Blushing Pinocchio – The Half Trillion Lie
When in doubt, or when in debt by half a trillion dollars, why not just make some crazy stuff up? This is the exact strategy California pension administrators used when implementing +50% increases in union member benefits earlier this decade. The pension plans decided to take a break from reality and enter fantasyland when they projected the Dow Jones Industrial Average would hit 25,000 by the end of the decade and 28,000,000 by 2099, a forecast that would even make Pinocchio blush.
Dealing with the Problem
Governor Arnold Schwarzenegger and his economic advisors attempted to take on the unions. Unfortunately, not everyone got the message. On the day the Governor struck a deal with the unions, California Public Employees’ Retirement System (CalPERS) ordered a hike of $4 billion to the annual pension payments to its members.
The financial woes of California have been well documented as the state looks to lower its $19.1 billion deficit and an estimated one-half trillion dollars in unfunded pension liabilities – a level equal to about seven times the state’s total debt level. Even after multiple years of severe cuts, Schwarzenegger has had to resort to drastic measures, including his most recent desperate move to get some 200,000 state workers to accept slashes in pay to a $7.25/hour minimum wage.
As I have discussed in the past, dealing with excessive debt requires a gut check. Cutting debt is similar to dieting – easy to understand, but difficult to execute (see my Debt Control article).
Whether Republican candidate Meg Whitman or Democratic candidate Jerry Brown wins the thankless position of California Governor, they will have to face the elephant in the room, but hopefully they will not resort to fuzzy accounting or predictions of Dow 28 million that would make even Pinocchio blush.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.