I have previously written about the threat of unfunded public sector pension obligations. Since then, several municipalities are reported to be using or contemplating use of Chapter 9 bankruptcy. See Mark Curriden, "The Next Chapter," ABA Journal, Nov. 2011. In doing so, many of these municipalities cite employee pension and retiree health care obligations as the cause or source of their financial woes.
Chapter 9 was created in 1934, "in the heart of the Depression," and is only available if provided for under State law. New Mexico law does not permit Chapter 9 bankruptcy, but other states do allow it.
Municipalities using it so far include Prichard, Alabama (Jefferson County), and Vallejo, California (Bay Area). However, they have done so amid a great deal of fan fare and public reporting, and a number other communities are expressly contemplating its use as well, including: Stockton and Camden New Jersey; Central Falls, Rhode Island; San Diego, California; Hamtramck, Michigan; and Harrisburg, P.A. Although Los Angeles has expressly rejected that option to date, some city leaders believe it will only be a matter of time before it too succumbs.
Is the threat imminent and appropriate? Many public sector employees and unions decry the avoidance of pension and retiree health care obligations as simply pushing onto the backs of low-paid employees the costs of curing a recession they didn't create. For instance, in Prichard, local attorney Robert Hedge, who represents the town's retires, claims that "the average pension was only about $15,000 a year," and "[t]he highest pension was $36,000 annually for a fire chief who had nearly four decades of service to the city." And most people agree that the shocking and exorbitant obligations negotiated by Vallejo were wholly anomalous across the nation.
What then is the source of the deep fear and suspicion over these unfunded obligations? Marc Levinson, a partner at Orrick, Herrington & Sutcliffe in Sacramento says small towns like Prichard are especially vulnerable to bankruptcy because their unfunded pensions, although small in the relative scheme of things, are still an overwhelming percentage of their annual budgets, for which they have no means of generating additional revenue. Duane Brown, a New Mexico bond attorney with Modrall Sperling (and, by way of disclosure, my husband), adds that the specter of unfunded liabilities also makes bond holders nervous because they threaten bankruptcy, which in turn threatens the renegotiation and potential devaluation of all obligations, including bonds.
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Source: Mark Curriden, "The Next Chapter," ABA Journal, Nov. 2011.
