 2-5. Committee members voting in favor of low property taxes were Senators John Moorlach (R-Costa Mesa) and Janet Nguyen (R-Garden Grove). Committee members voting against the resolution were Senators Jim Beall (D-San Jose), Ed Hernandez (D-West Covina), Bob Hertzberg (D-Los Angeles), Ricardo Lara (D-Bell Gardens), and Mike McGuire (D-Healdsburg).

# # #

Senator Morrell represents the 23rd State Senate District, which covers portions of Riverside, San Bernardino and Los Angeles Counties.

Can California really hit a 100% renewable energy target?

Rob Nikolewski

http://www.sandiegouniontribune.com/business/energy-green/sd-fi-california-100percent-20170601-story.html

California takes pride in its clean energy credentials, but the state may be poised to take an even more dramatic next step: deriving 100 percent of its electrical power from renewable energy sources by the end of 2045.

“I don’t think it’s a big stretch, politically,” said Senate President pro tem Kevin de León (D-Los Angeles), who introduced a bill in Sacramento that would lay down the zero-carbon sources threshold.

The legislation, Senate Bill 100, passed the California state Senate on May 31 on a party-line 25-13 vote and now moves to the Assembly. With the state Legislature in Sacramento dominated by Democrats and two and a half months still remaining in this year’s session, the chances of Senate Bill 100 moving onto Gov. Jerry Brown’s desk look promising.

Through the state’s Renewables Portfolio Standard (RPS), California already has a standard calling for 50 percent clean energy by 2030. According to recent estimates by the California Energy Commission, the state now obtains about 27 percent of its electricity from renewables.

Can California, home to the world’s sixth-largest economy, essentially de-carbonize its entire electric grid in the space of 28 years? Is it technically feasible? And can it be done without sending ratepayers’ bills through the roof?

That seems to depend on who’s answering the question.

“I’m confident (Senate Bill 100) will get passed,” de León said while talking to reporters at a wind energy conference in Anaheim recently.

In 2015, De León introduced a bill that became law, establishing the current 50 percent reduction target.

“The one thing I realize a year or two later is, I made a mistake. I should have shot higher with the RPS,” de León said. “It is very clear to me that the investor-owned utilities are working really hard and they’re meeting the goals and they’re probably going to hit 50 percent RPS in the early 2020s without breaking a sweat.”

SB 100 doesn’t just set a 100-percent marker; it would also accelerate and expand existing California clean-energy targets.

Instead of reaching 50 percent by 2030, SB 100 speeds up the deadline by four years, to 2026. It also directs the state to reach 60 percent renewables by 2030. And SB 100 would also require state agencies such as the Air Resources Board to use the 100 percent target in their long-term planning and decision-making.

SB 100 sets a target for 100 percent renewable energy but does not mandate achievement of that goal. When asked about that, de León said, “Yeah, but we always hit our goals. It doesn’t make a difference.”

Others are much more skeptical.

“Do you wear a seat belt when you drive a car?” asked Gary Ackerman, executive director of the Western Power Trading Forum, an organization based in Sacramento whose 90 members in the West buy and sell power. “There’s no problem as long as there is no accident …. And that’s the risk California is driving toward at a very fast clip. I think it’s reckless.”

While the share of renewable energy sources is growing, the state’s largest source of electricity, by far, is natural gas, which makes up 44 percent of California’s power mix, according to 2015 figures from the California Energy Commission.

Natural gas burns twice as clean as coal but is nonetheless a fossil fuel.

By doubling the state’s clean-energy requirements from 50 percent to 100 percent, Ackerman worries, “You’ll chase out all the gas-fired generators that are required to keep the grid secure and available and reliable … and when you do that, you’re taking more and more risk.”

But supporters of the 100 percent renewables effort may have received support from an unlikely source three weeks ago.

At an energy conference sponsored by the UC San Diego’s Institute of the Americas, an executive from Sempra Energy expressed confidence that the transition from traditional energy sources to renewables may not be so difficult after all.

“If you were to ask me three years ago, as a power engineer, can we actually achieve a high percentage of renewable, my answer would probably be no, we’re going to need some base-load generation,” said Patrick Lee. “But today my answer is, the technology has been resolved. How fast do you want to get to 100 percent? That can be done today.”

Considering that Sempra is a major player in the natural gas industry, Lee’s comments generated buzz among conference attendees.

But two days later, Lee took to Twitter to say that his remarks were “incomplete” and he did not mean to say reaching the 100 percent mark can be achieved immediately. “Today a reliable grid in (California) requires natural gas-fired generation,” he tweeted.

Lee is president of a new Sempra subsidiary called PXiSE Energy Solutions that is developing software technology for large-scale renewable projects.

In an email to the Union-Tribune, Doug Kline, director of corporate communications at Sempra, said Lee’s comments “were aspirational in nature” and going to 100 percent renewable energy right now is “not practical nor realistic.”

