Taxpayers get to cover CalPERS risky bets

The front page of Wednesday's Wall Street Journal featured a shocking news story about severe financial problems in the public employees union-dominated California Public Employees' Retirement System, which has lost a quarter of its assets since July after investing heavily in real estate schemes — including high-risk speculative ventures on vacant land. According to the Journal, CalPERS has experienced its worst decline since 1932 and has lost 103 percent on its housing investments in the latest fiscal year. Here's the kicker: “CalPERS invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails.” And this means that “[u]nless CalPERS' returns bounce back by June, the fund expects that the rates it charges government to participate in the pension could rise starting in 2010.”

The simple translation is that taxpayers are going to have to pay far more to prop union pensions because of CalPERS' imprudent investments.
All told, CalPERS provides retirement and health benefits to more than 1.6 million state and local public employees and their families. It has $182 billion in assets, the most of any U.S. public pension fund, but in the past 14 months has lost nearly $80 billion, reports the Sacramento Bee.

“The use of debt is unconscionable,” said Supervisor John Moorlach, the former county Treasurer who predicted the county's bankruptcy in 1994 caused by the leverage-based investments made by former Treasurer Bob Citron. Mr. Moorlach, as well as the Register Editorial Board, have warned of an emerging pension debacle.

CalPERS plays games with amortization, Mr. Moorlach explains. Instead of amortizing its losses over five years, it amortizes them over 30 years, which pushes eventual costs into the future.

The leveraging is not illegal. Why not? If the investments work, then union members get even more financial benefits, but if they don't then they are still guaranteed their generous pensions, and taxpayers bail them out.

What happens when companies, unions, governments and other understand that taxpayers will bail out their worst financial decisions? The answer is “moral hazard.” Those who are protected from the consequences of their decisions will continue to make unnecessarily risky decisions. Expect more bad decisions and an endless number of taxpayer-funded bailouts.