The 2016-17 Budget: The Governor’s Proposition 2 Debt Proposal

The 2016-17 Budget: The Governor’s Proposition 2 Debt Proposal MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2016 Summary Proposition 2 requires the state to pay down a minimum annual amount of state debts. In this publication, we analyze the administration’s proposal for meeting Proposition 2 debt payment requirements in 2016-17 and beyond. We find the administration’s proposal focuses on paying down debts that benefit schools and potentially benefit special fund fee payers. Specifically, the administration focuses on Proposition 98 settle up and repaying special fund loans. These debts also tend to carry relatively low interest rates. We suggest an alternative approach for the Legislature to consider in meeting Proposition 2 debt requirements. Our approach focuses more on debts with high interest costs that the state is otherwise not addressing. Specifically, we suggest prioritizing two debts: (1) the state pension system for judges and (2) retiree health benefits for state and California State University (CSU) employees. Under our approach, the Legislature would continue to have an average of several hundred million dollars per year to pay down other Proposition 2 eligible debts. Compared to the Governor’s Proposition 2 debt plan, our alternative could save taxpayers billions of dollars more over the long run and begin to address more of the state’s retirement liabilities sooner. Many other approaches are also reasonable, however. We suggest the Legislature hear from the pensions systems and others in considering its long-term plans for using Proposition 2 debt payment funds. BACKGROUND In this section, we describe the constitutional box on the next page—the annual state budget pays requirements for minimum annual debt payments down billions of dollars of other liabilities outside and the debts eligible for these payments under of Proposition 2 requirements. In the appendix Proposition 2. We note that—as described in the of a companion budget brief, The 2016-17 Budget: 2016-17 BUDGET Proposition 2 One Part of State’s Debt Approach Other Liabilities Paid Outside of Proposition 2 Requirements. Beyond Proposition 2’s requirements, the annual budget pays down several billion dollars of liabilities each year. These include debt service on bonds, budgetary liabilities—such as K-14 mandate reimbursements—and pension unfunded liabilities. For example, in addition to $1.9 billion in Proposition 2 debt payments, the 2015-16 Budget Act allocated about $3 billion to the California Public Employees’ Retirement System to pay down the unfunded liability for state employee pension benefits. The 2015-16 budget plan also included $6.6 billion for debt service on general obligation bonds. The Governor’s Reserves Proposal, we detail the amount”). Second, the state must set aside a portion administration’s calculation of Proposition 2 of capital gains revenues that exceed a specified budget reserve and debt payment requirements. threshold (we refer to this as “excess capital gains”). The state combines these two amounts and then Proposition 2 Debt Payment Requirements allocates half of the total to pay down eligible State Constitution Requires Minimum Debt debts and the other half to increase the level of the Payments Each Year. Passed by voters in 2014, rainy-day reserve. Proposition 2 amended the State Constitution Some Proposition 2 Rules Do Not Apply to to change budgeting practices concerning debt Debt Payments. While Proposition 2 requires the payments and budget reserves. Specifically, state to “true up” reserve deposits, debt payment Proposition 2 requires the state to spend a requirements are not revised in this way. In minimum amount each year to pay down specified addition, unlike reserve requirements, which the debts. These minimum payments are required Governor and Legislature may reduce during a through 2029-30. Thereafter, debt payments budget emergency, the state may not reduce the become optional, but Figure 1 amounts not spent on Provisions of Proposition 2 Relevant to Debt Payments debt must be deposited into the rainy-day reserve. Upcoming Fiscal Year (2016-17) Minimum Debt Payments Set by “Excess Capital Gains” “Base Amount” Portion of capital gains revenues over Proposition 2 Formula. 1.5% of General Fund revenues. 8% of General Fund taxes. Figure 1 illustrates the steps in determining 50% 50% the amount of required debt payments under Debt Payments Budget Stabilization Account Proposition 2. First, Eligible debts include: Fill rainy-day reserve to the state must set aside (cid:127) Proposition 98 “settle up.” 10% of General Fund taxes. (cid:127) Special fund loans. 