Living without those checks became extremely difficult and according to the New York Times, 11 retirees died, while others have declared bankruptcy. Today, the rest of the 150 retired workers are struggling to get by and although they've sued the city of Prichard, the suit was unsuccessful. There just isn't any more money.
As public pension funds across the nation suffer from years of underfunding, and from assets that lost value in the financial crisis, experts say similar scenarios are fast approaching for a number of other towns and cities across America.
After years of putting off the inevitable, financially strapped municipalities across the nation are facing a huge problem. State laws require that retirees be paid. Cities and towns like Prichard that can no longer pay their retired works the pension they promised them are in effect, breaking the law. But there seem to be few legal requirements that governments actually put the money behind their promises.
In the years leading up to the financial crisis, many cities delayed funding their pensions, as assets were seeing high returns and governments expected good times to last. But as the crisis hit, from the end of 2007 to the beginning of 2009, pension funds lost nearly one third (29%) of their value.
Experts estimate city pension funds are short more than half a trillion dollars ($574 billion). Fund analysts expect a number of pension funds to run dry in the next ten years.
Under-funded pension funds are plaguing some of the nation's largest cities. The Pittsburgh firefighters union has filed suit to prevent a state takeover of the city pension fund, urging city officials to raise taxes, if necessary, to shore up the under-funded pension fund. Union attorney Joshua Bloom says a state takeover would deprive firefighters of the local pension control guaranteed by their contract and put the city on a course to insolvency. Bloom adds that Pittsburgh will "go from the most livable city to the most bankrupt city."
The financial troubles in South Burlington, Vermont have gotten so bad the city might have to borrow money to pay its employees. City Manager Sandy Miller has discovered a $9 million shortfall in the pension fund and an undetermined deficit in the general fund that he says resulted from unconventional accounting practices. Now, the city is strapped for cash.
In a previous article Municipal Default Crisis On the Horizon, we told you about a warning issued by a leading finance guru that over 100 US cities could face bankruptcy in 2011.
Meredith Whitney, who's known for predicting the financial crisis, says the coming municipal crisis is now the biggest threat to the U.S. economy.
Detroit has reportedly reduced police, lighting, road repairs and cleaning services affecting as much as 20% of the population. The state of Illinois is about six months behind on creditor payments, while potential defaults threaten the state of Florida.
Moreover, many cities and states are fighting an uphill battle to keep their pension plans adequately funded. New York City is planning to put $8.3 billion into its pension fund next year, which is twice what it paid five years ago. Along with New York, Detroit, San Francisco and Los Angeles are among the cities that risk bankruptcy in 2011.