Prof: Providence retirees may face 73% haircut in bankruptcy
February 22nd, 2012 at 6:00 am by Ted Nesi under Nesi's Notes, On the Main Site
Providence Mayor Angel Taveras and city retirees don’t agree on much, but they’d probably both acknowledge that Providence’s pension system has a sizable long-term shortfall.
The math is pretty simple. Providence has promised its workers and retirees $1.32 billion in pension benefits, but it’s saved only $362 million to pay them. Thus, the city pension fund was short $958 million as of June 30 (based on market value).
As is often pointed out, there’s no immediate crisis there. The city must pay that $1.32 billion over decades – it’s not about to receive a bill for the other $958 million, an amount that’s far more than this year’s entire $614 million city budget.
But a more immediate crisis – a bankruptcy filing by the city – could force the question sooner. And if that happens, the retirees may discover their unfunded pension promises are worthless IOUs.
That suggestion comes from David Skeel, a law professor at the University of Pennsylvania and prominent expert on bankruptcy. In a recent working paper which argues that states should be granted the same right as municipalities to file for bankruptcy, Skeel suggests public-sector workers’ property rights only cover funded pension benefits – not unfunded ones.
If a judge agreed with Skeel’s argument, Providence’s retirees would find they have a secured claim on the pension fund’s $362 million in assets, but Providence could write off all or some of the additional $958 million in unfunded benefits the city promised but hasn’t saved for, or about 73% of its total pension liability.
“With a state’s unfunded pension promises, a court would likely conclude that the promises constituted a valid property right to the extent the state set aside designated revenues for them,” Skeel writes in the paper. “But an unfunded promise would be treated as an ordinary unsecured claim, subject to restructuring.”
Skeel elaborated on his argument in an interview with Voice of San Diego, another city where bankruptcy is being discussed because of unfunded pension obligations. Skeel suggested events in Central Falls, where pensions have been cut by up to 55% in bankruptcy, has shown retiree benefits are not untouchable.
“It had previously been the third rail,” Skeel said. “But after Central Falls, it’s unclear if it’s so much of a third rail anymore.”
Skeel suggested the retirees’ property right encompasses pension funds, not pension promises. “The question is what is fully protected, the promise or the pool of funds?” he said. “There is an argument, and I think it’s a pretty powerful one, that it’s the pool of funds.”
In the working paper, Skeel cited the Fifth Amendment’s Takings Clause as the main rationale for protecting retirees’ unfunded pension promises as well as pension funds, because writing off those promises “would defeat the beneficiaries’ ‘investment backed expectations.’”
“This argument is unlikely to prevail with respect to obligations for which no funds have been set aside, because there does not appear to be a property right for bankruptcy purposes in the absence of collateral,” Skeel wrote.
There may be a historical argument for Skeel’s theory in Providence, since the benefits weighing down the city pension system were granted based on the idea that the fund was in robust health.
When the union-majority Providence Retirement Board voted to award 6% COLAs in 1989, labor leaders defended the richer benefit as affordable because the city’s pension fund was “one of the wealthiest in the country.” They also incorrectly estimated the COLAs’ cost at only $750,000, while the city put the cost at $22 million.
• Related: Taveras, retirees to meet March 3 at Rhodes on the Pawtuxet (Feb. 21)
Tags: bankruptcy, central falls, chapter 9, david skeel, municipal, pensions, providence, providence financial crisis, retirees
Nesi's Notes covers politics and the economy in and around Rhode Island for WPRI.com. (Twitter: 
I would agree somewhat. Not fully. “Skeel suggests public-sector workers’ property rights only cover funded pension benefits – not unfunded ones”. Wrong. If they are unfunded because the city did not put in the required amounts then I would disagree with the article. Providence unlike Central Falls has many more options. Tax exempts, illegals ect… But, if it comes to bankruptcy, the retirees will bring the city down with them.
