Saturday, May 20, 2017

Dave Crane, post of the year

California Cover Up

Pension loan would cover up wealth transfers to employees

California proposes to issue a pension obligation bond to finance extra contributions to the state pension fund, CalPERS. It would also cover up wealth transfers from citizens to state employees. Here’s how it works:
When pension promises are made by the state to its employees, both the state and employees incur costs (“Normal Costs”) in the form of contributions to CalPERS with the hope that the sum of contributions and investment earnings will be sufficient to fund the promised pension payments. If investments earn at the rate CalPERS used when setting the Normal Cost, everything works out. But if investments earn at a lower rate, deficits (“Unfunded Liabilities”) arise. In contrast to joint sharing of Normal Cost, employees don’t share in the cost of Unfunded Liabilities. 100% of that cost falls on citizens, whose services get crowded out and taxes get raised to pay off the liabilities.
As the astute reader will infer, employees profit from the highest possible investment return assumption being used by CalPERS to set Normal Costs. The higher that rate, the lower the Normal Cost, which is their only cost. But the higher that rate, the greater the likelihood of Unfunded Liabilities. Because public employees control CalPERS, investment return assumption rates have been set at levels virtually guaranteeing the creation of Unfunded Liabilities. That transfers wealth from citizens to employees. The transfer has been huge: citizens are already on the hook for $60 billion of Unfunded Liabilities for state employee pensions accruing interest at 7.5% per year and more transfers are occurring every day CalPERS continues setting Normal Costs unfairly low.

A price fixing by government causes crash later.

Think of government as preventing half your price comparisons, and the protected good is never tested for shortage or over runs. Thus, some paths through the queues are missing when the protected good eventually marks to market, we get jamming..

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