Alabama Town’s Failed Pension Is a Warning

[harvey007]

Source: NY Times

PRICHARD, Ala. — 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.

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“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.”

Read more: http://www.nytimes.com/2010/12/23/business/23prichard.html

[Creative]

1. Governments set themselves up for this, but if the heed Aguirre's advice,

there will be total collapse of the bond market and cities would no longer be able to borrow. Subsequently, they would not be able to fund major capital improvements.

[Downwinder]

2. Works for Corporations, why not Cities?

[Creative]

5. Cities are in fact, incorporated, but unlike a for profit business, they do not produce

any commodities of value. Thus, they would have no basis on which to borrow.

[Blue_Tires]

3. that's what years and years of bad government earn you

if i had been paying into a pension fund for my entire career just to have it yanked, i don't know how i wouldn't start looking for a 'second amendment solution'...

[Downwinder]

6. You cut expenses and try to exist on Social Security. n/t

[PoliticAverse]

7. Not all State and Local employees are covered by Social Security

http://www.ssa.gov/pubs/10051.html

[shanti]

8. but

what if you're not of age for SS? i'm retiring next week at 55, the earliest i could do so. however, i still feel a bit jittery about the future :scared: if my pension gets yanked before SS, i am royally screwed.

[Downwinder]

9. At 57 you get considerations on SSI. Add in a debilitating disease

and it really gets scary.

[PoliticAverse]

4. Unfunded and underfunded pensions are a timebomb.

Many governments and corporations have done the same thing.

[dixiegrrrrl]

10. For the record, on Pritchard.

It has been a struggling city for many years.
Declared bankruptcy in 1999 and in 2009.
The per capita income for the city was $10,626, pop. is around 27,000 and it is a high crime, high drug area.

The Mobile Mental Health Center main building is close by the neighborhood, and had to close down evening sessions in
1995 due to gunfire and drive bys in the area.( I was working there then).

So the money problems are nothing new, but definitely predicted, esp. in the kind of depression this country is having.

[OrwellwasRight]

11. Why is this not LBN? nt.

[Pale Blue Dot]

13. I have no idea. Seems funny. nt

[OrwellwasRight]

15. It's timely and relevant and not opinion and from a reliable source.

I don't understand the mods anymore. I was reading a thread last night that had a quarter of the posts deleted. But the thread wasn't locked. It just read like a redacted document you get in response to a FOIA request. I should stop wondering and just post.

In any case, the pension failure will, despite the facts, be mischaracterized as the fault of greedy public servants with exorbitant salaries and overly generous pension plans. And more working people will turn on other working people as a result.

[lonestarnot]

12. So 150 retirees are just out, no recourse?

[Statistical]

14. I know this isn't popular but this is why I like 401K

It is cold hard cash and it is in my name. When I change jobs I roll it into an IRA.

[OrwellwasRight]

16. And when the market crashes again?

[Statistical]

18. The market has recovered over half the drop from the peak.

Investing is a lifetime plan not a single day event.

Still if you don't want to invest in equities you can open a 401K and/or IRA and put 100% of your money into govt treasuries.

Or even better a mix of T-bonds, corporate bonds, and equities.

As one gets closer to retirement you should shift money out of equities and down the risk ladder into safer (and lower yielding) investments.

[OrwellwasRight]

20. And if folks had to retire before they got their money back?

Or if they worked for Enron or Tyco or Global Crossing?

Defined Benefit pension plans are the gold standard. It is why the CEOs have them and they tell us peons to trust in the market. I'm glad you're happy with what you've got. Many others are not.

[Statistical]

21. Once again then don't put a single penny in stocks. 401K & IRA =/= stocks.

Open IRA put it 100% in govt T-bonds.

Still even if you DO invest in stocks you should reduce exposure as you get closer to retirement. Don't think you can handle that put 100% into govt bonds (or govt bond fund).


"Or if they worked for Enron or Tyco or Global Crossing?"
Never put more than 10% of your money into a single position. Period. doesn't matter if it is $1000 or $22 million.


