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INTRODUCTION
Public sector pension funds with excessive liabilities have been well documented. For instance, 'Pension plans operated by state governments on behalf of their employees are underfunded by an estimated $452 billion according to official reports, with total liabilities of $2.8 trillion and total assets of $2.3 trillion in 2008. However, many economists argue that even these daunting liabilities are understated. .... Using methods that are required for private sector pensions, which value pension liabilities according to likelihood of payment rather than the return expected on pension assets, total liabilities amount to $5.2 trillion and the unfunded liability rises to $3 trillion'. (p. 1) 1
Mitchell states that 'The current economic environment has produced a "perfect storm" for public pensions, where low interest rates are spiking liabilities, depressed equity markets are whittling away assets, and economic recession is drying up state and local tax revenue. ... Inasmuch as public employee pensions are not guaranteed by the federal government, it is even possible that public sector plans might default. Whereas this has not happened to date in the United States, it is true that a few cities and towns (including Cleveland, OH, and Bridgeport, CT, as well as Vallejo, CA) have declared bankruptcy'. (p. 12) 2
The dubious honor of being the first city in the nation to default on pension obligations goes to Prichard, which is located in Mobile County, Alabama. Interestingly, 'The first recorded default by a local government unit [also] occurred in Mobile, Alabama in 1938'. (p. 9) 3 On 22 December 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, breaking a state law requiring it to pay its promised retirement benefits in full', and that '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 the situation in 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'. 4 'The situation in Prichard is extremely unusual in that a...