The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn't have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent.
The CTA, which manages the second-largest public-transit system in the United States, had to hope for a huge contribution from the Illinois Legislature. That wasn't going to happen.
Then the authority found an answer.
"We've identified the problem and a solution," said CTA chairman Carole Brown on April 16, 2007. The agency decided to raise money from a bond sale.
A year later, it asked Illinois Auditor General William Holland to research its plan. The state hired an actuary, did a study, and, on July 17, concluded that the sale of bonds would most likely result in a loss of taxpayers' money.
Thirteen days after that, the CTA ignored the warning and issued $1.9 billion in bonds. Before the year ended, the pension fund was paying out more to bondholders than it was earning on its new influx of money. Instead of closing its funding gap, the CTA was falling further behind.
Public pension funds across the United States are hiding the size of a crisis that has been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.
The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.
The misleading numbers posted by administrators of retirement funds help mask this reality: Public pensions in the United States had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.
That lack of funding explains why dozens of retirement plans in the United States have issued more than $50 billion in pension-obligation bonds during the last 25 years - more than half of them since 1997 - public records show.
The quick fix for pension funds becomes a future albatross for taxpayers.
The public gets nothing from pension bonds - other than a chance to at least temporarily avoid paying for higher pension-fund contributions. Pension bonds portend the possibility of steep tax increases. By law, states must guarantee debts of public pension funds.
With the recession that started in December 2007, cities and states are closing huge deficits by cutting services and firing employees. The economic downturn gives state legislatures another reason to cut back on funding pensions.
Government retirement plans nationwide do not calculate their shortfalls based on market values of their assets and liabilities, said Orin Kramer, chairman of the New Jersey State Investment Council, which oversees that state's pension fund.
Fund accountants resort to a grab bag of tricks to get by. They set unrealistically high expected rates of return to reduce governments' annual contributions. And they use smoothing techniques to paper over investment reverses so they make losing years look like winners.
Accountants do that by averaging gains and losses, usually over a five-year period - sometimes for as long as 15 years of investment returns.
That can delay governments' catching up with losses for more than a decade.