CA Public Pensions: Failed Projections
Written by James Chan   
Tuesday, 30 March 2010 13:45




If your financial advisor told you that the Dow would grow over 8% per year, every year, forever, you’d most likely think he’s either totally incompetent or has hallucinogen abuse issues.

Or, he might just have been working for the California state government.

Way back in 1999, the geniuses at the state legislature in California projected that the stock market would rise by 8.25% annually, in perpetuity. To put that in perspective, according to them, the Dow should have reached 25,000 by now. Last time I checked, it was… 10,895.96. To that I say, bravo, our great state legislatures. That was only about 14,000 points off. Maybe Goldman should give you one of those $30 million bonuses. Based on those figures, they let public safety employees such as police chiefs and firefighters retire at 3% of their final salary for every single year they have worked. If that doesn’t sound too bad, consider the case of a San Ramon Valley fire chief’s compensation. Final salary: $221,000. Pension: $284,000. He makes more money in retirement than working.

Consequences? Pension costs have risen from $150 million to $3 billion. This may seem like small potatoes in comparison to Washington DC’s profligacy, but consider that in the meantime, California had to issue IOUs because it was so broke, key social services such as education and health care are in tatters, and the state’s poorly planned (to say the least) finances made it a laughingstock of the whole nation. Clearly, accurate financial projections matter quite a bit to a government’s economic health.

My point is, don’t rely on government cost estimates too much. Especially if Californian politicians are doing the estimating. After all, if you’ve been paying attention over the past year, they can’t even pass a budget, let alone estimate future ones. Let’s hope the CBO did a better job estimating the costs of the recent health care bill.


(Photo: DoctorWho)
 

Comments  

 
+9 # Guest 2010-04-21 18:45
Did I hear that California is going to go bankrupt? I think I hear lots of "yes" coming from all sides.
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+4 # Guest 2010-05-06 13:28
Yes, and just as you might think (and they surely claim) that California has lots of competent and smart people running the system, something like this takes place. I am not saying that it is wrong to be optimistic, but being overly optimistic will result in losing foothold on reality.

This is like promising each of your friends $1 million next month, assuming that you will hit the lottery jackpot every time from now until then. Great scenario, but good lucks.
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+2 # Guest 2010-05-26 11:22
Quoting Nick:
Yes, and just as you might think (and they surely claim) that California has lots of competent and smart people running the system, something like this takes place. I am not saying that it is wrong to be optimistic, but being overly optimistic will result in losing foothold on reality.

This is like promising each of your friends $1 million next month, assuming that you will hit the lottery jackpot every time from now until then. Great scenario, but good lucks.


California is run by a bunch of idiots. They probably all understand that we can't sustain with the system in hand but no one cares...they will not be in the office when hell breaks loose.
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+8 # Guest 2010-05-10 17:35
The Pension System isn't the only mess they have to handle in California. They are overly generous with their state welfare - they gave out money like they grow them on trees. People got used to the freebies and you are not going to take that away from them any time soon.

Unless something big happens, I would expect California to be near bankruptcy in about 10 years.
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