Fixing California, along with much of the U.S.A.

An interesting article in the L.A. Times talks about the destruction of a former drug house in an L.A. neighborhood. They talked about the amount of crime and violence that had surrounded it and how the neighborhood had become safer. Of course, the crime probably moved about five blocks, but it looks good on a bar chart.

It did get me to thinking about the California state budget crisis. If not completely balanced, the California budget would be much closer if the federal government were today to legalize marijuana and assign to the states the franchise for selling it legally at a moderate profit.

At a stroke, a massive amount of state, county, and local spending would be eliminated. Everybody gets paid in this futile "war on drugs," launched by Richard Nixon with a promise that it would be over in a few years. The snitches get paid, as do the cops, the public defenders, the prosecutors, the judges, and the prison guards, all for preventing the use of a substance less lethal than tobacco or alcohol.

In addition to the money saved, there is the money earned by selling it. The stuff is sold now, but the public sees no revenue. Billions would flow into state treasuries that now go to Mexican drug lords, who hire people to kill Mexican public officials. The feds wouldn't need to keep shipping our cash to Mexico and Colombia to fight the effects of the illegal cash we are shipping there.

While we're at it, we could legalize and tax prostitution. I notice that Eliot Spitzer's pimp in New York may go to jail for two years. At a cost of tens of thousands of dollars to achieve exactly what?

As the great thinker Lysander Spooner wrote in the 19th century, vices are not crimes.

Lane Community College is toast

I've run for the LCC Board three times now, all unsuccessfully. In all three, in varying degrees, I've argued that the college spent money on grand gestures, such as KLCC and the boutique Women's Program, which could be better spent on getting larger numbers of students an education they could afford.

It doesn't matter now. The Oregon Public Employee Retirement System (PERS) has sunk the ship. Or is slowly sinking the ship in a process that will continue for years. Retrenchment will be the order of the day for the next twenty years. Those things I said should be replaced by more effective operations will gradually die off, not to be replaced by better options. There is no money left for good options.

This may seem grim, and far beyond anything yet appearing in the news, but it's all online, waiting for anyone who wants to check the numbers and consider the implications. PERS posts its monthly returns online. A year ago, PERS will roughly fully funded, not including the side accounts (more about them later). It shows a loss of 27% for 12 months on its investments. Since the actuarially assumed ROI is 8%, this puts it down by a third compared with where it needed to be.

But it's much worse than that. Two asset classes -- private equity and real estate -- have done so badly that they can't be properly valued. So PERS is carrying those investments at cost, which is reports to the last thousand dollars even though the market is not known within a billion dollars. Those two classes at the end of December represented a third of the PERS regular fund, $15 billion out of $45 billion. Knowing what highly leveraged positions have done in the past year, it seems certain that they have lost most of that money. It would be odds on that they've lost 80% of it.

January was another bad month in the market, and PERS probably dropped two billion more. A proper valuation would probably be between $30 billion and $35 billion on January 31. If the total PERS UAL is under $25 billion, it would be surprising.

Bringing us back to LCC. In 2003, LCC floated a $53 million bond and created a PERS side account. The theory was simple, borrow at a little over 5% and let PERS invest it at 8%. Unfortunately, after several good years, PERS has had an awful year and wiped out all the earlier returns. LCC has paid nothing on the principal and consequently now has a $55 million debt and a $30 million side account. Again, this is pending an honest valuation by PERS.

The LCC portion of the PERS UAL is hard to know, but I think half a percent is reasonable. That would make it $125 million. Add the $25 million shortfall resulting from the bond, and PERS represents a $150 million hole for LCC.

I suppose it could be as low as $100 million, although I'd be really surprised if it were less than $120 million. Whatever the figure, it's a colossal sum and will require contributions that would average $10-15 million (principal and interest) if spread out over 20 years. Since LCC won't even begin to dent the problem for several years, until the issue hits the board upside the head and even not then immediately, the cost is eventually going to reach $15-20 million/year.

If anyone can tell me where this will come from, I'd be interested to hear.