For the first time, a public pension plan files for bankruptcy

April 25th, 2012 at 9:54 am by under Nesi's Notes, On the Main Site

This story is ricocheting around the world of public finance today. Darla Mercado reports for InvestmentNews:

In what’s believed to be a first by a public pension plan, the Northern Mariana Islands Retirement Fund filed for Chapter 11 bankruptcy protection on Tuesday.

The public defined-benefit plan is in a big hole. At the moment, it’s only 38.8% funded, thanks to low investment returns and a benefit structure that’s been increased without raises in funding ….

Marcia Wagner, managing director at The Wagner Law Group, believes that this is the first time a public pension plan has filed for bankruptcy. Notably, this is a restructuring of the fund and not a liquidation, which would be under the jurisdiction of Chapter 7 of the U.S. Bankruptcy Code.

The development of the restructuring will set a precedent, particularly at a time when local government budgets and defined-benefit plans are under strain.

For Rhode Islanders, at least two things are immediately striking about this story.

First, the Mariana pension plan’s funded level of 38.8% is actually better than Providence’s pension plan, which is 32% funded, and other plans in places like Cranston and Coventry are in far worse shape than that.

Second, this will test a novel legal theory that it’s possible for pension funds filing for bankruptcy as a separate entity from the government that set them up. That would allow Providence’s pension fund alone to file for bankruptcy without the capital city going into Chapter 9.

The story is also a reminder that Rhode Island isn’t alone in having a unique pension-plan design. The Mariana fund “permitted the grandchildren and great-grandchildren of the first generation of retirees to receive benefits after the original retiree died,” Mercado writes.

Meanwhile, the Providence City Council’s far-reaching pension overhaul, which includes a multi-decade COLA freeze, passed out of committee on Tuesday evening. The full City Council is scheduled to vote on the measure at a special meeting Thursday night. And the Projo obtained the mayor’s alternative offer to retirees.

• Related: Prof: Providence retirees may face 73% haircut in bankruptcy (Feb. 22)

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13 Responses to “For the first time, a public pension plan files for bankruptcy”

  1. Ed says:

    Charles Lamb : Credulity is the man’s weakness, but the child’s strength. Charles Lamb knew much about Rhode Islands public sector employees. Too bad for the Providence public sector employees, that Mayor Taveras only spoke about FY2013. He did not mention the rest of FY2012. Providence will file chapter 9. You people who think you are entitled to these overgenerous benefits are going to get a dose of reality. You have been overcompensated for your entire lives. Say thank you for what you got, if you are old, life as you know it is over. I hope you taught your kids how to save because that is where you are going to be living.

  2. GaryM says:

    Ted,

    Interesting, but unlikely to survive.

    More likely, this is to buy time and also line some crony law firm’s pocketbook (paid of course by taxpayers who will now take a double hit).

    1. Ted Nesi says:

      Worth watching though, don’t you think?

      1. GaryM says:

        No doubt, this will be felt everywhere. Thanks for posting the link to the court document. I read through the case and once again, it boils down to how “reasonable” will be defined by the courts.

        In case anyone wants to know, the Northern Mariana Islands is one of the two insular area Commonwealths of the United States of America, the other being Puerto Rico occupying a strategic region of the western Pacific Ocean about three-quarters of the way from Hawaii to the Philippines.

        Thanks Wiki

  3. oreo says:

    Ed the talking horse speaks again.

  4. Read more about the Northern Mariana Islands Retirement Fund and the recent Chapter 11 Bankruptcy filing here: http://retiree.thecnmi.com

    The CNMI Government (sponsor of the plan) stopped making the CNMI Constitutionally mandated Employer Contributions to this Fund in 1999. Eventually CNMI courts found that unconstitutional 6 years later ( http://www.cnmilaw.org/pdf/superior_court/09-06-29-CV06-0367.pdf ) and have ordered the the CNMI Government to pay the fund $231 million in missed payments. Since that time not a cent has been paid to the Retirement Fund from the Government to satisfy that judgement. The CNMI Government still continues to fail to remit the full amount owed in Employer Contributions to the Fund for active members.

    The program is generous but the reason it is hemorrhaging today is not due to the limited over-generous areas but the failure of the Government to properly fund the system as contractually agreed.

    1. Steve D says:

      NM, the exact reason Providence pension is in trouble! Now I’m not saying 6% pensions don’t have to go, but look at the whole picture. Gina and Angel’s failure to look at the past will come back to haunt them……

      1. Tough Love says:

        Denial ? Grasping at straws ?

        As the author said, plan on becoming a burden to your kids when your Plan fails.

    2. John Smith says:

      Lets not forget to mention that the Northern Marianas Governor has complete freedom to ignore any order from the local Northern Marianas Courts, since the Northern Marianas Attorney General is appointed by him. The Attorney General, is the chief law enforcement officer in the islands, and no court case may be filed without his consent (which means the consent of the governor). If he/she dares to make any move without the consent of the governor, his is removed from his extemely well paid post, within 24 hours. Contined.. .

      1. John Smith says:

        Additionally, the Retirement Fund Board is also appointed to their cushy posts by the governor, with no input from we members (retirees/current government employees). There are no requirements for appoint to the board, other than to be a political supporter of the governor, and to be in his good graces. Very few have ever been college graduates, and a large number have not graduated from high school. The board has absolute authority to do with our money as they wish, again with no input from we members. They may loan it to whom they choose, and later forgive the debt, they may vote themselves raises, they may travel around the world on our dime, they may hire as many employees as they chose, for any salary they chose, or retain numbers of outside attorneys, with huge retainers (even though they are already assigned a government attorney), etc.
        Continued. . .

      2. John Smith says:

        I should add that the reason the Retirement Fund Board has filed for bankruptcy (no matter what they say) is to immediately stop all other court actions concerning the Fund – in other words to halt any action on the part of the Federal District Court to acquire the case, and thereby force the Northern Marianas Governor/Government to comply with the local court judgement, which ordered them to reimburse the Retirement Fund, the $231 million, plus interest, they knowingly, and deliberately deprived us of. . .

        By the way, the local court, also ordered the governor/government to immediately resume the full monthly payments into the Retirement Fund, required by the Northern Marianas Constitution. To date, after three years, the governor/governor has also failed to comply with this order.

  5. [...] 22. RHODE ISLAND NEWS: "For the first time, a public pension plan files for bankruptcy," by Ted Nesi (WPRI [Providence] Channel 12 News blog, Apr. 25, 2012). blogs.wpri.com… [...]

  6. [...] assets, not its promises; that suggests a 73% haircut. Another pension fund is now trying to file for bankruptcy on its own. Finally, look back to Vallejo. True, the city didn’t cut pension benefits by a penny – [...]