When Prichard, Alabama ran out of pension money in 2009, it simply stopped sending checks to its 150 retired workers, even though the town was breaking a state law that requires municipalities to pay in full. This is not a normal situation, but it is a reminder that pension obligations can reach a point where cash-strapped cities are faced with a nightmarish choice: Do they continue to pay retirees or do they continue to provide basic services, like police and fire? From the NYT:
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."
But can a city filing for bankruptcy protection legally scrap long-standing pension agreements? No one seems quite sure. From the WSJ:
Legal and municipal-finance experts say rising pension costs, combined with dwindling state and federal aid, could push more cities to follow Prichard's lead, or at least raise the prospect as possible leverage in contract negotiations with public workers. "Right now we are looking at a major squeeze on municipalities and I would fully expect more cases to be filed than traditionally have been," said David Skeel, a professor at the University of Pennsylvania Law School who focuses on bankruptcy law. Mr. Skeel said the question of whether a municipality can cut benefits to current retirees is a "big issue" emerging from the smattering of recent cases in Chapter 9, which provides a route for municipal bankruptcies.
Beyond the financial aspect of a Chapter 9 filing is the politics. L.A., like other major cities, currently finds itself with serious pension shortfalls, and the outlook over the next four years is even bleaker. Yet, no elected official wants to even mention the word bankruptcy because it could be career suicide. From my Los Angeles magazine article on the subject:
L.A.'s overloaded retirement program is putting a stranglehold on municipal finances, and while many elected officials wish the thing would just go away, it won't. Simply put, the city is committed to paying way more in pension benefits than it can afford, a gap that's expected to widen during the next several years. For now, roughly one out of six dollars in L.A.'s general fund--the operations part of the budget--goes toward paying pensions. By 2014, the amount could easily be one out of three. When so much money is required for retirees, less money is available for libraries, parks, trash pickup--perhaps police and fire services, too. The worst-case scenario would involve massive layoffs, crippling service cuts, significantly higher taxes, and debt levels running into the billions of dollars.