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By CYRIL TUOHY, managing editor of Risk & Insurance®

Marsh & McLennan Inc.'s $500 million malpractice settlement with Alaska retirement authorities last month may tempt other cash-strapped pension funds to ask, "Why not us?"

With many worst-case scenarios coming to pass, state and local governments are looking to blame financial and benefits advisors like MMC subsidiary Mercer, according to one benefits broker with Aon Consulting.

Such seems to be the case in Alaska. Alaska Attorney General Dan Sullivan said in a statement that the unfunded liabilities (which were approaching $9 billion at the time of the settlement) faced by the Alaska Retirement Management Board (ARMB) were caused by stock-market declines, healthcare cost increases and negligence on behalf of Mercer.

ARMB sued Mercer for malpractice, breach of contract and unfair trade practices in advising Alaska on the management of two retirement funds between 1992 and 2004.

Alaska authorities denied they were at fault.

Mercer, in a statement, denied liability in the case. Insurance will cover $100 million, or 20 percent, of the $500 million settlement, Mercer also said.

The settlement was announced June 11. The case, which began in 2007, was scheduled to go to trial in July. It was the second such settlement for Mercer in 13 months. Last May, as part of a separate complaint, Mercer settled allegations brought against it by Milwaukee County for $45 million related to beefing up employee pensions approved by county officials in 2000.

Could Alaska and Wisconsin serve as an example to other public entities?

Consider how vast the sea of red ink faced by state and local government pension funds:

-- In New Jersey, the unfunded liability for public employee pensions is as high as $56 billion, more than three times the $18 billion included in a bond offering by the state three years ago.

-- Early this year, in an interview with the Financial Times, Orin Kramer, chairman of New Jersey's pension fund, said the deficit facing U.S. public pension funds will grow to $2 trillion.

-- The Illinois pension plan has unfunded liabilities of nearly $80 billion, according to an article posted Jan. 5, 2010, on Seeking Alpha, a Web site covering pension funds and mutual funds.

-- One of every $3 spent by the Los Angeles Unified School District funds teacher pensions, according to an article published in the Boston Globe in 2008. The same article also cites a $4.5 billion bond issue to cover unfunded pension liabilities for 33,000 Philadelphia city employees.

-- The city of Vallejo, Calif., in 2008 declared bankruptcy, its finances collapsing under the weight of police, fire and local employee contracts.

In many ways, the hundreds of state and local governments around the country have only themselves to blame as they put off properly funding their pension plans, according to many retirement benefits experts.

During boom times, when pension-fund returns were hovering in the high single digits or higher, it was easy for local governments to mask their unfunded liabilities.

The math changed dramatically in recent years as funds remained flat or lost money and the financial crisis underscored the magnitude of the pension shortfalls. Local and state governments, meanwhile, continued to honor their obligations. According to an estimate in 2008 issued by the National Conference of State Legislatures, recession-fueled budget crises were expected to cause $97 billion in shortfalls nationwide over the next 18 to 24 months.

July 6, 2010

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