On Saturday morning, Providence Mayor Angel Taveras will convene a meeting of the city’s retirees to ask them to accept reductions in their pension benefits to help the capital avoid filing for bankruptcy, as nearby Central Falls did last August. What happens if they don’t come to an agreement?
David Skeel is a professor at the University of Pennsylvania Law School in Philadelphia and a nationally known expert on bankruptcy and Chapter 9. We spoke on Thursday about what bankruptcy would mean for Providence’s pension system, how Central Falls has changed the legal landscape, and why he doesn’t buy the case for Rhode Island’s bondholders-first law. The transcript has been lightly edited for length and clarity.
I was fascinated by the argument in your working paper that government employees’ and retirees’ property rights cover the pension fund but not the pension promises. Could you explain that?
The question is if a city or a state makes a pension promise, but does not fund the promises – which has been true in many states in recent years – what exactly is protected in the event of a default or of bankruptcy? A lot of people assume that what’s protected is the full promise, even if there’s no funding behind it.
Although this is certainly not free from doubt – this is unchartered territory in many respects – my view is that there’s a good argument that what’s protected is the amount of money that’s been set aside. Pension obligations are a form of what we refer to in the law as a property right, and other kinds of property rights are protected up to the value of the property that’s set aside for them. So if somebody has collateral for a transaction, we treat that promise as sacrosanct up to the value of the collateral.