Prichard, Alabama, Finally Defaults on Pensions

This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.

Then Prichard did something that pension experts say they have never seen before: It stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

Prichard stands as a warning to cities like Philadelphia and states like Illinois, whose pension funds are under great strain: If nothing changes, the money eventually does run out, and when that happens, misery and turmoil follow.

The declining, little-known city of Prichard is now attracting the attention of bankruptcy lawyers, labor leaders, municipal credit analysts, and local officials from across the country. They want to see if the situation in Prichard, like the continuing bankruptcy of Vallejo, California, ultimately creates a legal precedent on whether distressed cities can legally cut or reduce their pensions, and if so, how.

“Prichard is the future,” said Michael Aguirre, the former San Diego city attorney, who has called for San Diego to declare bankruptcy and restructure its own outsize pension obligations. “We’re all on the same conveyor belt. Prichard is just a little further down the road.”

Many cities and states are struggling to keep their pension plans adequately funded, with varying success. New York City plans to put $8.3 billion into its pension fund next year, twice what it paid five years ago. Maryland is considering a proposal to raise the retirement age to 62 for all public workers with fewer than five years of service.

Illinois keeps borrowing money to invest in its pension funds, gambling that the funds’ investments will earn enough to pay back the debt with interest. New Jersey simply decided not to pay the $3.1 billion that was due its pension plan this year.

Colorado, Minnesota, and South Dakota have all taken the unusual step of reducing the benefits they pay their current retirees by cutting cost-of-living increases; retirees in all three states are suing.

Rule Number One

You can't pay what you do not have. The problem for Prichard is a declining tax base, loss of population, declining property values, and most importantly a pension plan that was amended by the Alabama legislature more than 15 times over the years.

Each modification increased the economic burden on the city, every Alabama city in fact.

Every state in the union needs to stop meddling in the affairs of cities. Cities in Illinois are in the same boat.

Prichard never would have made those promises except it was forced by the state. The question is what to do about it. Expect to see more sad cases like these end up in bankruptcy court. Promises were made that cannot be met. The state forced those promises on cities.

Higher taxes are not the answer. At this point, there is no answer that will satisfy anyone, let alone everyone.

If the court declares the city must pay up in full, perhaps the city should pursue dissolution. What I expect to happen is for the bankruptcy court and the city to agree to pay pensioners some minimum benefit, far less than what was promised.

It's only a matter of time before a major city decides to do what Prichard, Alabama, and Vallejo, California, did: declare bankruptcy to shed pension promises forced by state legislatures.