Prop Zero
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Bill Lockyer, Sage of the Markets

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    NEWSLETTERS

    State Treasurer Bill Lockyer may be in the wrong profession. Perhaps he should be picking stocks.

    That's the unkind thought I had while reading a piece by Lockyer -- who is in fact one of California's most thoughtful public servants -- in the Mercury News.

    Lockyer, with justification, demolishes the assumptions behind a Stanford study that almost certainly exaggerated the state's pension obligations, for what the treasurer sees as political reasons.

    But then Lockyer takes a flying leap in arguing that the 7.75 percent annual return that forms the basis for calculations by CalPERS, the state pension fund, is a very solid number. He writes:

    "CalPERS' 7.75 percent rate has worked because it's conservative and prudent. Over the past 21 years, CalPERS' portfolio has generated an average annual return of 8.6 percent. In 15 of those years, it beat the 7.75 percent assumed return rate."

    What he doesn't say: past returns are no guarantee of future results. And how does Lockyer know that the 7.75 percent rate will hold up in the long term. Perhaps Lockyer, a science fiction fan, has figured out how to see the future.

    Since taxpayers have to make up the difference when CalPERS runs short (diverting money from more important things, such as schools, to retired employees), the argument that we-made-this-amount-in-the-past-so-we-can-assume-we'll-do-it-in-the-future isn't good enough. Pensions are crucial to retirement security, but assumptions need to be conservative, and programs need to be designed in ways that minimize risk. (The best example I know of a pension set-up like this was proposed here).