Lastly pensions aren't magic. How DO pensions pay a lifetime of payments? The company pays about 5% to 10% of your gross salary to a trustee who invests it rather conservatively. Most pension plans aim for 3% real (over inflation) annual return. Average inflation over last 40 years has been ~3% so that is roughly 6% nominal return. If you take 5%-10% of your salary (including any employee matches) and earn 3% real return over your working years you could take that sum and purchase an annuity for a lifetime of guaranteed payments.

[OrwellwasRight]

23. most people at those companies didn't have a choice

the company plan was the employee stock plan -- not all 401(k) plans are the same or offer the same choices.

and again, the big executives don't rely solely on stocks -- they get cash guarantees = defined benefits

should make you wonder

[Statistical]

24. They had a choice, they took it greed pure and simple.

"not all 401(k) plans are the same or offer the same choices."
True but by law there isn't a single 401K plan that mandates employees purchase company stock or doesn't provide bond options.


BTW most executives are paid by stock options. Far lower taxation and easier to defer compensation. Usually the cash portion of total compensation is rather low.

"should make you wonder"
It indeed should make you wonder where you get these ideas from.

[Swede]

25. I agree with 100% of what you just posted,Statistical.

Take your vested money,invest in something conservative. Even in the bad times,you only lose on money withdrawn.

[OrwellwasRight]

29. and you

I like the way you go straight to snippy remarks. I get my ideas from reading and studying if you must know.

1) You are simply wrong. Employers do not have to offer options. Ever hear of an ESOP? They do not even have to offer a retirement plan of any sort. They can offer exactly what and how much they like. And they don't have to offer proper counseling so that people understand whether they have choices and what exactly those choices are. This is exactly what George Miller has been fighting for for the past 4 years. And it's pure vindictive spite to say the secretaries, clerks, assistants, and other folks who worked at Enron lost their life savings out of greed. I don't know why you have to get so snippy just because people disagree with you. You even said in your first post on the subject that you knew you were stating an unpopular position. That doesn't mean it's right. That means it's right for you. Awesome. Go on with your 401(k). I'm not trying to stop you.

2) Stock options are exactly what you say. They are a form of compensation. They are NOT a retirement plan. The pensions that executives get are ON TOP of salary, bonuses, AND stock options. And they are pensions earned after long years of service, like two years. THAT's greed. And it should make people wonder--why do executives get guaranteed pensions while workers are told to hope for the best from the markets?

And your snippy remark to me makes me wonder where YOU get YOUR ideas from.

[tularetom]

17. The taxpayers are legally on the hook for those pensions

The city is nothing more than the collective agency of its citizens and as such, those citizens are liable for any debts incurred by those they hire to manage their city for them. The pensions are a valid and legal contractual obligation of the city. It may mean that the administrators, firemen, park and street workers and cops have to take a pay cut but the city is obligated to make good on the contracts it has entered into.

If the city has to raise property taxes to meet their obligations, well, tough shit. The taxpayers should have insisted on better municipal leadership than what they got from their elected representatives and hired professionals.

[notesdev]

19. get used to it

Wall St. stole your pensions and your government helped them do it.

[Statistical]

22. No they didn't. The states simply never put the money in to begin with.

Say a state and/or city has $12 million in current year pension obligations. The budget comes up short and they only have $8 million. They put in $8 and will "catch up" the $4 million next year. Next year comes and they are short again. Next year Republicans cut taxes and "balance" the budget by reducing the amount contributed to pension.

Two decades later the difference between what the pension has and what is has promised is now hundreds of millions of dollars. Ooops. To "fix" it would require hundred million dollars. Maybe 100%+ of current year tax revenue.

That is why they are called "unfunded" or "underfunded" liabilities.

[girl gone mad]

26. To deny Wall Street's role in the crisis..

is to deny reality. It's reminiscent of the Republicans on the bipartisan financial crisis commission wanting to bar the words "Wall Street" from their final report.

[Statistical]

27. You can't lose money that wasn't ever there.

Sorry I know it is painful to accept the reality that for last 30 years governments and companies have been selling retirees a bill of goods but that is the reality.

[girl gone mad]

28. For those who like their pension discussion with a hefty dose of intelligence..

I recommend:

http://pensionpulse.blogspot.com

No point in discussing the matter with the willfully uninformed.