It does not matter why they are unfunded. If the money is not there then it cannot be paid out. When bankruptcy occurs whatever available assests there are are used to satisfy the creditors at the highest percentage possible. If the plan is only funded to 23% then that would be all there is to pay out. Don’t forget if bankruptcy occurs the city has other creditor besides retirees that will want their share as well.
Of course it does, legally. If they did not abide by the contract by not funding and spent that money elsewhere then they will not win in court. Do you believe that if I do not pay my car loan and spend that money elsewhere I would still own that car? They would take the car back. The money is there. They can tax private schools, get rid of illegal’s, lay offs ect… none of this has been done. They can not go bankrupt unless they prove there is no other way of paying there bills. This is NOT CF.
Poor OREO ……….. a Civil Servant desperately trying to keep that which is no longer possible. Welcome to the land of Private Sector Taxpayers.
Not in any union, nice try. Grow up and educate yourself.
“The question is what is fully protected, the promise or the pool of funds?” he said. “There is an argument, and I think it’s a pretty powerful one, that it’s the pool of funds.”
Agreed! That is the reality all of us with a 401k retirement plan live with. Our fortunes rise and fall with the performance of each plan’s underlying investments.
The public employee retirement plans must also be based on investment performance. Taxpayers cannot be on the hook to guarantee unrealistic benefits — that is reality.
I ask if you had a car payment of $200 each month. You have plenty of money to cover the costs but instead of paying your car payments you go on vacation, shop ect… what do you think the car company would do? Let you off your contract? think again. Now, if Providence did put in every cent they should have and there’s still an unfunded liability then you have a case. Like it or not there is a contract and that is the reality.
Ahhh, your assumption is “you have plenty of money.” The city does not have plenty of money. The pensions are unsustainable in present form. I guess you can try to force the promise on the city, but it really could result in bankruptcy — enabling Providence to restructure those contracts.
They repossess the car!
If the person not making the car payment declared bankruptcy the bank or car company would get a piece of assests owned by the person declaring backruptcy with no garuntee of getting the full value of the contract. After all the available assests are gone any remaining liabilities are written off.
Skeel suggested events in Central Falls, where pensions have been cut by up to 55% in bankruptcy, has shown retiree benefits are not untouchable.
“It had previously been the third rail,” Skeel said. “But after Central Falls, it’s unclear if it’s so much of a third rail anymore.”
But didn’t they negotiate a settlement with the retirees in CF, in which the retirees agreed not to challenge their benefit reduction in court? Sounds like they still don’t want to touch that “third rail”. And that is Central Falls. The retirees knew CF has no money and no tax base. Providence is not CF. So to everyone who is all excited about bankruptcy for Providence, because “look what happened in Central Falls”, don’t assume they will have the same success in reducing benefits.
The union contracts were changed in Central Falls and the unions didn’t even peep about it.
Contracts were dissolved in Vallejo California also and they will be dissolved in Birmingham County, AL soon.
But they didn’t touch the retirees benefits in Vallejo, did they?
In Vallejo, no, but officials there said that was because they CalPERS, the huge California public pension fund, threatened to fight them in court. It’s unclear who would have that kind of clout to intervene here, particularly since Providence would be filing mainly because of its pension and OPEB benefits.
Retiree benefits were completely suspended in Prichard, AL’s C9 filing because they were declared unsecured creditors.
“Clout to intervene” Ted? So you think you need “clout” to fight it in court? They didn’t decline to fight it in court because CalPERS had “clout”, they declined because they knew they’d lose. Do you really think the retirees will not fight a reduction of benefits in court? They already are. And they’re doing pretty well. And Providence can declare that the reason they are filing bankruptcy is “because of it’s pension and OPEB benefits” all they want, a bankruptcy judge is going to apply the law as he sees it, and decide who gets paid based on that. Finger pointing will not be considered…..
