Thomas Donlan explains in the latest issue of Barron’s why Detroit’s bankruptcy could prove helpful because of its “ray of light illuminating the management and reporting of state and local government pension funds.”

From the giant bellwethers in California to the littlest sheep following them, many public pension funds and their managers have failed to invest enough to pay pensions with the returns, taken foolish chances with their beneficiaries’ money, and hidden the results with dubious financial reporting.

Detroit’s pension funds reported in 2007 that they were fully funded. After four years of recession, the funds said that they were still more than 80% funded in 2011—a mere $644 million shy of the $3.2 billion needed in the investment fund for it to be able to pay all benefits promised to that point.

Then a new administration hired new actuaries and auditors, who said the city pension funds were $3.5 billion short of the sum needed to be fully funded. The new deficit was part of an $18 billion total of liabilities that drove the city to file for reorganization under Chapter 9 of the bankruptcy code.

What accounted for Detroit’s sudden pension gap? Accounting. Officials wanted to promise municipal workers more comfort in retirement than the city wanted to pay for. Financial advisors helped them.

Detroit’s advisors had forecast that the city’s pension investments could earn 8% per year over the next 40 years. A high estimate of investment returns holds current pension-contribution costs low, and that meant that the city could spend more of its tax money on things other than pension contributions.

The new actuaries were a bit more cautious. They reduced the estimated return on investments, but only to 7%. If they used a lower return, they would be reporting an even bigger hole in the funding.

Detroit was not alone in expecting an 8% return on its pension investments. The rate is only slightly above the 7.75% average of municipal and state estimates, according to the National Association of State Retirement Administrators.

Corporate investment estimates are somewhat more restrained, but there are very few pension funds of any kind anywhere in the U.S. that use a rate of return as low as the 4% rate on a blend of nearly risk-free Treasury securities. Few are even willing to consider the 5.5% corporate-bond rate suggested by Moody’s, which Barron’s also used in its review of state finances last month.

For a government using an 8% investment rate estimate to convert to 5.5% would raise its unfunded liability by about a third and double its required annual contribution.