California Dreaming: Pension Bill Fails
A recent legislative attempt in California has apparently caused quite a stir. Assembly Bill (AB) 2122 sought to preclude companies from paying dividends to shareholders before satisfying pension obligations and to "make directors and officers of a corporation jointly and severally liable for improper distributions" under certain circumstances.
Refer to the July 13, 2006 post entitled "Dividends, Pensions and California Chaos".
Blogger Jerry Kalish provides a novel suggestion.
The proposed bill - and the politics behind it - conveniently ignores the massive unfunded pension liabilities in California, e.g, the California State Teachers' Retirement System faces a $24 billion unfunded pension liability.
But we got them beat in my home state of Illinois which at $35 billion has the largest unfunded pension obligation in the country. The Fitch Rating service released a "negative outlook" for Illinois finances - one of only three negative outlooks issued by the rating service in its review of the states. The other two? Louisiana dealing with the aftermath of Hurricanes Katrina and Rita and Michigan dealing with massive problems in the automobile industry.
Um! Should there should be a law that no more salary increases occur for state legislators until pension liabilities are met?
So where does this attempt stand now?
According to the website that tracks California legislation, the bill failed passage on June 22, 2006 with "reconsideration granted".
While laudable to encourage prudent pension funding, there are a host of problems associated with this type of reform.
Is Milton Friedman right when he said that "the government solution to a problem is usually as bad as the problem" and that "there's no such thing as a free lunch?" Notwithstanding the law of unintended consequences, empirically validated time and time again, there are a variety of better, and arguably more efficient and cost-effective ways to solve the pension "crisis" than putting state legislators in charge of a company's capital structure.