No RI judge will do anything that will hurt the unions.Unions have Taft Carter in their back pocket
It’s called the LAW. If the decision went the otherway the unions would accept like adults.
Federal Judges oversee Chapter 9 not local judges.
In any court decision “Impossibility of Performance” will void what has been agreed to that is IMPOSSIBLE… contracts 101.
Art – the city does have plenty of money. They do not tax many private schools; cater to illegals, major staff getting raises, ECT. I do agree if the city does go under they can and will restructure the contracts. But, by then it wouldn’t matter Providence would look like Gotham after Bane gets done with them.
Agreed, Providence needs to get fiscally responsible in so many ways, including providing $ervices to people who are here illegally. No doubt, this will be a fight.
[...] Prof: Providence retirees may face 73% haircut in bankruptcy [...]
Providence is “looking at a black hole” but has enough money to engage Attorney Flanders’s law firm for $325 an hour!!
My error==it is actually $395 per hour!!!
I cannot comment on the legal issues but I do think the refusal of some city retirees to demand city health coverage rather than medicare and COLA’s far beyond the cost of living are unreasonable. If retirees refuse to compromise on these issues at all they will proabaly bring on and deserve the “haircut” likely to result.
But not only retirees should help cut the deficit, non-profits, churches, and wealthoer state taxpayers should also step up. It would also help if Providence residents shopped, ate out, and hired services more in Providence instead of often heading off to out of town malls and restaurants.
I know that state workers are shopping out of state as much as possible now. After what happened to them. Can’t blame them.
According to the state those workers would be in breach of Rhode Island tax laws by not remitting the sales tax to RI.
I agree Jim, But who is going to enforce this law in RI.
Actually OREO, RI could if it chose to. For example, NY has sent it’s tax agents to NJ malls and copied down the (NYS) license plate #s of those stuffing large screen TV, etc. into their cars. Then they sent them friendly reminders to pay the NJ “Use tax” on the purchase on their yearend tax filings.
Tough – you think state employees are going to go to MA and tell on state employees? I agree it could and should be done but it’s not going to happen.
All of this is good example of why CBAs btw unions and governments should not be allowed.
I agree with you on this one!!
Chapter 9 lurks around every corner.
‘We have contracts’ shout the union members with 6% COLAs and then the contracts get flushed down the toilet.
If you think that’s what will happen, you don’t know anything about Chapter 9.
Ignorance lurks around every corner….
Chapter 9 is coming to Providence.
I know more than you do that’s for sure. How are those Central Falls contracts coming along? Oooops! They don’t exist any more.
Mr. Donahue – Be careful what you wish for. If you did know much more about a capitol city going Bankrupt you would NOT want that to happen. Judge will rule with the law or retirees and Providence will not go bankrupt. Providence is not Central Falls. Providence has many more options.
Flanders is there to renegotiate contracts. What do you think will happen when that is refused?
Chapter 9.
I love these union trolls. Still upset because Raimondo was using false statistics because some union fireman said so? LMAO
This can’t happen, that can’t happen? Smell the coffee its happening. Then the trolls will go into lawsuit mode. We’ll sue and you’ll see, you’ll see like some 6 year old pouting.
Ted
Calculating the true liability has never been done before in any Chapter 9. But I have spoken to actuaries on this and this appears to be what would happen if a Chap 9 takes place:
1) Chapter 9 filed
2) The judge would try to get negotiations going, but if he could not, he would then appoint an actuary on behalf of the court to calculate the true liabilities.
3) The Actuary cannot make up his own rules and thus would have to turn to reliable and conservative standards used by a recognized authority who most likely would be the PBGC’s “standards of operation” (e.g. setting what discount rate to apply)
4) After recalculating the entire pension plan using PBGC’s more conservative standards, the actuary would then report back to the court the true liability which would be something much different than what Prov is now reporting.
5) Then the real “pennies on the dollar” discounting would begin.
