Our View: Taxpayers get to pay to cover CalPERS' risky investments

Look out — another massive taxpayer-funded bailout is coming down the pike.

The front page of last 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 Orange County 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. Moorlach, as well as the Orange County Register Editorial Board, have warned of an emerging pension debacle. "This is the O.C. investment pool story all over again. Leverage kills if you're trying to make a killing. ... The goal should be a reasonable rate of return on annual net rental income — not on appreciation from flipping."

CalPERS plays games with amortization, Moorlach explains. Instead of amortizing its losses over five years, it amortizes them over 30 years, which pushes eventual costs into the future. And CalPERS takes an extremely aggressive investment strategy.

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.

Reed Royalty, president of the Orange County Taxpayers Association and Orange County retirement board member, told the Register, "Public employees are guaranteed their pensions no matter what. The tendency is to want to take higher risk because the more they earn, the easier it is to talk to supervisors, legislators and city council members about granting them higher benefits. ... It galls me. ... Public employees have no risk. It's wrong for employees of anything to have zero risk and nothing but gravy."

Craven politicians have used these high returns to justify a constant ratcheting up of pension plans, with public employees retiring as early as age 50 with 90 percent or more of their final year's pay guaranteed. The only way to sustain this is to keep the investments performing at unrealistically high rates. "It's like putting your foot on the pedal and making the machine run at 7,000 rpm even though it's not designed to run at this pace," Moorlach said. In 2004, when he predicted problems after the board approved a big retroactive pension spike for county employees, he compared the decision to banking that the Angels would make the playoffs every year for 30 years.

What happens when companies, unions, governments and others 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.