When you get down to it, the private equity and hedge fund industries were built on the backs of millions of hard-working folks earnings civil servants wages--police officers, teachers and others. Obviously, the main source of funding for many alternative investment firms were working the public pensions.  

State governments are falling behind in their race to cover the retirement benefits they have promised, to the tune of $750 billion. Local pensions are likely in the same boat. (Corporate pensions, the ones that still exist, are faring a lot better. Still, the funded ratio dropped last year to below 100 percent.) The GAO has found that the percentage of public pensions that are severely underfunded has risen to 40 percent.  

The kicker is that, according to the Washington Post, a lot of pensions use accounting methods that make the problem seem less severe. Many would argue that they use really rosy return assumptions.  

So you've got to wonder what the answer is? I really don't see an obvious one. You can't just snap your fingers, change policies and expect everything to work out. I applaud the PBGC decision to allocate more to equities over the next decade or so. But is chasing the returns the answer? You can be a great hedge fund and private equity fund picker, but the returns aren't likely to bridge the gap meaningfully. There might have been a time when the prospect of better returns would have made a difference, but for a lot of pensions, even significantly higher returns won't matter all that much.

So at some point, we'll have to acknowledge reality, and have a serious national discussion about slashing benefits. Wall Street is no longer the answer; we're way beyond that now. - Jim