05/01/2015 07:06 pm ET Updated May 01, 2016

Leverage Fandango


Leverage is not the answer. Leverage is the question. Maybe is the answer.

A very late legislative bill (HB15-1388) proposes PERA borrow $12b (That's $12 Billion -- $12,000,000,000) and bet it in the stock market. Interest rates are very low now. If the market goes up, PERA makes a lot of money and the amount we taxpayers pay into PERA goes down.

The trick is, while interest rates are low now, the market is as high as it's ever been. On average, stocks cost 18 times projected earnings -- again as high as ever. There's no way to really know, but the market seems a lot more likely to go down than up. In that case we taxpayers make up the difference.

PERA (the Public Employee Retirement Association) is the embodiment of our promise to teachers and driver's license clerks that instead of social security, we will give them a pension when they retire.

In 1999 a myopic legislature and governor looked at an irrationally exuberant stock market inflated PERA and started handing out half price years of service, pumping up the cost of living factor and otherwise dissipating assets. The stock market promptly crashed and fifteen years later we're still repairing the damage.

In the casino of life, betting big at the top of the market can be painful.

Now I'm going to get into the weeds. Stop reading unless you like rolling around in the muck.

The Colorado Constitution says the state can't borrow money without a vote of the people. Art. X, Sec. 20. No one knows if PERA is so much a part of the state that it is subject to this restriction. In 1998, however, the Colorado Supreme Court told us another state affiliate, CHAFA, is distant enough to dodge the requirement. Campbell v. Orchard Mesa Irrigation District, 972 P.2d 1037 (Colo. 1998).

To avoid that borrowing restriction, the bill choreographs an elaborate fandango where CHAFA borrows the money, hands it to PERA to bet in the stock market and repays the lenders out of the regular payments government employers would otherwise have made to PERA. Ultimately, the Supreme Court may say the state is prohibited from doing indirectly what it's prohibited from doing directly. Or, the Court may say O.K.

Getting an answer will take a while. By then the market may have crashed making timing perfect. Or interest rates may have risen enough to make the whole scheme moot. Or the market may have drifted up enough to let us bet big at the very worst moment.

Place your bets.