The Pension Fund Crisis: How Should You Invest Your Money?

Disclosure: this post is for educational purposes only. I am not a professional financial adviser.

Compare and contrast. Here’s a DMN personal finance column from last summer advocating investment in municipal bonds.

[I]nvestment grade municipal bonds are relatively safe because the cities, counties, school districts, hospital districts and airports that issue this debt have the financial wherewithal — mainly tax revenue — to pay it back. It is true that there have been some high-profile municipal bond defaults in recent years, such as in Stockton, California, and Detroit, but overall the default rate for munis is exceedingly low.

Now here’s a column from ValueWalk yesterday that argues the Dallas fire and cop pension fiasco is a canary in coal mine and that municipalities across the country — heck, even states — will in coming years have to file for bankruptcy:

The next substantial fall in asset prices will sharpen the focus on budget deficits and pension underfunding, with the most indebted and underfunded states likely to find they are unable to rollover their debts at any price. Remaining residents will be negatively impacted, pensioners will see their payments slashed, and bondholders will recover little, if any, of their debt. As there is virtually no political will to take action to avoid these problems, investors should position their portfolios in expectation that these events will happen.

What’s in your wallet?


  • Greg Brown

    Because S&P 500 index funds are solid and reliable investments, but not nearly as sexy as a condo in Hawaii.

  • John Franklin Guild

    Because they could only have projected something around 1-3% returns each year (presently about 2% for AAA 10-year or 3.5% for A), revealing that using the pension fund to give significant raises (in the form of significantly higher than market interest) to senior offices and firefighters as a method of retention is not in fact free (this was the pitch when they adopted the DROP accounts). A handful of officers and firefighters got as much as $100,000 a year in above market interest on their DROP account–quite the “free” incentive, no? (to be clear, the officers and firefighters might have been worth that to retain, but this was not the best way to bump their comp). Of course, nothing in life is free, and frankly, its time for voters to stop pretending that we are being mislead when in fact were are passive participants in the con. We like to be told we can do more while paying less in taxes, and when we vote for people who base their policies on that premise without a realistic plan for doing it, we deserve what we get.

    If the pension had invested very conservatively, their actuaries would have adjusted the assumed rates of return, possibly also requiring significantly larger contributions by the city to provide the other benefits provided in the pension plan. And the the city would have had to deal with the problem (both of retention of senior officers and firefighters and funding the traditional pension) instead of kicking the can down the road. Voters would have revolted at any solution to the problem (increasing taxes, reducing police and fire services, etc.), so we made the choice easy for the city council members who were in the know. And the police and fire representatives on the pension board, who actually controlled the decision making, probably assumed: 1) they are senior and most of the benefits of the DROP accounts go to them and their buddies (i.e. senior officers and firefighters), who will cash out before these problems are revealed; 2) the good times will go on forever, their “experts” aren’t telling them any different, so why worry (i.e. the thought process of most of us every time the economy is good); and 3) the city politically will be stuck trying to make good on the pension if things get really bad (as they have), so they don’t think they are screwing over the younger officers and firefighters.

    In short, it’s all short term thinking. So how do we fix this? No idea. How do we prevent it from happening again? Voters have to base their decisions on the long term rather than accepting short term benefits without questions.

    • TargetThe Narcissist

      wrong. there is no fixing a ponzi scheme. defined benefits are sanctioned ponzi schemes that everyone else would go to jail for.

      • If this happened anywhere in the real world, the private sector, ala Bernie Madoff, the officers in charge would be in prison. I would suggest the pension fund officers in charge of these funds not only breached a civil fiduciary duty to the fund, but also engaged in criminal fraud. I would expect to see some form of kickbacks/money laundering back to the fund managers, or some other financial connection to the fund managers and the “exotic” investments they “invested” in. These “investments” do not make any sense; and no reasonable or prudent pension fund official would engage in such behaviour.

        • TargetThe Narcissist

          that’s the problem, at least when i was in the actuarial field, the actuaries fall through a “loophole”, they have no fiduciary duty. the only duty they have is to the society of actuaries, it doesn’t enforce anything, its like a club not an oversight body.

          there is no accountability nor fiduciary duty to the public. at all, not at that level, the high ups that know its all a ponzi scheme.