Really Bad Ideas, Part 2: Giving Up Without Admitting It
Really Bad Ideas, Part 2: Giving Up Without Admitting It by John Rubino – Dollar Collapse
Doing the right thing is hard for both individuals and their governments. Name the goal – maintaining a healthy weight, paying off high-interest credit cards, keeping debt-to-GDP at reasonable levels, whatever – and with each missed deadline or broken promise success recedes further into the distance. And the temptation grows to just give up and pretend that the goal never really mattered.
This is happening everywhere. In the US, state and local pension plans are underfunded to the point of becoming a political (not just a long-term financial) issue. And governments, confronted with the resulting set of unpalatable options, are surrendering without admitting it. In California, for instance, the governor is proposing to fund part of its several hundred billion dollar pension liability by, believe it or not, borrowing more money:
(Chief Investment Officer) – California Gov. Jerry Brown’s revised state budget proposes a $6 billion supplemental payment to The California Public Employees’ Retirement System (CalPERS), which he says will save the state $11 billion over the next two decades.The supplemental payment effectively doubles the state’s annual payment. It is intended to ease the effect of increasing pension contributions due to the state’s unfunded liabilities and the CalPERS Board’s recent decision to lower its assumed investment rate of return to 7% from 7.5%.
California currently has $282 billion in long‑term costs, debts, and liabilities; $279 billion are related to retirement costs of state and University of California employees, according to the revised budget.
“These retirement liabilities have grown by $51 billion in the last year alone due to poor investment returns, and the adoption of more realistic assumptions about future earnings,” said Brown in his budget.
The funding for the supplemental payment will be paid through a loan from the Surplus Money Investment Fund.
Borrowing to make a pension payment is known as a “pension bond,” and is analogous to funding your kid’s private school tuition with credit cards. It gets you through the year but at the cost of potentially-big trouble down the road. In California’s case, the assumption that the pension fund will generate a higher return on its investments than the state has to pay to borrow requires a continued bull market in stocks and bonds to work out. In a bear market – which based on history is seriously overdue, pension assets will depreciate, while the state’s debt will not. Result: An even bigger mess, very possibly resulting in some form of bankruptcy on the part of the pension funds or even the state. For a glimpse of where the pension bond mindset can lead, see Fear of junk bond ratings hangs over Illinois budget crisis.