03/28/2024

Why The Dot-Com Bubble Is Key To Understanding California’s Growing Public Employee Pension Debt

California faces a mounting public employee pension debt. In his State of the State address, Gov. Jerry Brown said the liabilities are “so massive that it’s tempting to ignore them,” but he said people in the state can’t turn away from these obligations promised years ago.

To figure out how California got in this situation, it’s helpful to rewind the clock to the late 1990s, back to the days of the dot-com bubble. That’s when the state and local governments chose to make pension benefits a lot more generous. It’s a decision that turned out to have lasting implications.

The end of the 1990s was a time when a lot of people got obsessed with the stock market. People were clamoring for shares of internet companies such as theglobe.com, which helped people create personalized web sites. Its stock surged 606 percent on its first day of trading in November 1998. It didn’t matter if the companies were making money – theglobe.com wasn’t.

“Stocks were moving and going up, up, up, up,” said Michael Liedtke, a technology reporter for the Associated Press in San Francisco. “It seemed like there was no correction – it was just like this intoxicating feeling coming throughout the Bay Area.”

Liedtke said people were so excited about the internet that venture capitalists were shoveling money into e-commerce startups, which in turn spent lavishly on TV ads, showered employees with stock options and hired big-name bands for parties.

“They hired the B-52s to play at launch parties,” Liedtke said. “You see tech conferences now with big bands, but these are like little startups no one heard of.”

So what’s the connection between the B-52s and government worker pensions? The California Public Employees’ Retirement System, CalPERS – the largest public pension fund in the country – was riding high on the stock market boom. It had done so well that state and local agencies were able to put less and less money into the fund. That, plus political change in Sacramento, opened the door to boosting pension benefits.

In 1998, Gray Davis became the first Democrat to be elected governor in 16 years, gaining office with support from public sector unions.

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