One more note, the Federal judge in the Prichard, Al. Chap 9 was headed in that direction when he terminated all pension payments to all existing pensioners. In short, he froze the pension system until an actuary could report back what was going on with the true liabilities.
However, that case was thrown out because of a quirk in Alabama state law that the federal judge had to recognize. He threw the case out. The case is now moving through the Alabama state court system to resolve that quirk in the law that has to do with Chap 9 and municipal bonds.
Gary, what’s the best source you’ve read on how the judge made the initial decision to freeze pension payments in Alabama once the Chapter 9 began?
In Prichard the Judge ruled that pensioners were not secured creditors.
The only expenses that matter in Chapter 9 are those bare bone expenses to run the city.
Ted,
The below link is to a story on Judge Shulman’s March 2010 denial of the Prichard retirees motion to reestablish the pension payments previously terminated by the court because of the bankruptcy, but was denied by the court.
http://blog.al.com/live/2010/03/motion_to_force_prichard_to_pa.html
The pensioners argued that pension payments are administrative costs to the city like wages and thus must be paid. The judge ruled that they are not. This appears to be the only case law at the federal level of a pension ruling in a Chapter 9 case that I know of.
If anyone knows of another, please post a link.
I think the city will be forced to CUT spending, layoffs, tax increases ect.. Not a union member, I deal with contract law. I never said Ms. Raimondo used false data, what I said was the way they went about the “reform” will be struck down in court. It’s an easy win for the unions. You do realize the unions won the first round. And will win the fight in the end as they have a valid contract! But, if they do not win the state is screwed anyway. Union members will otp out of the retirement system if there is no contract and that means big tax hikes. I do wish you would realize the law will be upheld, weather you like it or not, weather it’s good for the public or not, weather it’s good for the state or not, the law will prevail.
Law will prevail, bankruptcy law.
You deal with contract law? Try and spell ‘whether’ correctly the next time you write one.
Not a english major and didn’t use spell check. My mistake. Be careful what you wish for. Bankruptcy would doom the state and every land owner in the state. Do you own a home in RI? If you do good luck after the city goes down.
Spell check doesn’t help when it’s not a typo. Weather is an entirely different word from whether.
Property values are still falling all over the US. Is the US in bankruptcy?
Not yet but if Obama gets in again count on it!
Gary – would the employees of the city still be held to their contract, or would they be able to “opt” out of the retirement system? It’s my understanding the contracts would be void. I could be wrong?
OREO,
You ask a very interesting question that has never been before the courts: Can a judge rewrite a pension plan for employees not yet retired forcing contributions from them into a failed plan.
I’m not an attorney so don’t take this as a legal opinion. In the Prichard Alabama case, the judge made a clear distinction between retirees and employees still on payroll, the latter being administrative costs of running the city.
The IRS sets the threshold on exactly what defines a “qualified” pension plan and paying into a pension plan that would pay back less money than was put in is not a qualified pension plan.
I think this is one of the reasons judges threaten the actuary boogeyman on the plaintiffs to negotiate. The judges don’t want to touch this.
I don’t think employees have any rights to opt out, but who knows.
Gary and OREO, thanks for the polite and thoughtful discussion. As the blog’s proprietor, I appreciate when people keep things calm and respectful. Also, I think your discussion is a reminder of just how complicated these issues are.
OREO,
I should mention, this is one of the distinctions between a private sector bankruptcy and a municipality Chap 9.
In the private sector, the pension plan is effectively terminated and the remaining assets passed over to the PBGC. But in the public sector, there is no PBGC. So does the judge terminate the pension plan, or keep it going in part through current employee contributions?
It’s never been tested in court so it’s anyone’s guess what could happen.
Here is a good place for Providence to cut back. Fire all the teachers abusing sick time.
Providence School Department data revealed that 37 percent of the teachers were absent 19 days or more. That’s over 10 percent of a 180-day year. Furthermore, 11.5 percent were out twice that much time.
