The cover story of Barron's is on public pensions, an issue I have been railing about for years, and heatedly so for several months. Please consider The $2 Trillion Hole.

LIKE A CALIFORNIA WILDFIRE, populist rage burns over bloated executive compensation and unrepentant avarice on Wall Street.

Deserving as these targets may or may not be, most Americans have ignored at their own peril a far bigger pocket of privilege -- the lush pensions that the 23 million active and retired state and local public employees, from cops and garbage collectors to city managers and teachers, have wangled from taxpayers.

Some 80% of these public employees are beneficiaries of defined-benefit plans under which monthly pension payments are guaranteed, no matter how stocks and other volatile assets backing the retirement plans perform. In contrast, most of the taxpayers footing the bill for these public-employee benefits (participants' contributions to these plans are typically modest) have been pushed by their employers into far less munificent defined-contribution plans and suffered the additional indignity of seeing their 401(k) accounts shrivel in the recent bear market in stocks.

Most public employees, if they hang around to retirement, can count on pensions equal to 75% to 90% of their pay in their highest-earning years. And many public employees earn even more in retirement than their best year's base compensation as a result of "spiking" their last year's income by working ferocious amounts of overtime and rolling in years of unused sick and vacation days into their final-year pay computation.

THE PROSPECTS ARE BLEAK for many state and local governments as a result of all this. According to a survey last month by the Pew Center on the States, a nonpartisan research group, eight states -- Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia -- lack funding for more than a third of their pension liabilities. Thirteen others are less than 80% funded.

The more likely outcome is dramatic cuts in essential services, such as police and fire protection, health spending, education and infrastructure improvements, in order to cover ballooning pension payments. State and municipalities, after all, must do something: Most have a legal obligation to pay out earned pension benefits. And some don't even have the courage to switch new teachers, bureaucrats and police to a defined-contribution system, to prevent the funding problem from worsening as time rolls on.

THUS, MORE DEBT DEFAULTS and bankruptcy filings probably lie ahead, unsettling the $2.7 trillion municipal-bond market. The possibility of taxpayer revolts and likely insolvencies has shaken some investors' confidence in general-obligation bonds -- those backed by the "full faith and credit" of the states or localities. Once the gold standard for munis, GOs are under a cloud in financially troubled areas.

The size of the legacy-pension hole is a matter of debate. The Pew report puts it at $452 billion. But the survey captured only about 85% of the universe and relied mostly on midyear 2008 numbers, missing much of the impact of the vicious bear market of 2008 and early 2009. That lopped about $1 trillion from public pension-fund asset values, driving down their total holdings to around $2.7 trillion.

Other observers think the eventual bill due on state pension funds will be multiples of the Pew number. Hedge-fund manager Orin Kramer, who is also chairman of the badly underfunded New Jersey retirement system, insists the gap is at least $2 trillion, if assets were recorded at market value and other pension-accounting practices common in Corporate America were adopted.

Finance professors Robert Novy-Marx at the University of Chicago and Joshua Rauh of Northwestern University asserted in a recent paper that the funding gap for state pension plans alone might exceed $3 trillion, in part because state funds are using an unrealistic long-term annual investment return of 8% to compute the present value of future payments to retirees, as is permitted in government standards for pension-fund accounting.

MAKING THE STATE AND local pension problem all the more trying is that government entities can do little to wriggle out of their exposure, even if spending on essential services is threatened. The constitutions of nine states, including beleaguered California and Illinois, guarantee public-pension payments. And most other states have strong statutory or case-law protections for these obligations. "One shouldn't be surprised by this, since state legislators, state and local judges and the state attorneys general are beneficiaries of the self-same public pension funds that they've done so much to promote and protect," Orin Kramer notes wryly.

True, a dozen or so states, including New York, Nevada, Nebraska, Rhode Island and New Jersey, are attempting reforms such as raising retirement ages, cutting pension-benefit formulas, boosting employee contributions, curbing income "spiking" and partially switching employees to less costly defined-contribution plans. But these changes affect almost exclusively new employees and do little to solve the existing funding gap.

Populist Rage

That was page one of a three page article. I encourage everyone to read it all.

I am very grateful to Barron's for the opening sentence "LIKE A CALIFORNIA WILDFIRE, populist rage burns over bloated executive compensation and unrepentant avarice on Wall Street."

I get a lot mail suggesting I have been giving too much attention to unions and pensions. In reality, I have not been giving enough attention to the issue, or at least bloggers in general haven't.

There are a dozen blogs covering every aspect of the housing bubble, bailouts, and wall street salaries. Yet I am aware of no other major blogs covering the enormous pension problem in depth. Moreover, I have hardly shied away from bailout fraud, calling for the indictment of Geithner, Lewis, Bernanke and others on numerous occasions. Here is a list.

March 2, 2010: Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says "Don't Trust Your Government"

January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP

January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels

January 26, 2010: Questions Geithner Cannot Escape

January 07, 2010: Time To Indict Geithner For Securities Fraud

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl"

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

Who Is Covering The Pension Issue?

I recently spoke with Barry Ritholtz at the Big Picture blog about unions and his reply was something to the effect of ... don't you realize how much unions have shrunk over the years?

I explained about public pensions and their problems and received a comment "Mish, it's just not my issue."

Indeed none of the other top blogs give this critical issue even a smattering of a glance.

The Pension Tsunami

Those who want to follow the pension crisis daily need to subscribe to Jack Dean's Pension Tsunami feed (click on sign up in the upper right). Jack Dean does not write a blog, rather he posts links to every article that comes his way on the subject.

Jack told me a couple years ago, he would only see a few stories a week. Now there are a dozen stories a day, typically in local newspapers. However, there is seldom a major story in a national publication like what just appeared in Barron's.

Steven Greenhut's Plunder!

I encourage you to read Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation by Steven Greenhut.

Plunder! is a fantastic book. I finished it weeks ago, but have not had time yet to do a review. I will. In the meantime I assure you it is well worth a read. It will open your eyes as to what is happening and why in regard to public unions.

Plunder! is now on my recommended reading list on the left.

Public Unions and Pensions are the #1 Issue Affecting States

Public union salaries and pension promises are the number one budget issue affecting cities and states. $2-3 trillion is a lot of money, and that is how deep in the hole public pensions are.

Cities at least have the option of declaring bankruptcy, states don't. However states can default, and unless something is done soon, some state like Illinois or California is going to decide that is the proper thing to do.

And even if states don't default, many cities and counties will. It's just a matter of time, and probably sooner rather than later. Yet all the focus by hyperinflationists is on a US default which may never happen.

Forget about hyperinflation because jobs are not coming back, and cities and counties will be defaulting on debt. Defaults, by definition are anything but inflationary.

Speak Out, If You Don't, Who Will?

To see what others are doing please read ...

• Inspired Reader Stands Up To Union Mobs
• God Bless Justin In Albany; Won't Be Bullied In Phoenix; You Can Speak Out Too!

Another action you can take is to vote against any candidate from any party, backed by public unions.

One thing is certain: The longer we put off addressing public union salaries and public union benefits, the worse off we will be. If you don't speak up, and take action who will?