PERSPECTIVE--In a recent news release, State Treasurer John Chiang said: “…the Governor and I are partnering on a fiscally prudent plan to buy down our pension debt using what Albert Einstein once called ‘the eighth wonder of the world,’ compound interest. ”
It’s not Albert Einstein he should be crediting, but Bernie Madoff.
The plan calls for shifting $6B from the state’s short-term investment pool, where it earns less than a point, to CalPERS, where it could conceivably earn 7% (the most recent 20-year average). The difference in earnings could generate $11B over the next 20 years for the financially challenged fund.
The math is theoretically correct, but it is a classic example of papering over a problem.
Just as Madoff used cash from recent investors to pay established clients, Chiang is shortchanging the needs of the rest of the state by denying access to these monies for general purposes.
He is also ignoring the risks of shifting funds from a risk-free pool to a highly volatile investment fund. As I have stated before, the world economy has undergone major structural change over the last few decades. Increased competition, which has been generally good for consumers, has also heightened investment risk. Chiang should know that past performance is no indicator of future returns, especially when the past has little resemblance to the present. Whipsawing is a more appropriate description of CalPERS performance in more contemporary times.
Rather than coming to grips with the real problem, that is, insufficient employee contributions to cover very generous benefits, Chiang wants to play a shell game. Yes, even assuming the 5.1% rate for the most recent 10 years, more cash would be generated, but any improvement in returns is lost to the general fund.
Chiang should be considering altering the investment strategy of the short-term pool. A targeted rate of 1.5 points (about one-third more than the current return) could be accomplished without undue exposure to additional risk. It would be much safer than allowing CalPERS to roll the dice and pray we do not have a major economic crisis.
But regardless, he is re-purposing cash and locking it up at a time when the state has other pressing needs.
Once the $6B is transferred to CalPERS, it becomes political capital benefiting only one segment of the state’s population – public employees.
But then, they are who Brown and Chiang represent.
(Paul Hatfield is a CPA and serves as President of the Valley Village Homeowners Association. He blogs at Village to Village and contributes to CityWatch. The views presented are those of Mr. Hatfield and his alone and do not represent the opinions of Valley Village Homeowners Association or CityWatch. He can be reached at: firstname.lastname@example.org.) Prepped for CityWatch by Linda Abrams.