1.5 percent of General (cid:127) Payments for pensions above current law requirements. Fund revenues (we refer (cid:127) Prefunding retiree health benefits. to this as the “base 2 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET constitutionally required debt payments for any Proposition 98 “Settle Up.” Proposition 98 reason. establishes a constitutional minimum funding Administration’s Estimates for Debt guarantee for schools and community colleges. Payments. The administration estimates that Settle up occurs when the minimum guarantee required debt payments will total $1.6 billion in turns out to be larger than the amount that 2016-17. These requirements are based on the was initially included in the budget. Settle up administration’s January 2016 estimates for 2016-17 existing as of July 1, 2014 is eligible to be paid General Fund revenues and tax proceeds, personal from Proposition 2. The 2015-16 budget included income taxes derived from capital gains, and the $256 million for settle up, leaving $1.2 billion share of excess capital gains that the Constitution outstanding. requires that the state spend on education. The Pension Unfunded Liabilities. Payments estimates of these amounts—and therefore of toward unfunded liabilities of “state-level pension required debt payments—will change when the plans” are eligible to meet Proposition 2 debt administration releases its revised budget plan in payment requirements. In Figure 2, we have listed May 2016. unfunded liabilities of pension benefits related to state and CSU employees, judges, school and Debts Eligible for Proposition 2 Funds community college employees, and University As shown in Figure 2, there are four types of of California (UC) employees. Our display of debts eligible for payments under Proposition 2. debts eligible for Proposition 2 differs from that These include two types of budgetary liabilities— of the administration primarily because we list certain amounts the state owes schools and amounts the state’s General Fund owes other state Figure 2 funds—and unfunded liabilities for pensions and Liabilities Potentially Eligible for retiree health benefits. Proposition 2 also made Proposition 2 Debt Payment Funds eligible reimbursements for pre-2004 mandate (In Billions) claims from cities, counties, and special districts, Amount but the 2014-15 budget paid off these outstanding Budgetary Liabilities claims. We describe each of the remaining eligible Special fund loans to the General Funda $4.0 liabilities in greater detail below. Proposition 98 settle up 1.2 Special Fund Loans. As one of many actions Unfunded Retirement Liabilities—Pensions School and community college employeesb 81.5 the state took in the 2000s to address its budget State and CSU employees 43.3 problems, the state loaned amounts to the UC employees 12.1 General Fund from other state accounts known Judges 3.4 CalPERS quarterly payment deferral 0.6 as special funds. Any such loans outstanding as Unfunded Retirement Liabilities—Retiree Health of January 1, 2014 are debts eligible for payment State and CSU employees 74.1 under Proposition 2. As noted in Figure 2, our UC employees 17.3 display of special fund loans differs somewhat a Amount listed differs from administration’s display for two reasons. First, we list certain transportation loans that the administration lists separately ($879 million). from the administration’s display. In particular, we Second, we list transportation loans from weight fees that the administration does not include in its list of eligible debts ($1.4 billion). include loans from a fund receiving transportation b Reflects total unfunded liabilities for school and community college employees administered by CalSTRS ($72.7 billion) and CalPERS ($8.8 billion). CalSTRS weight fees that—upon repayment—will be used for total includes amounts assigned to the state ($14.9 billion) and districts transportation bond debt service. ($57.6 billion), and the amount unassigned ($0.2 billion). www.lao.ca.gov Legislative Analyst’s Office 3 2016-17 BUDGET pension unfunded liabilities related to school and during those employees’ working careers. This community college “classified” employees, such process shifts the cost of these benefits to future as food service workers. Proposition 2 requires taxpayers. Proposition 2 permits the state to use payments for retirement liabilities to be in excess of its debt payment funds to prefund these benefits. the amounts scheduled under law. In other words, Prefunding involves investing contributions and the spirit of the measure is to accelerate payments using the resulting investment returns to partially for retirement liabilities, not to replace planned or fund future costs. Prefunding these benefits costs expected payments. taxpayers much less over the long term than the Payments to Prefund Retiree Health Benefits. state’s and UC’s current “pay-as-you-go” approach. The state and the UC generally pay for retiree health benefits when employees retire rather than FRAMEWORK FOR PRIORITIZING ELIGIBLE DEBTS In this section, we lay out a framework to of June 30, 2015 the state’s unfunded liability help the Legislature prioritize the debts eligible for retiree health benefits was estimated to be for Proposition 2 funds. We suggest three factors $74.1 billion. While the administration has for consideration related to each eligible debt: begun efforts to prefund these liabilities through (1) whether or not the state is already addressing it, the collective bargaining process, the necessary (2) its interest rate, and (3) the group or entities who bargaining agreements are not yet in place to benefit from its repayment. address the vast majority of this unfunded liability. The nearby box describes the Governor’s approach No Plan in Place to