Bailout

The Gordian nightmare of public pensions

By Felix Salmon

Maybe it’s because I’m European, but I simply cannot get my head around a developed nation where people with lifelong service in the police or the fire brigade can find themselves with no pension at all. Zero. But if you’re unlucky enough to have served in Prichard, Alabama, that’s the situation you’ve found yourself in for the past 14 months

The NYT had a heart-rending story on the city’s finances last week: it seems that if a city has unfavorable demographics and an incompetent government, then there’s no one?not the state, not the federal government, not any kind of pensions guarantee agency?willing to step in and make things right.

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.?

Back in March, Prichard was given two months to work out how it was going to pay its pensioners?and that was after they’d already gone without pay for half a year. Today, we’re told, “a mediation effort is expected to begin soon.” And according to Michael Corkery, the city has proposed capping benefits to current retirees at about $200 a month.

The problem here isn’t gold-plated pensions?Prichard was paying out only $1,000 a month on its average pension when it defaulted back in October 2009. Neither is it, as Mish would have it, the Alabama legislature, which passed various bills amending city pension plans over the years. And it’s not greedy bondholders, either, asserting their seniority over pensioners: Prichard doesn’t have any outstanding bonds, and even bank loans don’t seem to be an issue.

Ultimately, the problem here is a confluence of two factors. On the one hand you have the nationwide?and indeed global?issue of unfunded public pension liabilities. On the other hand you have the statistical inevitability that in a country with thousands of municipal pension plans, some of them are going to run out of money.

One thing I’m pretty sure about: if and when a city with bonded debt arrives at the same place as Prichard, all the covenants in the world won’t be enough to protect bondholders from default. It’s politically impossible to pay creditors on Wall Street while short-changing people who worked for the city for decades and who have no other income to fall back on.

And more generally, the problem of municipal pensions is shaping up to be a Gordian nightmare. Cities which have diligently funded their own pension plans won’t ever want to bail out those who haven’t, or see federal funds used for such purposes. But on the other hand, situations like Prichard’s are clearly unacceptable, which means that there has to be some kind of bailout. Public pensions, I fear, could turn out to be the biggest moral-hazard play ever.

Full post as published by Macroprudential on December 27, 2010 (boomark / email).