With California's wallet emptying out faster than the cash is trickling in, state officials scrambling to pay the bills have set their sights on new lending sources: California's two biggest public pension funds.
Sen. Dean Florez, D-Shafter, has proposed that the California Public Employees' Retirement System purchase the state's looming debt. The money would keep California operating – including paying state employee payroll and funding schools – into next year.
Florez outlined the plan in a letter to state Treasurer Bill Lockyer on Friday. Lockyer spokesman Tom Dresslar on Monday said his boss will also float the idea to the California State Teachers' Retirement System. Lockyer sits on the boards of both funds.
"I just thought, 'Nobody is talking about CalPERS as a possible investor,' " Florez said Monday. "They might be able to get us a better deal than the banks, and we might be able to give them a better return on their investment than the stock market, especially right now."
Florez and Dresslar said that if the funds wouldn't purchase state notes, Lockyer could ask them to issue letters of credit to shore up investor confidence.
Institutional buyers usually bridge California's end-of-year operating expenses by purchasing revenue anticipation notes, or RANs. But with investors flocking to conservative investments, Lockyer may have tough finding buyers for the $7 billion in RANs that the state plans to offer for sale next week.
Normally, investors snap up state notes. But the sharp downturn in the economy and the stock market's wild ride have left investors frightened.
Schwarzenegger said last week that he'll seek a short-term $7 billion loan from the federal government if the RANs go unsold.
It's not clear whether CalPERS and CalSTRS will step into the breach, say experts. The financial turmoil has wiped out tens of billions of dollars in investments for both funds.
CalPERS, the nation's largest public pension fund with $211 billion in assets as of Friday, has lost about 11 percent of its value since the end of June. No. 2 CalSTRS' $158.7 billion in assets represents a 6 percent loss between June 30 and Aug. 31, the last date for which data are available.
Representatives for CalPERS and CalSTRS said that both funds would consider buying RANs.
"If we are approached, our investment staff would do their normal due diligence and make an objective evaluation of its merits," CalPERS spokeswoman Pat Macht said in an e-mail.
"We look forward to seeing the letter from the office of the state treasurer," Ricardo Duran of CalSTRS wrote in an e-mail. "Once it has been received, CalSTRS will do legal and investment analyses of the opportunity as part of its due diligence."
It's possible that the funds will take a pass, said Keith Brainard, research director for the National Association of State Retirement Administrators.
"If the state can't borrow money from the credit markets, why would CalPERS be interested?" Brainard said.
Call The Bee's Jon Ortiz, (916) 321-1043.
