Remember the term "too big to fail?" It was used to justify bailouts of various companies, banks and government institutions during the 2008 financial collapse.
We've heard the same verbiage tossed about in conjunction with various public sector pension plans. As with those enterprises that were not allowed to fail, it is assumed that public pensions will somehow be preserved--the impact of their collapse would be too great, both politically and economically.
But if you don't think a public pension plan can't go under--think again. Two years ago, there was an event in Prichard, Alabama that set off alarm bells among pension managers and public officials. After years of under-funding, the pension fund for retired municipal workers ran out of money. And, with the city in economic extremis, officials did something once considered unthinkable: they stopped sending out monthly retirement checks.
The situation in Prichard is extremely unusual — the city has sought bankruptcy protection twice — but it proves that the unthinkable can, in fact, sometimes happen. And it 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.
It is not just the pensioners who suffer when a pension fund runs dry. If a city tried to follow the law and pay its pensioners with money from its annual operating budget, it would probably have to adopt large tax increases, or make huge service cuts, to come up with the money.
Current city workers could find themselves paying into a pension plan that will not be there for their own retirements. In Prichard, some older workers have delayed retiring, since they cannot afford to give up their paychecks if no pension checks will follow.
So 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, Calif., 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.”
As the Times reports, Prichard once had a fairly standard municipal pension plan; employees paid in 5.5% of their salaries and the city contributed 10%. But, as payouts began to exceed new contributions, the plan started running out of money. And when the pension fund was exhausted, the city stopped sending out checks. Alabama law requires that public pensions be funded--and paid--but no one has bothered to enforce the law.
Little wonder; Prichard is in bankruptcy for the second time in less than 15 years. Even if the state tried to force the city to pay up, no one is sure where the money would come from.
One final note: Prichard's municipal pension plan covered only 450 employees. But, as the city's population dropped (and tax base shrank), Prichard was unable to make the required contributions to keep the fund solvent. As early as 2004, experts warned the city's retirement fund would run out of money within five years.
Their prediction was spot-on. Did we mention that the city's unfunded liabilities were relatively modest (millions versus billions of dollars), but Prichard was still unable to pay its retirees. Wisconsin unfunded pension liabilities currently top $3 billion. By the size of other state shortfalls (read: California), the Badger State is a piker.
Too big to fail (without reform)? Hardly.
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