What happens when local officials invest hundreds of millions and billions of dollars for the "people" when they probably aren't comptent to manage their own retirement account?
CNBC: City Plan Backfires(cache)
Local governments across the country hit on the solution to the underfunding of their generous pension funds a few years ago. They borrowed $64 Billion by issuing “pension obligation bonds.” The idea is simple: borrow money by selling bonds at fixed interest rates and invest the money in something that makes more that you have to pay, like stocks (also called a carry trade). It is like you taking out a loan against your future income (not your home because the local governments have no assets but future tax revenue), then going to Las Vegas to try to make more than you owe. Sounds brilliant, doesn’t it?
If you are Stockton, CA (which is now in bankruptcy) you sell $125 Million of bonds in the Spring of 2007 to play this game. Then, when you lose money and can’t pay it back, you complain that the investment bank that sold the bonds didn’t tell you the risks.
Let me see if I understand. We have people in office who have the power to obligate the tax payers to pay $125 Million in the future that don’t understand that the low interest rates they planned to pay are low because there is little risk to bonds and that interest rates they expected to receive are high exactly because there is risk. Now, when their gamble didn’t pay off, they claim they were duped and somebody else should pay for their “error”.
A few good questions arise from this story:
- Can we depend on our brilliant civic leaders and professional bureaucrats to solve our problems, as we are constantly told we should?
- Why does government at all levels attract such “brilliant” people? And what can we do about it?
- Why have we entrusted these people with managing enormous sums of money when most of them have never run a business, met a payroll or accumulated anything in life except a hansom government pension and benefits package?
- Why don’t civic leaders have any personal responsibility for their actions as a business executive or owner who made such ignorant decisions would? They have no skin in the game and that is the problem. The stand to win if they succeed but take no personal responsibility if they lose.
- Would it be better to take this kind of power away from government and let people plan for themselves, for their own retirement, etc. We are told that the people are too stupid to do this, but how can you be any more ignorant than those running government. The only difference is they get to blow other people’s money while we only get to lose our own.