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California's bad bet makes JPMorgan's look minor

Congress ordered JPMorgan Chase & Co.'s chief executive officer, Jamie Dimon, to testify about $2 billion that his bank lost on an investment bet.

Worrisome as that gamble was — after all, the banking crisis was largely due to bad bets by banks — it is unfortunate that Congress has never called hearings on a far bigger bet, one that has had more catastrophic consequences for millions of taxpayers.

The one I'm referring to was made by California legislators on Sept. 10, 1999. They decided that investment gains would cover 100 percent of the cost of retroactive pension increases they granted that day to hundreds of thousands of state workers.

The politicians made the wrong bet — and the result has been a penalty to California's budget that has averaged $2 billion a year ever since and that will cost the state billions more for decades to come.

Promising that "no increase over current employer contributions is needed for these benefit improvements," and that the state pension fund would "remain fully funded," the proposal, known as SB 400, claimed that enhanced pensions wouldn't cost taxpayers "a dime" because of healthy investment returns. The proposal went on to assert that it "fully expects" the state's pension costs to remain below $766 million a year for "at least the next decade."

The Legislature included cost projections provided by the California Public Employees' Retirement System, or CalPERS, in the description of the bill and passed it with broad bipartisan support. Gov. Gray Davis signed it.

Since then, the pension system has earned only 75 percent of what it had hoped. Because the state is unconditionally on the hook, the state budget has had to make up the difference. As a result, the state has spent $27 billion on pensions, $20 billion more than CalPERS projected.

Because the boosted promises last for decades — for employees' lifetimes — and because the pension fund amortizes the difference between what it expected to earn and what it really earned during such a long period, just a small portion of the increased costs has so far been recognized. Far larger increases are in store.

To finance the $20 billion of extra cost for pensions, the state has cut spending on services and raised taxes. As one example, spending on the University of California and California State University systems declined 18 percent from 2002 to 2012, while state spending on pensions rose 214 percent.

The pension deal was a stunning example of nondisclosure. The legislators didn't inform the taxpayers that:


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