A small town in Alabama, which has stopped paying its retirees' pensions, could be an early casualty in a coming pension disaster, the New York Times reports.
As public pension funds across the nation suffer from years of underfunding, and from assets that lost value in the financial crisis, experts say that days of reckoning are fast approaching. In Prichard, Alabama, that day came last year: When the fund ran out of money, the city stopped paying retirees, the NYT reports. Retirees have sued, but to little avail. The money simply does not exist.
Without pension checks, 11 retirees have died, according to the NYT. Others have declared personal bankruptcy. The rest of the 150 retired workers are struggling to get by.
After years of procrastination, governments across the nation are beginning to be crushed under the enormity of their pension promises. State laws require that retirees be paid -- Prichard is breaking the law -- but there are fewer 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, funds lost 29 percent of their value. Now, funds still expect the kinds of returns they were seeing before the crash, effectively disguising the hole.
City pension funds are short $574 billion, according to analysis by professors Robert Novy-Marx and Joshua Rauh, who expect certain funds to run dry during the coming decade. In Prichard's case, the fund had resources in 2003 to cover only 33 percent of its promises, the NYT says.
"The reality for Prichard is that if you took money to build the pension up, who's going to pay the garbage man?," said R. Scott Williams, a lawyer for the city, according to the NYT. "Who's going to pay to run the police department? Who's going to pay the bill for the street lights?"
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