An Ugly Mess

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Ugly tidings for pension funds aren't just for states anymore. Big cities, corporations, and even some state and city agencies are facing some rather serious floggings after years of optimistic assumptions, generous benefits, poor management, and, in some cases, willful blindness. For the latter, you only have to look in the most obvious place: Illinois.
Starting with a $1.5 billion dollar hole in 2007, the high of the boom, is the first sign that you are dealing with misunderstood financial genius. Expecting the legislature to bail you out is, however, another story. Topping the cake is ignoring the people who actually understand, well, math, when deciding what to do next. ("I'm certain we can expect 8.75% over the long haul.") It takes that kind of talent to start losing money on the proceeds of a bond issuance five months after it's underwritten. Welcome to Chicago.

"We've identified the problem and a solution," said CTA Chairman Carole Brown on April 16, 2007. The agency decided to raise money from a bond sale.
A year later, it asked Illinois Auditor General William Holland to research its plan. The state hired an actuary, did a study and, on July 17, concluded that the sale of bonds would most likely result in a loss of taxpayers' money.
Thirteen days after that, the CTA ignored the warning and issued $1.9 billion in bonds. Before the year ended, the pension fund was paying out more to bondholders than it was earning on its new influx of money. Instead of closing its funding gap, the CTA was falling further behind.

Brace yourselves. There goes another $1 trillion.
Hidden Pension Fiasco May Foment Another $1 Trillion Bailout [Bloomberg]