By James Nash – Jul 25, 2011 9:01 PM PT

Overseers of 10 public pension funds with combined assets topping $1 trillion joined a call for a deal on raising the U.S. debt ceiling, warning that a failure by leaders in Washington would have “devastating” consequences.

The nation needs the ability to borrow more to avert default, while President Barack Obama and top lawmakers should work to reduce the deficit over the long term, the pension chiefs said in an open letter to Obama and Congress.

The funds including the California Public Employees’ Retirement System, the nation’s largest public pension, serve 7.7 million active and retired workers in California, Florida, Colorado, New York City, Maryland, Ohio and North Carolina. They joined a group including asset managers such as BlackRock Inc. and Legg Mason Inc. that earlier made public a similar call for an agreement to head off a U.S. default.

“America is now a debtor nation and it must show the world that the nation’s word is its bond,” the pension chiefs including Calpers said in one of the letters released yesterday. “It is critical that the debt ceiling be raised to avoid a default,” the group said. “The huge budget deficit, both current and long-range, is the real problem.”

Calpers, with $240.1 billion in assets, reported July 18 that it had earned almost 21 percent on its investments in the 12 months through June, its largest gain in 14 years.

‘Terrible’ Consequences

A U.S. debt default would set off a “terrible and swift” reaction in financial markets, Joe Dear, the chief investment officer of Sacramento-based Calpers, said July 18.

“The fact that a pension fund of our size has to seriously contemplate a default by the U.S. government on its debt obligations would have been inconceivable and incomprehensible to me a couple of years ago,” Dear said that day in an interview outside a Calpers board meeting in Petaluma, north of San Francisco. “We certainly hope the policy makers will find a way to protect the credit rating of the U.S. because it is in everybody’s interest.”

Negotiations have been stalemated between the Obama administration and congressional Republicans on raising the $14.3 trillion debt limit. Ohio Republican John Boehner, the speaker of the U.S. House of Representatives, and Senate Majority Leader Harry Reid, a Nevada Democrat, have offered competing plans to increase the ceiling while reducing spending.

Default Threat

If the parties are unable to reach agreement by Aug. 2, the U.S. government may default because it no longer will be able to pay its bills and refinance maturing debt. Such an outcome would cost the government its top-rated credit score, threaten to upend financial markets and push up interest rates.

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