Address for addressing this unfunded liability in more Some Eligible Debts detail. The State Is Already Addressing Some Eligible The State Is Also Not Yet Addressing Some Debts. The state is already addressing most of its Judges’ Pensions. Another significant eligible key liabilities. In other words, the state has plans liability that does not have a funding plan is the in place to address most of the liabilities shown in state’s pension program for judges elected or Figure 2. For example, recent actions taken by the appointed before November 9, 1994. This pension California Public Employees’ Retirement System program is known as Judges’ Retirement System I (CalPERS) board aim to increase the likelihood that (JRS I). The state essentially pays JRS I benefits on a unfunded liabilities for its key pension programs pay-as-you-go basis because the state has less than will be retired over about 30 years. Similarly, the 2 percent of the assets needed for pension benefits 2014-15 budget package included a plan that aims earned by these judges to date. By contrast, the to fully fund CalSTRS by the mid-2040s. state has 72 percent of the assets needed for pension The State Is Not Yet Addressing Retiree benefits earned by state and CSU employees. Health. On the other hand, there are other Other Liabilities. There are some other debts debts eligible for Proposition 2 funds that, at eligible for Proposition 2 debt payment funds that least in part, are not being addressed and merit do not have a funding plan in place. First, like the further legislative attention. Of these, the largest state, the UC does not yet have a prefunding plan is the state’s retiree health benefit program. As in place to address its retiree health liabilities. 4 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Likewise, budgetary debts such as special fund Figure 3 loans and Proposition 98 settle up are generally not Rough Estimates of paid off under any preset schedule, meaning the Interest Rates for Eligible Debts Legislature must choose when to repay these debts. Interest Rate Eligible Debts Have Different Interest Rates Budgetary Liabilities Prioritizing High-Interest Debt Maximizes Special fund loans to the General Funda 0.9% Savings for Taxpayers. The Proposition 2 eligible Proposition 98 settle up 0.0 debts vary widely in terms of their interest rates. Unfunded Retirement Liabilities—Pensionsb State and CSU employees 7.5 (While retirement liabilities do not explicitly accrue School and community college employeesb 7.5 interest like loans or bonds, for simplicity we refer UC employees 7.3 to retirement liability growth rates as “interest.”) Judges 4.3 In Figure 3 we make some rough estimates of the Unfunded Retirement Liabilities—Retiree Healthb State and CSU employees 4.3 interest rates of various eligible debts over time. UC employees 4.5 The figure shows that retirement liabilities grow a Rate shown is growth in interest costs if all loans are repaid in 2017-18 rather much faster than budgetary liabilities. Prioritizing than 2016-17. b Over the long run, retirement programs grow at a rate similar to the assumed rate high-interest debts in the short run would result of return on investments, holding other factors constant. in more savings than prioritizing their low interest amount which compounds over time. As such, counterparts. These savings would accrue to retirement liabilities present significant long-term taxpayers in the future, either in the form of lower risks to the state budget. taxes or more public services. Other Eligible Debts Have Low Interest Rates. Retirement Liabilities Have High Interest Budgetary liabilities either accrue no interest Rates. Left unaddressed, over the long run, or grow at comparatively low interest rates. For retirement liabilities tend to grow at a rate similar example, when the state repays special fund loans, to their assumption for investment returns. This the General Fund incurs interest on the loan. That is because when public employers delay action on interest is calculated based on the earnings rate unfunded retirement liabilities, employers lose of the state’s short-term savings account on the another year of assumed investment returns, an Governor’s Retiree Health Proposal Approach Relies on Collective Bargaining Process. The state does not put money aside to fund future retiree health costs, but rather pays these costs as they are incurred on a pay-as-you-go basis. The Governor has proposed one approach to address retiree health liabilities through the collective bargaining process. Specifically, the administration’s proposal aims to (1) establish a prefunding plan through collective bargaining and (2) reduce state costs going forward through benefit scope changes for future employees. As such, the administration’s proposal hinges on the state’s success in using the collective bargaining process to establish a major new prefunding revenue stream from state employees. For more information on the Governor’s approach for prefunding retiree health benefits, see our March 2015 report, The 2015-16 Budget: Health Benefits for Retired State Employees. www.lao.ca.gov Legislative Analyst’s Office 5 2016-17 BUDGET day that the loan was made. Interest rates were Paying