The stock market’s volatility continues to roil and slam retail investors’ portfolios. After last month’s ups and downs, the Dow continued its downward trajectory this week by dropping another 700 points.
While many focus on such dramatic plunges, there is a more obscure, almost hidden problem in the financial system: public employee pension funds across America are suffering extensive market losses and putting the retirements of the workers they are supposed to protect at high risk.
About half the states have pension plans that are 70% funded or much worse. And states can’t borrow or sell bonds to China to prop them up, according to a recent report on MarketWatch. It is estimated that in five years or so, some of those states will likely have to either cut their services, the equivalent of a state bailout, or they will need a federal bailout. And that’s a problem for all taxpayers.
The MarketWatch report, which draws many of its conclusions from a PBS documentary, The Pension Gamble, exposes the fact that the pension systems of many states are a ticking time bomb, especially Kentucky.
According to the article, the problems with Kentucky’s public pension fund have arisen from incompetent or poor management and hefty fees which have resulted in catastrophic losses. Kentucky Retirement Systems, known as KRS, has an estimated $36 billion deficit, according to the report.
It’s had an awful track record. Kentucky lost $1.2 billion in the 2001 dotcom bubble and another $2.8 billion in the 2008 financial crisis.
What happened? Gross mismanagement. The pension fund’s managers put money in exotic and risky investments like hedge funds and paid huge fees for the privilege of doing so. The state’s governors raided the pension fund money rather than raising taxes. Shockingly, at one point, only one member of the KRS had any investment management experience.
To say that this is taking a toll on pensioners is an understatement. “The pension benefit was a big deal,” said one Kentucky police officer. “I knew that after 20 years of a career, my wife and I would have health insurance and I would have some kind of pension.” Now he’s not so sure.
And Kentucky is not alone. Other states and their workers are clearly at risk. Perhaps the worst is the Public Pension Fund in Puerto Rico. Puerto Rico’s Employee Retirement System is over ninety percent unfunded and has a debt of over $45 billion. Making matters worse, much of the now defaulted debt was sold to retail investors.
Investors have filed numerous investment fraud lawsuits to recover losses on those Puerto Rico pension bonds.
It’s as clear as day: America’s public employee pensions are a ticking time bomb. The U.S. public pension sector must wake up and work on a solution with their legislators and federal agencies so that they don’t become the next Kentucky. Or even worse, the next Puerto Rico.
Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers. The firm may represent investors in cases against companies mentioned in this blog. Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments. https://www.puertoricobondfundsattorney.com/en/