Senate Bill allows state of California to borrow money from UC, CSUs

The State Assembly passed a bill that allows California to borrow from the University of California (UC) and California State University (CSU) systems on July 11.

Senate Bill 79, which passed the Senate last February, creates a State Agency Investment Fund that the state can draw from to help cover state expenses, and then, repay with interest.

The state government borrows to cover expenses for the first half of every fiscal year, and repays those loans in the second half after income tax revenue comes in, said California Department of Finance deputy director H.D. Palmer.

The investment fund would make borrowing easier and less expensive for the state, as well as give state schools a new market to invest in, Palmer said.

“If we could do our cash borrowing within state resources, as opposed to going to outside sources, it’s going to save in interest,” Palmer said.

The bill was not popular with all members of the state legislature however, with two senators and 27 assembly members voting nay, the majority of them Republican.

Assemblyman Katcho Achadjian, who represents the Central Coast, was one of the legislators to vote against SB 79. He later said in a statement that his decision was because he did not have accurate time to review the bill.

“Given the recent cuts to the CSU and UC systems and the state’s poor record of repayment on internal loans, I believe that legislation should have been subject to more serious legislative scrutiny,” Achadjian said.

The maximum interest rate also seemed greater than that available from private institutions, Achadjian said.

In addition, Achadjian said he believed that instead of making more tools for borrowing, the state should be working toward a means of balancing the budget without borrowing money.

Ultimately, it is up to the schools to decide whether or not they want to risk lending money to the state under SB 79, Palmer said.
 The state cannot simply take money from the State Agency Investment Fund that would be established if SB 79 is signed into law. Any borrowing that occurs would have to be negotiated between the state and the lenders, the UC or CSU system, to establish interest rates and time frame for repayment of the loan, Palmer said.

The money lent would not have any impact on the $650 million in funding cuts that the CSU system is facing in the upcoming year. The UC and CSU systems have special funds set aside, Palmer said.

“Both the UCs and CSUs have cash pooled for investment,” Palmer said. “It’s not just money that can be used to offset projects.”

The CSU system has these cash investment accounts as part of their business model, said CSU media specialist Erik Fallis, in which the CSUs operate similar to a private company.

“The CSU has these accounts because clearly we have to operate like any other entity,” Fallis said.

This cash is generally invested in relatively safe markets, with a low interest return, Fallis said. If SB 79 were signed into law, however, the CSU system could invest in slightly riskier markets and expect more interest.

If the CSU were to use the approximately $500 million in investment funds to offset the budget cuts, then the state schools would have no cash reserves left for investment in the future or to help the schools out of the probably budget holes in the future, Fallis said.

“We can’t spend the funds all in one year,” Fallis said.

Ideally, the state wouldn’t be in a financial situation where it needed to borrow money from state institutions, but that’s not always practical, Fallis said.

“In a perfect world, we wouldn’t be doing this, but in the state of California, we’re far from a perfect world,” Fallis said.