Tale of Prichard pension program

By Chang Se-moon

On December 22, 2010, the New York Times reported that “Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers.” The Prichard pension dilemma has also been reported in the Huffington Post on December 23, 2010, and by the Canadian Broadcasting Company on January 26, 2011. Prichard is located in Alabama with the population of about 28,000 of which 85 percent are African-Americans. Thirty-five percent of Prichard residents live below the poverty level as defined by the U.S. government.

The pension plan for retirees of the City of Prichard was established in 1956. The 1956 pension plan was amended by the Legislature more than 15 times. Importantly, a 1963 amendment required the City to pay the losses, if the pension board makes mistakes in granting pension benefits, or if the bank invests unwisely, or if the stock market collapses.

In 1975, control of the pension plan was taken away by the state legislature from the City and given to the new Pension Board to oversee retirement benefits. The Mayor of Prichard has no control over selection of the members of the Pension Board. In 1983, pension payments increased by 50 percent with no increase in contributions. In 1991, employees with 25 or more years were allowed to receive pensions at age 55, lowered from 60. No one knows when, but the Pension Board began adding the accumulated unused sick, vacation and compensatory hours (times the current rate of pay) to the pension calculation, effectively increasing pension benefits by 26 percent, with no offsetting contribution or revenues to pay for it.

The burden of pension payments led Prichard to file for bankruptcy on Oct. 5, 1999. Only two years after the city paid off its creditors from the 1999 bankruptcy, the City of Prichard again filed for bankruptcy on Oct. 27, 2009 in an attempt to cope with the debt in pension funds. The City, not the Pension Board, filed these bankruptcies because the Prichard pension program made the City responsible for any shortfalls in pension funds. The City was not able to bail out its pension debt because it was barely meeting daily financial obligations. Pension payments to all retirees stopped in September 2009 when the great recession hit and the entire balance of the pension fund decreased to $26,908, from the high $8,279,710 in 2001.

On Aug. 31, 2010, U.S. Bankruptcy Judge William Shulman dismissed Prichard's bankruptcy case, stating that the City was not eligible for Chapter 9 under Alabama law. On May 19, 2011, the Prichard City Council approved an agreement that would allow partial payment of pensions. On May 25, 2011, Mobile County Circuit Court Judge Michael Youngpeter approved the May 19 agreement. U.S. District Court Judge

Kristi Dubose in Mobile asked the Alabama Supreme Court during the week of May 15, 2011 to determine whether Prichard has the right under state law to seek Chapter 9 bankruptcy protection over pension funds. The May 19 agreement led to the resumption of a partial payment in June 2011.

The June 10, 2011, 8 p.m. Hannity Show on Fox News commented that the Prichard pension problem was the fault of “politicians.” Reality is not that simple. Real causes of the Prichard pension problems are many and include, but are not limited to, state constitution that does not allow home rule, past members of the pension board who pushed for increased pay without an increase in contributions, state legislatures that allowed changes in calculation methods that led to higher pension benefits, and the predominantly poor African-American composition of the City’s race mix that led to a benign neglect by leaders at all levels of the government. Life would have been simpler if the pension system were a defined contribution, not defined benefit, in its very beginning.

The case would be quite a big lesson for Korea whose national pension system is also feared to face balance problems in decades to come.