San Diego It's time to jettison "America's Finest City" for a new moniker: "The Capital of Cognitive Dissonance." What, you ask, is cognitive dissonance? To a psychologist, it's the acute discomfort you feel when there is a discrepancy between a cherished belief you have clung to for years and a new piece of information.
Depending on your personality structure, you may react to the painful new information in a number of ways: you may set aside the old beliefs, reject the new information no matter how persuasive it is, give your old belief a new spin, or just blank out the whole messy topic. The first course requires courage and the second requires stupidity. The last two are the coward's way out.
The theory of cognitive dissonance was developed in the 1950s when a social psychologist observed cult members who believed that a flood would destroy the earth and the cultists alone would be rescued by aliens from another planet. When the flood never came, the courageous ones admitted they had been duped, but most members came up with a new interpretation: the earth was not destroyed because of the cult members' faithfulness.
Addicted smokers are classic cases of cognitive dissonance. They know smoking is bad for their health, but they convince themselves that cigarettes calm their nerves or keep their weight down, thus improving rather than imperiling their health.
Today, a case of cognitive dissonance is rattling county psyches. In recent years the county has been smug about its pension investment strategy. While the city's pension plan swirled down the toilet, the county's was celebrated nationally. For example, the January/February issue of Alpha, a magazine for hedge fund investors and managers, featured the county's chief investment officer, David Deutsch, on its cover. Boomed the headline, "Making Waves: San Diego County CIO David Deutsch Is Creating a Splash, Using Hedge Funds to Power Returns at America's Top-Ranked Public Pension Fund."
Yeah, he has created a splash -- like a two-ton boulder crashing into a river. As the article explains, the county pension fund has $1.3 billion of its money -- one-fifth of its holdings -- in hedge funds, the unregulated, secretive, often-offshore pools of money designed for the superrich but now being peddled to dice-rolling pension and endowment funds. By contrast, the state's conservative pension system has only 1 percent of its money in hedge funds.
The county plunked about $175 million in Amaranth Advisors, which has taken a bath in natural gas futures contracts. That $175 million is a big chunk of the $7.7 billion portfolio, especially since there is a question about how much the county will recover.
In the article, Deutsch boasted about the county's "alpha engine," which uses exotic investment strategies like hedge funds to try to make the portfolio immune to the usual risks of stocks and bonds. It's "the hottest thing around," bragged Deutsch to the reporter. Now the hottest thing around is the seat Deutsch has been sitting in.
The county's crapshooting partly results from its big ego. It assumes it can make 8.25 percent a year on its portfolio -- high by standards of other pension funds. So it gambles to hit its target. Bad strategy.
Like other pension funds, the county's has a large unfunded liability. It has now become larger. It would be larger still if the county had not sold those dubious pieces of paper known as pension obligation bonds in 2002 and 2004. What has really become larger is the cognitive-dissonance discomfort of county government -- not to mention employees and retirees. Will the county continue to plunk 20 percent of its money into hedge funds? Will it stick with its so-called revolutionary approach and choose different kinds of hedge funds? Or will it confess to itself that its money-management skills aren't so ingenious after all and go back to conventional stocks, bonds, and real estate?
The county will now go through the cognitive dissonance that the city has suffered. Just think about all the cherished beliefs that have crashed in the last couple of years. In 1996, the city was proud to host the Republican convention, which was to spotlight its mayor, Susan Golding, ambitious for higher office.
Then came an expensive makeover of the stadium for the Chargers, who promised to stay until 2020. In 1998, the electorate voted for a new ballpark. The city would put in $300 million, and surrounding development -- retailers, office buildings, and particularly hotels -- would pay debt service on the bonds.
It was during the giddy bull market of the 1990s. City leaders and the Union-Tribune assured the citizenry that San Diego was loaded with money and government was superefficient. City employees were granted wonderful new benefits: they could retire with both a monthly payment and a pot of money on the side. They could purchase years of benefits for a song, as if they had been on the payroll. The city won awards for good government. National publications hailed the city for its low ratio of city workers to population, as well as low taxes and fees, neglecting to point out that the city was ignoring infrastructure and basic services.
In 1997, author Joel Kotkin declared in City Journal that San Diego was "a city for the new millennium." Following the 1996 Republican convention, "San Diego stepped forward into the limelight as a model for today's urban America -- a prosperous, confident big city, perfectly adapted to the new information-age economy," he penned rapturously. The primary cause of the city's success was a "pro-business, small-government political culture" that had been fostered by the dynamic Mayor Golding, whom Kotkin slobbered all over. Prosperity had reached most San Diego residents, the author proclaimed.
"San Diego has no entrenched municipal employee unions with the political might to shape municipal priorities," gushed Kotkin. He raved how the city was incubating tech and biotech firms -- neglecting to note that techs and biotechs were a small percentage of employment, then as now. Of course, this encomium was published before the tech wreck that began in 2000.