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Another sign public pension funds may be overleveraged

August 23, 2016

Every morning at Truth in Accounting, we put together a summary of news called “The Morning Call.”

This morning, we had an interesting and informative article from Kentucky, by John Cheves of the Lexington Herald-Leader.  It was titled “Legislators win; state employees, teachers lose in pension report.”

Cheves described recent results in several public pension funds in Kentucky.  It caught my eye because he drew attention to how relatively poorly-funded plans were involved in riskier investment strategies, and also had lower returns last year than the “safer” plan (for judges and legislators).

This is consistent with a concern I’ve had for a while now – how conditions in public pensions tend to echo those before the savings and loan crisis really began to blossom and boil in the late 1980s.

Back then, regulators allowed many effectively-insolvent S&Ls to stay open, with aid of less-than-truthful accounting.  This helped unleash a wave of risk taking and other less-honorable behavior to multiply the costs of resolving the S&L crisis.

Let’s hope we aren’t facing a similar set of issues in public finance, today.

Cheves’ article caught my eye for another reason.  The “safer” fund has about three-fourths of its portfolio invested in equities.  Not T-bills.  Equities.

Granted, pension plans are touted to have "long-term horizons" and everything.  But ...


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