With Sonoma County in the midst of trying to launch Sonoma Clean Power, it may be instructive to ask if any lessons are to be applied from a couple of recent colossal public policy blunders.
For those unfamiliar with Sonoma Clean Power, this is a proposal to put the county in the business of buying and selling power, and its purpose is to encourage greater use of "clean power".
The blunders I'm referring to are the pension cost crisis and the mortgage debacle. The lesson from both of these events is that those making decisions with other people's money ought to temper their optimism and exercise more prudent skepticism about the possible outcomes.
In the case of public employee pensions, policy makers in almost all California jurisdictions made a decision to increase the benefit formulas and make those improved benefits retroactive. These decisions were made when the return on stock market investments had exceeded the long-term average for a number of years. The decision was based on an assumption that the above average investment returns would continue and the increased benefits would in effect be "free" by not requiring higher contributions from the general funds. Now. after a period of lower investment returns, we see the folly of that assumption resulting in severe strain on governments' budgets.
Could this change in investment experience have been foreseen? In truth, only the most naive would expect anything other than a swing back toward the long-term trend line. Why did no one even ask the question, what will happen if our assumptions are overly optimistic? Had that question been asked it's almost certain the pension formulas would not have been changed, and we wouldn't be suffering through reduced basic government services that we are now. Like many poor investment decisions, the decision to improve pension benefits was driven by the blind optimism of thinking benefits could be increased at no cost.
The mortgage crisis is another example of too much optimism overwhelming good judgment. Had bankers and public policy makers stopped for a moment to ask what would happen to mortgages extended to poorly qualified home buyers making no down payment if the booming real estate market cooled, it's unlikely we would have had the crisis that we still are recovering from. Again we see that optimism caused blindness to risk.
This includes the optimism of homebuyers who could obtain a mortgage without risking their own money, the optimism of real estate, mortgage and investment banking interests who could do ever more business for which they collected fees, not to mention the optimism of politicians who saw the incidence of homeownership, a popular policy objective, go up.
That brings us to the topic of the Sonoma Clean Power proposal. The optimism element emerges in the form of policy makers predisposed to "do something" for the environment. Sonoma Clean Power has these folks drooling over the potential benefits. Will we again rush into a speculative venture blinded by unquestioning optimism to increase renewal energy and failing to ask what the risks to taxpayers are if things don't work out as expected?
It's time to stop looking at only the best-case scenario and consider the ramifications if the worst case proves to be the reality. Our elected officials will be remiss if they charge ahead without learning what the worst-case outcome is and insulating taxpayers from loss and liability. With huge pension liabilities the county cannot absorb another ill-considered decision.
There are excellent lessons to be drawn from very recent past mistakes. Will we learn and benefit, or are we doomed to repeat them?