"No. California Government Code 16429.3 states that monies placed
with the Treasurer for deposit in the LAIF by cities, counties, special
districts, nonprofit corporations, or qualified quasi-governmental agencies
shall not be subject to either of the following:
"(a) Transfer or loan pursuant to Sections 16310, 16312, or 16313.
"(b) Impoundment or seizure by any state official or state agency."
The non-LAIF money in the pool can't be spent either. It can be borrowed, but it has to be paid back. When Governor Schwarzenegger tried to raid the Public Transportation Account for the state budget, the California Transit Association took him to court and won. The Third District Court of Appeals ruled in June 2009 that diversions from the Public Transportation Account to fill non-transit holes in the General Fund violated a series of statutory and constitutional amendments enacted by voters via four statewide initiatives dating back to 1990.
In short, the use of these funds for the state budget has been blocked by the voters themselves. Bond issues are approved for particular purposes. When excess funds are collected, they are not handed over to the State toward next year's budget. They just sit idly in an earmarked fund, drawing a modest interest.
What's Wrong with This Picture?
California's budget problems have caused its credit rating to be downgraded to just above that of Greece, driving the state's interest tab skyward. In November 2009, the state sold 30-year taxable securities carrying an interest rate of 7.26%. Yet California has never defaulted on its bonds. Meanwhile, the too-big-to-fail banks, which would have defaulted on hundreds of billions of dollars of debt if they had not been bailed out by the states and their citizens, are able to borrow from each other at the extremely low federal funds rate, currently set at 0 to .25% (one quarter of one percent). The banks are also paying the states quite minimal rates for the use of their public monies, and turning around and relending this money, leveraged many times over, to the states and their citizens at much higher rates. That is assuming they lend at all, something they are increasingly reluctant to do, since speculating with the money is more lucrative, and investing it in federal securities is more secure.
Private banks clearly have the upper hand in this game. Local governments have been forced to horde funds in very inefficient ways, building excessive reserves while slashing services, because they do not have the extensive credit lines available to the private banking system. States cannot easily incur new debt without voter approval, a process that is cumbersome, time-consuming and uncertain. Banks, on the other hand, need to keep only the slimmest of reserves, because they are backstopped by a central bank with the power to create all the reserves necessary for its member banks, as well as by Congress and the taxpayers themselves, who have been arm-twisted into repeated bailouts of the Wall Street behemoths.
How the CAFR Money Could Be Used Without Spending It
California, then, is in the anomalous position of being $26 billion in the red and plunging toward bankruptcy, while it has over $70 billion stashed away in an investment pool that it cannot touch. Those are just the funds managed by the Treasurer. According to California's latest CAFR, the California Public Employees' Retirement Fund (CalPERS) has total investments of $360 billion, including nearly $144 billion in "equity securities" and $37 billion in "private equity." See the State of California Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2009, pages 83-84.
This money cannot be spent, but it can be invested -- and it can be invested not just in conservative federal securities but in equity, or stocks. Rather than turning this hidden gold mine over to Wall Street banks to earn a very meager interest, California could leverage its excess funds itself, turning the money into much-needed low-interest credit for its own use. How? It could do this by owning its own bank.
Only one state currently does this -- North Dakota. North Dakota is also the only state projected to have a budget surplus by 2011. It has not fallen into the Wall Street debt trap afflicting other states, because it has been able to generate its own credit through its own state-owned Bank of North Dakota (BND).
An investment in the State Bank of California would not be at risk unless the bank became insolvent, a highly unlikely result since the state has the power to tax. In North Dakota, the BND is a dba of the state itself: it is set up as "the State of North Dakota
doing business as the Bank of North Dakota." That means the bank cannot go bankrupt unless the state goes bankrupt.
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