For an interesting analysis of the hidden dangers of public pension funds, see the article by Andrew G Biggs in the WSJ of Monday, 12/16/13.  Mr. Biggs does an interesting analysis comparing funding levels and investment risks of public pension funds from approximately 1975 to present time.  He concludes that public pension funds are roughly 10 times more risky to tax payers and government budgets today than in 1975.  He cites some interesting facts (which I was able to generally independently confirm from other sources) First, in 1975, state and local pension assets were equal to approximately 45% of annual government expenditures.  Today, pension assets are 143% of government expenditures.  Pension fund assets have grown not because pension funds are better funded but because public workforces have aged and the number of retirees has grown dramatically. Today, there are approximately 1.75 active employees for every retiree being supported by public pension funds.  Just 40 years ago, there were 7 active employees for every retiree.  Mr. Biggs also analyzes general investment strategies for today’s pension funds and notes how that has changed over the decades.  The safest investment, US Treasury Bonds, yielded 5.9 % in 1975, 14.8% in 1980, 6.5% in 1985.  Today the yield hovers at 0.1%. Because bond yields are so low, pension funds have much greater risk built into their investments to obtain an average 8% return per year.

Mr. Biggs concludes that pension funds managers will have to push for much greater funding from their member government entities, employees, or probably both .

My conclusion is that his analysis comes as no great surprise. We know that throughout California, cities and counties are required to devote an ever increasing percentage of their budget to supporting their pension obligations.  This leaves less money available to hire new staff, let alone give wage or benefit increases to the existing staff.  Moreover, we are constantly reminded that if a pension fund has a bad investment year, it will look to the employer and employee to make up the difference.  The reality for current California public employee association members is that less money will be available for their wages and benefits while more gets diverted into pension funds.