Municipal Pensions Often Worse off than the State's in Being Under Funded, But Higher Risk May be the Answer

Think the State Pensions are a problem [ they are, and remain so ], then wait till you see the exploding debt bomb laying inside municipal pensions. Last year's study by the IL Municipal League show many communities around Illinois are woefully under funded, when looking at the future liabilities of their pensions.

One source notes one big problem in trying to get caught up, are the restrictions on what the pension funds can be invested in. With interest rates at such low levels currently, the overly conservative approach to pension investments is locking up money that could be earning much more in the markets. But instead of allowing the pension funds to grow on market returns, municipal retirement funds are frequently tied up earning paltry sums in CD type investments.

While market's have risk, recall that the 40-percent market fall of 2008, was followed by a 60-percent rise in 2009. Now, that 60% was from a lower base, so we're still not back to where we were in 2007. But one either believes in the long term future of America, or you don't. If we're to have any chance of catching up in funding pensions at the local level -- there's going to have to be some higher level of risk taking than sitting on extremely low rates of return.

In fact, by being overly cautious in trying to protect the amount originally invested, we're only guaranteeing a dismal rate of return, and a guaranteed failure to meet the future cost of the promised pension benefits.

And when the market returns don't help you catch up -- because the funds aren't in the market -- the only way to catch up is to continue to break city budgets by forcing higher and higher contributions from the communities general revenue funds. The result there is what we're seeing today -- broken budgets, cutbacks in services, layoffs, and no hope in sight of ever catching up.

Investing in markets is not the same as going to a casino, or betting on the horses. Just a bit higher risk, can also mean higher returns. It's one way to address our local pension under funding.