Down Proposition 98 Settle Up and low when the state made many of these loans. As School Employee Unfunded Liabilities Benefits a result, interest owed on these loans is generally Schools. Paying down Proposition 98 settle-up low. Similarly, the state does not pay interest on obligations would result in one-time revenue for Proposition 98 settle up. school and community college districts. This action would increase near-term budgetary flexibility Different Groups Benefit From for districts. Similarly, using Proposition 2 debt Addressing the Various Eligible Debts payment funds to address unfunded liabilities for The Legislature may want to consider how school and community college employees could paying down Proposition 2 eligible debts would result in longer-term ongoing savings for districts. benefit certain groups—including taxpayers, Addressing these retirement liabilities could also schools, the UC, and special fund fee payers. Paying reduce future pressure on the state General Fund down all of the eligible debts would result in some to provide additional support to schools and benefits to at least one of these groups, but repaying community colleges. some of these debts could have more benefits to Paying Down UC Pensions and Retiree Health some groups than others. As such, evaluating the Benefits UC. Paying down UC’s unfunded liability distribution of these benefits among the various for pensions and retiree health benefits would reduce groups is also a consideration when prioritizing the UC’s long-term costs of providing these benefits. repayment of the Proposition 2 eligible debts. As with schools, this action would also increase Paying Down Unfunded Liabilities Benefits budgetary flexibility for UC, possibly resulting in Taxpayers. As we noted earlier, paying off more funding for UC programs or lower tuition higher-cost debts sooner results in future benefits for future UC students. Using Proposition 2 debt for taxpayers, either in the form of lower taxes payment funds to address UC’s retirement liabilities or more public services. For example, making could also reduce pressure on the state’s General additional contributions to retirement systems Fund to support UC operations in the future. in the short run would reduce long-term costs Paying Down Special Fund Loans May Benefit of these programs. These savings would result in Special Fund Fee Payers. Repaying special fund loans more money available in the long run for other increases the balance available in those funds. In state programs or for tax reductions. In the case of some cases, those balances could be used to increase retirement benefits for state and CSU employees services or reduce fees. If this occurred, it would and judges, paying down unfunded liabilities benefit the individuals and businesses that pay fees reduces long-term state General Fund costs. into and receive services financed by these funds. GOVERNOR’S PROPOSAL FOR DEBT PAYMENTS Proposition 2 administration’s proposal for debt payments under Proposition 2 focuses on special fund Figure 4 shows the administration’s debt loan repayments. Specifically, in 2016-17, it uses proposal for 2016-17 under Proposition 2. $1.1 billion of the required $1.6 billion to repay Administration’s Proposition 2 Debt Proposal special fund loans. As shown in Figure 5, the Focuses on Special Fund Loan Repayments. The 6 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET largest of these repayments are $308 million for the Figure 4 Unemployment Compensation Disability Fund, Administration’s Proposition 2 $173 million for the Transportation Congestion Debt Proposal for 2016-17 Relief Fund, and $112 million for the Off-Highway (In Millions) Vehicle Trust Fund. The total debt repayments Proposed also include $64 million in interest on special fund Debt Payment loans. Special fund loans to the General Funda $1,128 Administration Also Proposes Paying Proposition 98 settle up 257 Proposition 98 Settle Up. The Governor’s proposal University of California pensions 171 Total $1,556 for Proposition 2 debt payments includes funds a Includes $64 million in interest on these loans. Also includes $173 million in for paying down Proposition 98 settle up. The repayments to Transportation Congestion Relief Fund, which the administration displays separately. proposed $257 million payment would reduce the total settle up owed to schools and community 2015-16 Budget Act did not set a deadline for this colleges to about $1 billion. These payments action, the administration has indicated it expects would be in addition to estimated growth in the UC to make this change no later than June 30, 2016. minimum funding guarantee for schools and community colleges. Administration Includes Debt Payments for UC Retirement Liabilities. The administration proposes payments of Figure 5 $171 million for unfunded Proposed Special Fund Loan Repayments liabilities related to UC (In Millions) employee pension benefits. The funds would represent Fund Name Amount the second year of a Unemployment Compensation Disability Fund $308 Transportation Congestion Relief Fund 173 three-year agreement that Off-Highway Vehicle Trust Fund 112 requires the UC Regents Greenhouse Gas Reduction Fund 100 to limit the amount of