U.S. public pension funds don’t have nearly enough money to pay for all their obligations to future retirees. A growing number are adopting a risky solution: investing borrowed money.

As both stock and bond markets struggle, it’s a precarious gamble.

More than 100 state, city, county and other governments borrowed for their pension funds last year, twice the highest number that did so in any prior year, according to a Municipal Market Analytics analysis of Bloomberg data. Nearly $13 billion of these pension obligation bonds were sold last year, which is more than in the prior five years combined.

The Teacher Retirement System of Texas, the U.S.’s fifth-largest public pension fund, began leveraging its investment portfolio in 2019. Next month, the largest U.S. public-worker fund, the roughly $440 billion California Public Employees’ Retirement System, known as CalPERS, will add leverage for the first time in its 90-year history.

While most pension funds still avoid investing borrowed money, the use of leverage is spreading faster than ever. Just four years ago, none of the five largest pension funds used leverage.

Investing with borrowed money can juice returns when markets are rising, but make losses more severe in a down market. This year’s steep slump in financial markets will test the funds’ strategy.

It’s too soon to tell how the magnified bets are playing out in the current market, as funds won’t report second-quarter returns until later in the summer. In the first quarter, public pension funds as a whole returned a median minus 4%, according to data from the Wilshire Trust Universe Comparison Service released last month. A portfolio of 60% stocks and 40% bonds—not what funds use—returned minus 5.55% in the quarter, Wilshire said.

While leverage could pay off if markets rebound, the losses it risks could affect not just the pension funds but also the state and local governments that stand behind them—and ordinary citizens. When public pension funds’ investment returns fall short, governments are primarily responsible for taking up the slack, pressuring them to find the money by cutting other spending or by raising revenue from steps such as increasing taxes.

Public pension funds are “operating more like hedge funds in some cases,” said Joseph Brusuelas, chief economist at accounting firm RSM. “They’re treading on very risky footing doing things like this.”

Pension funds historically invested very conservatively, favoring relatively low-yielding fixed-income investments. CalPERS had all its money in bonds until 1967.

Funds suffered significant losses in the 2000-02 dot-com bust and the 2008 financial crisis. Those setbacks, coupled with years of insufficiently funded benefit promises, left the funds as a whole well over a trillion dollars short of the asset level they ought to have. The level is dictated by a formula that includes their obligations and their targeted investment returns.

In some cases, workers’ unions have secured sizable payouts for retirees that can keep pension funds paying out full or significant benefits to their members for many years.

Public-sector retirement plans tend to carry higher and more unpredictable costs because they offer defined benefits. While private employers have generally shifted to defined-contribution plans with payouts based on market returns, state and local governments still largely offer their employees pension checks calculated based on salaries and years of service.

Even the longest equity bull market in history—a roughly 11-year run through early 2020 in which the S&P 500’s 18% annual return more than tripled its historic average—didn’t close the gap between pension funds’ obligations and assets. In 2021, public pension plans had an average of just $0.75 for every dollar they expected to owe retirees in future benefits, according to data from the nonprofit Center for Retirement Research at Boston College.