Natural gas “is the backbone of energy production when the sun is not shining and the wind is not blowing,” Kline said. “This is not an ‘either/or’ equation: We need a mix of energy resources to maintain and ensure a reliable energy grid.”

One of the members of the board of governors at the California Independent System Operator (CAISO), which oversees the operation of about 80 percent of the state’s electric power system and electricity market, said SB 100’s goals can be achieved.

“It can be done and it is certainly a way to go forward,” said Angelina Galiteva, who is also the founder of Renewables 100 Policy Institute, a think tank in Santa Monica that promotes renewable energy.

On March 11, CAISO reported a first — utility-scale solar generation in its territory accounted for almost 40 percent of net grid power produced during the hours of 11 a.m. to 2 p.m.

“We’re learning a lot and we’re perfectly comfortable operating a high-penetration renewables grid,” Galiteva said.

At the same time, Galiteva acknowledged the challenges that come with integrating a large amount of renewable sources into the grid.

System operators have to balance supply and demand instantaneously, generating every kilowatt that is demanded by customers who expect their lighting, heating and air conditioning to come on the moment they flip a switch.

Solar and wind have problems with what’s called “intermittency” — that is, generating solar power when the sun isn’t shining and wind energy when the wind isn’t blowing.

The power system relies on energy sources like natural gas to fill in the gaps, ramping up and down over the course of the day and night to meet sharp changes in electricity net demand.

“As more solar is added, the ramping gets steeper and more challenging to manage but we’re going to be able to figure out ways to manage those ramps,” said Galiteva.

Energy storage systems are seen as likely solutions. Earlier this year, San Diego Gas & Electric unveiled the world’s largest lithium-ion battery energy storage center — a 30-megawatt plant in Escondido.

Energy storage is relatively expensive but its supporters expect costs to come down as the technology improves, especially by the time 2045 comes around.

Robert Michaels, an economics professor at Cal State Fullerton, is not as confident and predicts SB 100 will lead to higher bills for ratepayers.

“It’s going to be expensive,” Michaels said. “We already know there are a lot of problems with reliability, just with the percentage of intermittent renewables that you have here (in California). And until, and probably not even after, we get a lot more in the way of usable battery storage or some way of storing this stuff, it’s simply not going to be feasible.”

De León said a 100 percent renewable requirement will lead to lower bills, remove more greenhouse gas emissions “so our children can breathe clean air” and create more jobs in the green economy.

According to the U.S. Energy Information Administration, Californians pay an average retail price of 15.42 cents per kilowatt hour. That’s fourth-highest in the continental U.S.

But de León was quick to point out that the average monthly bill in California is almost $20 a month lower than the national average, largely due to the state’s energy efficiency measures.

“The goal and the vision is the right thing for California, especially with the current (Trump) administration,” in the White House, de León said.

One of the Republicans who voted against SB 100, state Sen. John Moorlach, R-Costa Mesa, compared the bill to the public pension crisis.

Politicians can promise “an amazing pension system formula and (they will) be gone, long gone, before the birds come home to roost,” he said. “Anything with a long timeline, you can thump your chest now but you won’t be accountable 30 years from now.”

Ackerman said the over-generation of renewable sources such as solar in California, together with the power already online from gas-fired generators, leads to a reduction in wholesale energy prices.

“You know who sees that benefit?” Ackerman said. “The people in the neighboring states because they’re buying that excess power at a significant discount. People in neighboring states are just backing down their generators and buying (the power) at a discount … It’s like a wealth transfer with Arizona, Nevada, Oregon and other states in the West.”

Boosting California’s renewable requirements is not new.

The state’s first iteration of the RPS in 2002, called for 20 percent of it power to come from clean energy sources by 2017. The target was then accelerated and the percentage later expanded to more than 30 percent before reaching its 50 percent level in 2015

“There was skepticism with the 20 percent (requirement), then at 30 percent,” said Galiteva. “We’ve seen this before.” The continued growth in renewables makes her think getting to 100 percent is within reach.

“We also need to be focusing on other sectors too,” Galiteva said. “De-carbonizing the electricity sector without de-carbonizing the transportation sector and the building sector only gets us part of the way … I mean, we didn’t say, let’s go halfway to the moon. Let’s shoot for the whole way.”

Ackerman has his doubts.

“I’m not saying it’s impossible but it could be very costly, too,” Ackerman said. “I don’t see a price tag attached to this proposal.”

A bill analysis by the Senate Committee on Energy, Utilities and Communications acknowledged that “achievement and progress towards RPS goals have come at a cost,” pointing to increased electricity rates plus the challenges of integrating large amounts of renewables into the energy system.

Another legislative study, done by the Senate Appropriations Committee, said implementing SB 100 would cost the California Public Utilities Commission about $2 million a year and the Air Resources Board $362,000.

It also said the costs for the California Energy Commission to accelerate the existing RPS are “unknown (and) potentially significant.”

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