School Land Bank Fund 59 Harbors and Watercraft Revolving Fund 51 future employee salaries Hospital Building Fund 50 that may count toward Oil Spill Response Trust Fund 40 UC employees’ pension Housing Rehabilitation Loan Fund 35 Accountancy Fund 21 benefits. Like the amounts State Corporations Fund 19 included in the 2015-16 Tax Credit Allocation Fee Account 13 budget, these funds would State Board of Barbering and Cosmetology Fund 11 Vehicle Inspection Repair Fund 10 only be released to UC Enhanced Fleet Modernization Subaccount 10 after the UC Regents have Other special fund loansa 52 made this change. The UC Subtotals, Proposed Repayments (Principal) ($1,064) Regents have not yet taken Interest on loans projected for repayment $64 Total Proposed Special Fund Repayments $1,128 this action. While the a Includes 17 other special fund loan repayments, each under $10 million. www.lao.ca.gov Legislative Analyst’s Office 7 2016-17 BUDGET LAO COMMENTS Governor’s Proposal low-interest debts, principally special fund loans and Proposition 98 settle up. Over the period, Administration Generally Pays Down 83 percent of Proposition 2 debt payments would be Low-Interest Debt in 2016-17. By using most directed to low-interest debt. of Proposition 2 required debt payments for Schools Benefit From Governor’s Proposal. special fund loans and Proposition 98 settle up, After a few years of large funding increases under the administration’s debt proposal prioritizes Proposition 98, the Governor’s budget provides low-interest debts in 2016-17. Two of these items, schools and community colleges a more modest repayment of the Transportation Congestion increase in 2016-17. Proposition 98 settle up is Relief Fund loan and Proposition 98 settle up, provided on top of the minimum guarantee. As a carry no interest at all. Other special fund loans result, the administration’s Proposition 2 proposal carry interest at a much lower rate than retirement would provide a small benefit to schools and liabilities. community colleges above their base increases in Focus on Low-Interest Debt Would Continue funding. Through 2019-20. Figure 6 displays Proposition 2 Special Fund Fee Payers Potentially Benefit debt payments under the administration’s From Governor’s Proposal. Repaying special multiyear budget forecast, categorized by fund loans could benefit special fund fee payers if interest costs. Over the next four fiscal years, increases in their balances were used to increase the administration would continue to focus on Figure 6 Governor's Focus on Low-Interest Debt Would Continue Through 2019-20 (In Billions) $1.8 High-Interest Debt Paymentsa 1.6 Low-Interest Debt Paymentsb 1.4 1.2 1.0 0.8 0.6 0.4 0.2 2016-17 2017-18 2018-19 2019-20 a Includes payments for state retiree health and UC employee pensions. b Includes loans from special funds and Proposition 98 settle up. 8 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET services or reduce fees. (The repayment of a loan JRS I actuarial valuation, a five-year plan to address provides a key opportunity for the Legislature to the JRS I unfunded liability would cost $4 billion. address how to deal with large fund balances.) Compared to the nearly $6 billion expected cost of However, it is not clear that these benefits the current pay-as-you-go approach, implementing would materialize. Specifically, while proposing this plan would save the state about $2 billion in repayment of special fund loans in recent years, the future. By year six of this plan, our alternative the Governor and other administration officials would likely free up about $200 million per year, have suggested that the state could borrow from which would be available for other legislative these funds again when the state General Fund priorities. faces a shortfall. We suggest the Legislature ask the Alongside JRS I, Address Debts That Benefit administration whether it plans to borrow from Special Fund Fee Payers, Schools, and UC. A these funds again in the future rather than using five-year plan to address JRS I would cost about the repayments to benefit fee payers. $800 million per year, leaving an average of several hundred million dollars per year in Proposition 2 Alternative Approach debt payment funds. Over this period, the Below, we outline an alternative approach that Legislature could use these funds to pay down could produce more savings over the long run than any other eligible debt, including special fund the administration’s proposal. loans, Proposition 98 settle up, and UC retirement Shift Attention Toward Unaddressed, liabilities. Paying down these debts could benefit High-Interest Liabilities. As we have noted, the special fund fee payers, schools and community state is already addressing some Proposition 2 colleges, and UC. eligible debts, while others merit further legislative Prioritize Funds for Retiree Health in the attention. Meanwhile, the various Proposition 2 Long Term. After retiring the JRS I unfunded eligible debts carry different interest rates—and liability, the Legislature could use Proposition 2 therefore different future costs. Proposition 2 funds as part of a retiree health prefunding plan. presents an opportunity for the state to shift Over the long run, investment