California’s mismanaged state pensions and budgets are wreaking havoc on the state as Kevin D. Williamson’s writes at National Review in Penniless in Paradise:
“In 1999, at the peak of the dot-com stock-market bubble, California reformulated its pensions and other public-employee-compensation practices, making them much, much more liberal than they had been. The state’s Democrat-run legislature did this on the theory that pension investments would keep offering double-digit returns more or less forever, which led elected officials to make big promises and set aside approximately zilch to make good on them. If borrowing money to acquire an asset based on the theory that the appreciation of that asset will more than offset the cost of financing the borrowing sounds to you like the woeful tale of a million subprime mortgages, then they really could have used you in the California legislature a decade or so ago, or at Fannie Mae. In bubble after bubble after bubble, the country keeps repeating the practice that everybody swore off after the great market crash of 1929 and the Great Depression: investing on margin. California took out something very much like an adjustable-rate mortgage, financing present political consumption by in effect borrowing against future returns on the assets in its pension system — but the returns didn’t materialize. CalPERS, the gigantic statewide pension system, was until a few weeks ago projecting 7.5 percent returns on its investments. Real returns: just over 1 percent. The entirety of the state’s finances are from top to bottom exactly what one San Bernardino resident called his city’s fiscal charade: a shell game.”
