PRICHARD, Ala. — This struggling small city on the outskirts of Mobile was warned for years that its pension fund would run out of money by 2009 if it did nothing. 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.
Since then, 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."
The situation in Prichard is extremely unusual — the city has sought bankruptcy protection twice — but it proves that the unthinkable can, in fact, sometimes happen. And it stands as a warning to cities like Philadelphia and states like Illinois, whose pension funds are under great strain: If nothing changes, the money eventually does run out, and then misery and turmoil follow.
It is not just the pensioners who suffer when a pension fund runs dry. If a city tried to follow the law and pay its pensioners with money from its annual operating budget, it would probably have to make large tax increases, or huge service cuts, to come up with the money.
Current city workers could find themselves paying into a pension plan that will not be there for their own retirements. In Prichard, some older workers have delayed retiring, since they cannot afford to give up their paychecks if no pension checks will follow.
So the declining, little-known city of Prichard is now attracting the attention of bankruptcy lawyers, labor leaders, municipal credit analysts and local officials from across the country. They want to see if Prichard, like the continuing bankruptcy of Vallejo, Calif., ultimately creates a legal precedent on whether distressed cities can legally cut or reduce their pensions, and if so, how.
"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 outsized pension obligations. "We're all on the same conveyor belt. Prichard is just a little further down the road."
Many cities and states are struggling to keep their pension plans adequately funded, with varying success. Florida's pension fund rebounded from the recession, gaining $9.8 billion after payment of benefits and was worth $109.3 billion in the year ended June 2010. Despite the recent investment gains, Florida's system, the fourth-largest in the United States, still can afford to cover only 87.9 percent of its benefit obligation to 1 million current and future retirees.
New York City plans to put $8.3 billion into its pension fund next year, twice what it paid five years ago. Maryland is considering a proposal to raise the retirement age to 62 for all public workers with less than five years of service.
Illinois keeps borrowing money to invest in its pension funds, gambling that the funds' investments will earn enough to pay back the debt with interest. New Jersey simply decided not to pay the $3.1 billion that was due its pension plan this year.
Colorado, Minnesota and South Dakota have all taken the unusual step of reducing the benefits they pay their current retirees by cutting cost-of-living increases; retirees in all three states are suing to keep their benefits intact.
No state or city wants to wind up like Prichard.
After a recent Prichard City Council meeting, Troy Ephriam, a council member who became chairman of the pension fund when it was nearly out of money, sat in his office and recalled some of the failed efforts to put more money into the pension fund.
"I think the biggest disappointment I have is that there was not a strong enough effort to put something in there," he said. "And that's the reason that it's hard for me to look these people in the face: because I'm not certain we really gave our all to prevent this."