Bloomberg’s David Evans has authored a disturbing piece on the state of public pension funds and their future prospects: Hidden Pension Fiasco May Foment Another $1 Trillion Bailout.

The article deals in some depth with questionable practices such as issuing pension bonds to cover up fund shortfalls. All too often, the assumptions that underly these bond issues are ludicrously optimistic.

The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that [...]

Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent.

The Chicago Transit Authority…

concluded it could borrow $1.9 billion, paying an interest rate of 6 percent to bondholders, and invest the proceeds to receive its expected rate of return of 8.75 percent. Such an annual return would add $52 million a year to bolster the fund. [...] Since the bond sale, the authority has held the money as cash, earning 2 percent.

In New Jersey…

While the state pays pension bondholders a fixed 7.64 percent interest rate, the fund has earned 4.8 percent annualized since the bond sale…

Google news reveals even more state, county, and local jurisdictions encountering pension fund problems. Pretty clearly this problem will have a huge impact on our already deteriorating economy.

A full read of the Bloomberg article is a must.