The further to the left or the right you move, the more your lens on life distorts.

Wednesday, August 24, 2016


California is the bellwether for the blue model—big intrusive (state) government that prides itself on over regulation, over-taxation, and an overbearing countenance that suggests quite strongly that the politicians in Sacramento (the capital) know best. Of course, all of this is supposedly done with the best of intensions. As a consequence, the Golden State is losing businesses at an alarming rate, is in dire financial trouble, has created underfunded state pensions, and is otherwise typical of many states with Democratic governance.

One of the characteristics of the blue governance model is to double down on bad ideas. Instead of fixing a problem (e.g., underfunded pensions), blue politicians expand on the idea, consciously avoiding the inevitable fallout and hoping that they can kick the can down the road so that implosion will be someone else's problem.

The Wall Street Journal reports on the latest example of doubling down on bad pension ideas:
In 2012 Democrats in Sacramento authorized state-managed individual retirement accounts for some six million employees working in the state without access to 401(k)s or pensions. The legislation required employers with five or more workers that don’t offer retirement plans to automatically enroll employees in a new public option. Employees can opt out.

A board comprised of Democrats and their nominees—namely, union reps and attorneys—has been charged with fleshing out the program’s details, which must be approved by the legislature and Governor. The Senate green-lighted the plan in May, and the Assembly intends to vote this week.

The legislation gives the board carte blanche to design and manage the state IRAs. One of the few rules is that the employee contribution must start between 2% and 5% of wages and can only escalate by one percentage point annually up to 10%. Administrative costs after six years are capped at 1% of program assets, which is greater than the operating expenses charged by 90% of IRA equity mutual funds.

The board could invest workers’ money however it chooses, so politicians would be able to direct billions toward their favorite causes. However, the board is supposed to stick to U.S. Treasurys or “similar investments” during the first three years to prevent the plans from going belly up if markets crash. So early investors may get little return on their savings.

Taxpayers would have to cover the program’s start-up costs (putatively in the form of a general fund loan), which are pegged at $134 million. And while the legislation stipulates that the state “shall not have any liability for the payment of the retirement savings benefit,” nothing prohibits the legislature from bailing out the plans in the future. Have you ever heard of a public fund that didn’t have an implicit taxpayer guarantee?

A legislative analysis notes that “the fiscal impact of this bill is subject to considerable uncertainty.” No kidding. If more workers opt out or contribute less than the board projects, administrative costs could exceed the 1% limit. Taxpayers might have to pick up the difference.

The legislation also contemplates a “reserve fund” to smooth out market returns. This would involve the board siphoning off investment returns when markets are roaring to offset losses during other years. What could go wrong?
The short answer is "a lot." History indicates that politicians in general and Democrats in particular are notoriously bad at managing pension funds. That's not an opinion, it's a fact demonstrated by failed or failing pension funds in Puerto Rico, Connecticut, Illinois and many other blue states and cities across the country.

If, as the Democrats suggest, they have only the best interests of workers at small companies at heart, why not let a leading private sector company (e.g., Fidelity Investments or Vanguard) manage the funds. We all know the reason. That would preclude the politicians from ('legally') skimming huge sums, rewarding financial company donors with contracts, and otherwise putting the workers' money at risk, backed, of course, by the taxpayers of California. And by the way ... when the IRA fails and California whines about bankruptcy, it will be taxpayer's nationwide who are told (not asked) to bail the state out.

Yep ... the system (in California and elsewhere) really is rigged.