Alabama Town’s Failed Pension Is Warning to Cities and States

I've never understood what sort of wrongheadedness produced the concept of employer-managed pension plans. Talk about putting all your eggs in one basket -- your employer goes bankrupt and you lose both your job and your lengthily accrued pension benefits.

Interesting note. Not only are government pensions officially in trouble, but they also assume that the return on investment for their pension funds are absurdly high, like an 8% annual return. If we take the reported figures and substitute in the risk free rate of return (which is what economic theory says we should use) then the unfunded government pension liability isn't a half trillion, it is 2.5 trillion. (See http://www.intellectualtakeout.org/library/pension-crisis/pu... for those figures.)

Now how are they trying to address this problem? Well many pension funds have been engaging in risky investments, hoping that they will generate the returns they need. But if they fail, they've created a bigger problem. Unfortunately for all of us, a large piece of that investment was private equity funds. Much of which went into leveraged buy-outs that should start going south in a year or two.

For those who remember the history, private equity is what the junk bond kings of the 80s renamed themselves to. Back then the Savings and Loans had a similar need for high returns and invested heavily in them. The deals failed, and we had the S&L crisis.

Same story. Only this time we're talking state and local governments, and the sums are an order of magnitude bigger.

Wow, I'm glad my Alabama town is more responsible than this one.