We agree on this. There’s so much waste.
How about the 5 & 6% COLA’s?
Do you think those are enforceable?
Impossible promises in a contract are unenforceable.
I don’t agree with the Cola’s at all. But, like the teachers abusing sick time the Cola’s in the contract. I wouldn’t sign another contract with employees unless they give in on at least these two points. Your write a very logical statement “impossible promises in a contract are unenforceable”. But legally I believe they are, not logical but legal. Two different things.
Contracts can be thrown out if they are unenforceable.
The public sector unions have boxed Providence and themselves into a corner. It is time for the city to file chapter 9 when the money is completley gone. Then cut all the pensions, starting with the disablitity pensions.
To Nesi, Are you Gina Raimondo’s press agent? I notice you print a very favorable opinion for her on the day that Tavares meets with Providence retirees and everything you write about her is so gushing. Is this your idea of objective journalism? I think it’s time we all read a different source.
Remember there isn’t any creditor with 1 billion owed them, so the F/F will win that point. Them after all properties are sold off and bank accounts seized the judge see’s who gets what. Best guess is police & fire retirees will get 89-90% monthly, no cola’s and the other creditors will get 3-5 cents on the dollar if nlucky. ANYWAY, will the last person running out of R.I please shut the lights off and lock the doors…….
Old 6789
A municipal bankruptcy doesn’t work that way. There is no selling off of public assets or seizing money in the bank to make whole the different liabilities such as an unfunded pension plan (unless the municipality itself agrees to sell the assets).
http://www.nytimes.com/2009/03/31/business/economy/31contracts.html?hp
The town of Vallejo demonstrated not only that it was possible for a city to tear up its union contracts in bankruptcy, but that it was even easier for a city to do so than for a company. The precedent may matter.
Municipalities do not file for Chapter 11 bankruptcy protection; they use Chapter 9, which has different terms and a much smaller body of legal precedent. Municipal bankruptcies are so rare that until the Vallejo ruling, it was not clear whether a city could get out of its union contracts in Chapter 9.
Unions representing Vallejo’s public employees tried to argue that state labor laws protected the contracts. But the federal judge handling the bankruptcy, Michael S. McManus, wrote that federal bankruptcy law trumped the state labor law. He also observed that Congress could have set tougher standards for municipalities voiding their labor contracts — it did so for companies. But such bills died in committee.
Bunch-
Interesting post! I noticed the follow-on comment in the story:
“After reaching his decision, the judge gave both sides one more chance to try to negotiate less-onerous concessions.”
As you may know, the Vallejo unions ended up negotiating new pension benefits just like CF did.
The Unions wouldn’t renegotiate anything if contract law trumped Bankruptcy law.
The same way creditors are treated in a personal bankruptcy the written contract for you to pay back at agreed terms is dissolved.
[...] • Related: Prof: Providence retirees may face 73% haircut in bankruptcy (Feb. 22) Tags: bankruptcy, california, chapter 9, municipal, stockton [...]
Guys who cares about the pension thing! The real problem is schools like Brown who dont pay property tax. They voluntarily pay 4 million. If they werent tax exempt they would be paying 80 million dollars. Tax them!
[...] 30. In that case, then, your argument is the $362 million would be protected to pay retirees but not the whole $1.32 billion [...]
Ha Ha. I hope providence goes bankrupt. RI is a corrupt lib state where everyone is gaming the system or looking for handouts. The city running out of money will be a great analogy for what is wrong with liberal govt policy and a microcosm for what could happen to the US under four ore years of Obama. Public workers here in RI are the worst. My garbage collectors are employed by the town… where I pay HUGE taxes. These jerks wont take your trash unless you bring the cans into the road so they dont have to move much to get them. When they are done emptying them, they just toss them into your driveway, lawn so you have to go pick them up. They also wont touch them if they are too heavy. What a joke. F- public employees. They suck. Privatize everything. Take their pensions.