Alabama Town’s Failed Pension Is a Warning

Pub­lished: Thurs­day, 23 Dec 2010 | 4:39 AM ET
By: Michael Cooper and Mary Williams Walsh The New York Times
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.

Dar­ren Robb | Stone | Getty Images

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. Since then, Net­tie Banks, 68, a retired Prichard police and fire dis­patcher, has filed for bank­ruptcy. Alfred Arnold, a 66-year-old retired fire cap­tain, has gone back to work as a shop­ping mall secu­rity guard to try to keep his house. Eddie Ragland, 59, a retired police cap­tain, accepted help from col­leagues, bake sales and col­lec­tion jars after he was shot by a rob­ber, leav­ing him badly wounded and unable to get to his new job as a police offi­cer at the regional air­port. Far worse was the retired fire mar­shal who died in June. Like many of the oth­ers, he was too young to col­lect Social Secu­rity. “When they found him, he had no elec­tric­ity and no run­ning water in his house,” said David Anders, 58, a retired dis­trict fire chief. “He was a proud enough man that he wouldn’t accept help.” 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.” 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. No state or city wants to wind up like Prichard. Dri­ving down Wil­son Avenue here — a bleak stretch of shut­tered store­fronts, with pawn shops and beauty par­lors that oper­ate behind barred win­dows and signs warn­ing of guard dogs — it is hard to see ves­tiges of the Prichard that was a boom town until the 1960s. The city once had thriv­ing depart­ment stores, two the­aters and even a zoo. “You couldn’t find a place to park in that city,” recalled Ken­neth G. Turner, a retired para­medic whose grand­fa­ther pushed for the city’s incor­po­ra­tion in 1925. The city’s rapid decline began in the 1970s. The growth of other sub­urbs, white flight and then middle-class flight all took their tolls, and the city’s pop­u­la­tion shrank by 40 per­cent to about 27,000 today, from its peak of 45,000. As peo­ple left, the city’s tax base dwin­dled. Prichard’s pen­sion plan was estab­lished by state law dur­ing the good times, in 1956, to sup­ple­ment Social Secu­rity. By the stan­dard of other pub­lic pen­sion plans, and the six-figure pen­sions that draw out­rage in places like Cal­i­for­nia and New Jer­sey, it is not espe­cially rich. Its biggest pen­sion came to about $39,000 a year, for a retired fire chief with many years of ser­vice. The aver­age retiree got around $12,000 a year. But the plan allowed work­ers to retire young, in their 50s. And its ben­e­fits were sweet­ened over time by the state leg­is­la­ture, which did not pay for the added ben­e­fits. For many years, the city — like many other cities and states today — knew that its pen­sion plan was under­funded. As recently as 2004, the city hired an actu­ary, who reported that “the plan is pro­jected to exhaust the assets around 2009, at which time ben­e­fits will need to be paid directly from the city’s annual finances.” The city had already taken the unusual step of reduc­ing pen­sion ben­e­fits by 8.5 per­cent for cur­rent retirees, after it declared bank­ruptcy in 1999, yield­ing to years of dwin­dling money, mis­man­age­ment and cor­rup­tion. (A pre­vi­ous mayor was removed from office and found guilty of neglect of duty.) The city paid off its last cred­i­tors from the bank­ruptcy in 2007. But its cur­rent mayor, Ronald K. Davis, never com­plied with an order from the bank­ruptcy court to begin pay­ing $16.5 mil­lion into the pen­sion fund to reduce its short­fall. A lawyer rep­re­sent­ing the city, R. Scott Williams, said that the city sim­ply did not have the money. “The real­ity for Prichard is that if you took money to build the pen­sion up, who’s going to pay the garbage man?” he asked. “Who’s going to pay to run the police depart­ment? Who’s going to pay the bill for the street lights? There’s only so much money to go around.” Work­ers paid 5.5 per­cent of their salaries into the pen­sion fund, and the city paid 10.5 per­cent. But the fund paid out more money than it took in, and by Sep­tem­ber 2009 there was no longer enough left in the fund to send out the $150,000 worth of monthly checks owed to the retirees. The city stopped pay­ing its pen­sions. And no one stepped in to enforce the law. The retirees, who were not union­ized, sued. The city tried to block their suit by declar­ing bank­ruptcy, but a judge denied the request. The city is appeal­ing. The retirees filed another suit, ask­ing the city to pay at least some of the ben­e­fits they are owed. A medi­a­tion effort is expected to begin soon. Many retirees say they would accept reduced ben­e­fits. Com­pa­nies with pen­sion plans are required by fed­eral law to put money behind their promises years in advance, and the gov­ern­ment can impose puni­tive taxes on those that fail to do so, or in some cases even seize their pen­sion funds. Com­pa­nies are also required to pro­tect their pen­sion assets. So if a cor­po­rate pen­sion fund falls below 60 cents’ worth of assets for every dol­lar of ben­e­fits owed, work­ers can no longer accrue addi­tional ben­e­fits. (Prichard was down to just 33 cents on the dol­lar in 2003.) And if a com­pany goes bank­rupt, the fed­eral gov­ern­ment can take over its pen­sion plan and see that its retirees receive their ben­e­fits. Although some retirees receive less than they were promised, no retiree from a fed­er­ally insured plan in the pri­vate sec­tor has come away empty-handed since the fed­eral pen­sion law was enacted in 1974. The law does not cover pub­lic sec­tor work­ers. Last week sev­eral dozen retirees — one using a wheel­chair, some with canes —  attended the weekly City Coun­cil meet­ing, ask­ing for some­thing before Christ­mas. Mary Berg, 61, a for­mer assis­tant city clerk whose mother was once the city’s zookeeper, read them the names of 11 retirees who had died since the checks stopped com­ing. “I hope that on Christ­mas morn­ing, when you are with your fam­i­lies around your Christ­mas trees, that you remem­ber that most of the retirees will not be open­ing presents with their fam­i­lies,” she told them. The bud­get did not move for­ward. Mayor Davis was out of town. “Merry Christ­mas!” shouted a man from the back row of the fold­ing chairs. The retirees filed out. One woman could not hold back her tears. After the meet­ing, Troy Ephriam, a coun­cil mem­ber who became chair­man of the pen­sion fund when it was nearly broke, sat in his office and recalled some of the failed efforts to put more money into the pen­sion fund. “I think the biggest dis­ap­point­ment I have is that there was not a strong enough effort to put some­thing in there,” he said. “And that’s the rea­son that it’s hard for me to look these peo­ple in the face: because I’m not cer­tain we really gave our all to pre­vent this.”
This story orig­i­nally appeared in the The New York Times

January 21, 2011 · Jennifer · No Comments
Tags: , , , ,  · Posted in: Failed Pension Plans, FINANCIAL EDUCATION 101, NEW YORK TIMES

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