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California – A Pension Disaster-In-Waiting Case Study

You know you’ve got a problem when former California governor Arnold (the Governator) Schwarzenegger and present chief state executive Jerry (Governor Moonbeam) Brown are on the same page about an issue. We’re talking about the brewing pension disaster in the Golden State. The particular set of circumstances unfolding are an almost perfect example of the idea of “unfunded liability” rearing its ugly head around the nation. We’ll get to the numbers in a moment but first a little background.

State workers in California pay into a pension system administered by a board known as CalPERS. The acronym is not important. What is important is that this huge pile of cash which is used to pay for member retirement is becoming something of a financial disaster. If one were very naïve, one might think that, through prudent investments and financial savvy, the state always has enough money on hand to make good on its pension payment obligations. The reality is that the plan is only about 70% funded, with a current “unfunded liability” of more than $38 billion dollars.

Like Schwarzenegger before him, Governor Brown realized that, despite a $16 billion overall state budget deficit, it makes more sense to pay as much as possible into pension coffers in order to avoid what amounts to a loan costing $145.9 million over the next two decades.

But CalPERS is not hip to this way of thinking. They rejected Brown’s request to pay more into state worker pensions to avoid having to eventually borrow money. Considering the state’s current creditworthiness ranks slightly lower than cattle dung, incurring more loans at terribly high interest rates only hastens the slide into financial oblivion. If you’re thinking now is not a great time to be a retired state worker in California, you’re right.

The real problem with funding is that pension investments took a nose dive in 2008, thanks to a stock market crash, and are not even close to recovering. Wait a minute! The long term stability of state workers’ golden years hang in the balance of the whims of a capricious stock market? Yep. Almost makes you wish you’d invested in real estate instead, doesn’t it?

The Heroic Investing Team






Flickr / DonkeyHotey


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