The check is not in the mail. Prichard, Alabama, came out of Chapter 9 bankruptcy in 2002 and promised to make deposits into its public pension fund. They didn’t and now they are simply out of money. Retirees did not get their October 1 payment. What’s next? The retirees are suing. The city is looking for investors in a bingo operation as a last ditch effort to raise cash. The bankruptcy word is being raised again. (see our post from June 20)
The city does not have general obligation bonds outstanding at this time but some are eyeing the cash in the water and sewer system. That system, which refinanced its bonds in May (insured by AGO) has had its disputes as well. They were under a consent decree to clean up their system. The Mobile Area Water and Sewer System (MAWSS) was willing to take them over, but the city refused. The city purchases water from MAWSS and handles its own treatment, distribution, billing and collection services. Standard and Poor’s rated the system BBB- in 2005 but rates the 2009 bonds A-. Coverage has improved, disclosure of the multiple lawsuits that were in the 2005 official statement have been dropped from the current disclosure and the refunding will save the water and sewer Board a significant amount of money. After the May 2009 issue, the Board signed a 10 year public-private-partnership contract for $78 million with Severn Trent to operate the system (the amount is according to WKRG). The amount seems high for a 2008 budget of about $7.4 million (excluding depreciation and amortization) that also includes about $1.0 million fixed cost for water purchase from MAWSS.
Is the city’s dilemma symbolic of a pattern across the U.S.? We think so. Small municipalities that manage their own pension and retiree benefit programs, poor fiscal management and maybe an external shock such as loss of a major employer or reduced tax revenues are symptoms of trouble. Vallejo, California fits this pattern as does the Sierra Kings Health Care District, California that just filed Chapter 9 last week. While the common belief in the market is that municipalities don’t default, we see trouble among these smaller, vulnerable communities. Watch the balance sheet for these factors before you pass “go”.