returns would pay its attention toward the more costly of these for a greater share of the cost of providing future liabilities. Addressing these types of liabilities could retiree health benefits, substantially reducing potentially result in billions of dollars more in the long-term costs of providing these benefits. long-term savings than the Governor’s multiyear Reducing and eventually eliminating unfunded Proposition 2 plan. As such, we suggest the liabilities for retiree health benefits could save Legislature consider placing a higher priority on taxpayers billions of dollars over the long term. unaddressed, high-interest liabilities. Under our approach, the state would prefund Prioritize Funds for JRS I in Near Term. retiree health liabilities using Proposition 2 and One unaddressed, high-interest liability that the other funds without requiring the employee match Legislature may want to consider addressing in sought by the Governor. As we describe below, the short term is JRS I. Over the next few years, our alternative could save more money than the the Legislature could use Proposition 2 funds to Governor’s approach. eliminate the relatively small unfunded liability for Our Alternative May Save More Than the JRS I. The long-term savings would be substantial. Governor’s Approach. The Governor’s approach for Based on information presented in the most recent prefunding retiree health benefits would produce www.lao.ca.gov Legislative Analyst’s Office 9 2016-17 BUDGET long-term savings. Those savings, however, would Budget: Health Benefits for Retired State Employees. likely be partially offset by increases in pay granted Develop a Long-Term Plan. The approach to employees in exchange for employees sharing in we have outlined above is one of many possible costs of prefunding the benefits. Compared to the approaches. We suggest the Legislature collaborate Governor’s approach, our alternative that does not with the administration, state pension systems— require an employee match may allow the state to including CalPERS, CalSTRS, and the UC address this problem at a lower cost. This approach Regents—and others to develop a long-term plan may also preserve the state’s ability to change these for Proposition 2 debt payment funds. Experts from benefits in the future. For more information on the these groups can present their case for how the Governor’s approach for prefunding retiree health state may best use Proposition 2 funds, informing benefits, see our March 2015 report, The 2015-16 the Legislature’s own priorities. CONCLUSION Long-Term Plan Needed. Proposition 2 using Proposition 2 as a part of a retiree health requires the state to make minimum debt payments prefunding plan that does not require the employee each year for 14 more years, resulting in roughly match sought by the Governor. Compared to the $15 billion to $20 billion (in today’s dollars) Governor’s multiyear Proposition 2 debt plan, our for paying down state debts. To maximize this alternative could save billions of dollars more over opportunity, we advise the Legislature to develop the long term while still maintaining some benefit a long-term plan for Proposition 2 debt payment for the groups mentioned above. funds. For example, as we outline here, one way Many Approaches Are Reasonable. As we to seize this opportunity would be to address have noted, our approach is one of many possible unfunded liabilities for retiree health benefits for approaches. Other approaches may save more for state and CSU employees and judges’ pensions. taxpayers or place more emphasis on benefits for Together, these liabilities represent two of the few certain groups. For example, some may point out remaining liabilities for which the state does not that paying more toward the CalPERS unfunded have a plan in place. liability would save the state more, in the long run, LAO Approach Results in More Savings to than our approach would. Others may want the Taxpayers. In this brief, we have outlined an state to focus less on debt payments that benefit the approach that uses Proposition 2 debt payment state General Fund and more on debt payments funds to address two of the last remaining that benefit schools and UC. For example, using unaddressed, high-interest liabilities. Specifically, Proposition 2 funds to address UC’s retirement our alternative would address the JRS I unfunded liabilities could, over the long run, result in more liability over five years while leaving several funding for UC programs, lower tuition, and hundred million dollars per year for paying reduce pressure on the state General Fund to down other eligible debts that could benefit support UC operations. These are all trade-offs the special fund fee payers, schools and community Legislature would want to consider as it develops a colleges, and UC. In the longer term, we suggest long-term plan. 10 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET www.lao.ca.gov Legislative Analyst’s Office 11 2016-17 BUDGET LAO Publications This brief was prepared by Ann Hollingshead and reviewed by Ryan Miller. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This brief and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 12 Legislative Analyst’s Office www.lao.ca.gov