SPRINGFIELD -- Losses at the city's police and firefighters' pension fund have thrown this city into its worst budget crisis in decades. The city wants to slash spending on health care, parks and roads. Skunk trapping may have to go, too.

One of the pension fund's problems: It's an investor in a $1.1 billion speculative office skyscraper rising in New York's Times Square in the middle of a commercial-property bust.

That folks in places like Springfield wound up owning a piece of one of the biggest real-estate gambles in America is indicative of how widely today's commercial-property collapse has spread. Some in the industry believe the damage will be deeper than the previous crash of the early 1990s.

The sector's woes are considered a major threat to economic recovery. There is some $3.5 trillion in commercial-real-estate debt outstanding -- more than the amount for auto loans, credit cards and student loans combined. And the default rate is rising sharply.

The police and firefighters of Springfield are one of 272 pension funds, foundations and endowments that invested in a pooled real-estate fund managed by Prudential Real Estate Investors, a unit of Prudential. The insurance giant's fund is the major backer of an office building in Manhattan called 11 Times Square. That building is the largest of $2.6 billion in commercial projects across the United States for which the Prudential fund has committed to pay over the next three years.

Prudential has marked down the $12.4 billion fund backing 11 Times Square by 32 percent from one year ago. Fund managers tell investors to expect as much as 20 percent in further write-downs this year, according to documents reviewed by the Journal. Investors have lined up to take $1.5 billion out of the fund but Prudential has stopped funding redemption requests, according to fund documents.

"We wanted a small portion of our portfolio in real estate, but we also wanted something that was as safe as possible in terms of the investment risk," said Assistant City Manager Evelyn Honea, president of the Springfield firefighters and police officers pension fund board, explaining its decision in January 2007 to invest with Prudential.

Honea says the investment is a long-term one.

"Would they have invested in a building of that size in New York if they had seen this coming? Probably not," she said about 11 Times Square. "But hindsight's 20-20 vision, unfortunately."

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