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Can a Pension Plan File for Bankruptcy?

From the PensionDialog blog archives
The news on April 19 included the headline, “In apparent first, a public pension plan files for bankruptcy.” That got our attention.

 

As of May 5, it seems that the Northern Mariana Islands Retirement Fund will not be able to remain in bankruptcy reorganization on a technicality. Two individuals and the U.S. Trustee stepped forward and joined in a previously filed motion to dismiss the Chapter 11 case, contending the fund is an instrumentality of the islands' government and, therefore, not eligible for bankruptcy. The hearing on dismissal is currently scheduled for June 1 in Saipan.

This is in keeping with what bankruptcy expert Frank Shafroth, the Director for the Center of State and Local Leadership at George Mason University, points out in our interview on the situation in the Commonwealth of the Northern Mariana Islands.

PD: The news story states, “The development of the restructuring will set a precedent...” Does it set a precedent?

FS: The development does set a precedent—because, to the best of my knowledge—no state or territorial pension fund has previously filed for bankruptcy protection. Furthermore, it is unprecedented that any pension fund, public or private, could file for bankruptcy separate and apart from its sponsoring government or corporation. Typically, the entity would file, not its pension plan. While rare, there are two municipalities that are seeking federal bankruptcy protection under Chapter 9: Prichard, Alabama, and Central Falls, Rhode Island. In each of these instances, the municipal entity filed for bankruptcy, not its pension fund.

PD: What difference does it make that this is a territory and not a municipality?

FS: The key difference is that with regard to Chapter 9 bankruptcies, federal law provides that an entity may be eligible as a debtor under Chapter 9 municipal bankruptcy only as such an entity is specifically authorized in its capacity as a municipality. The chapter of the Bankruptcy Code provides for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts). The chapter does not provide for territories.

PD: How could a Commonwealth pension fund file under Chapter 11?

FS: Because the Commonwealth of the Northern Mariana Islands (CNMI) is not a state, even if the pension plan were an agency or instrumentality of the Mariana Islands, the plan would not qualify as a municipality. Chapter 9 is limited to municipalities.

PD:Can you share some key facts about territory financial structure?

FS: The CNMI emerged from the Trust Territory of the Pacific Islands (TTPI), which the United States administered on behalf of the United Nations from 1947 until Palau. The last member of the TTPI to choose its own political future became an independent country in 1994.  In 1976, Congress approved the mutually negotiated Covenant to Establish a Commonwealth of the Northern Mariana Islands (CNMI) in Political Union with the United States. The federal law (the Covenant) making the Commonwealth a U.S. territory passed in 1975; the Commonwealth adopted its constitution in 1977; and its first constitutional government took office in 1978.

The CNMI has a GDP of $716 million. The Commonwealth in 2009 realized gross business receipts of $1.6 billion (the islands have a population of 53,883 according to the 2010 census). The Commonwealth in FY 2009 realized total revenues of $230.2

How did the Northern Mariana Retirement Fund get into so much trouble? Lack of consistent required payments from the government – a longstanding issue according to one report, which includes a lawsuit in 2006 seeking retribution from the government to fully pay its employer share of retirement contributions.

According to Radio New Zealand International, this has been a good thing: “The board decided to enter into chapter 11 petition, so it would re-organise itself and better function. And also extend the life of the retirement fund.”

In addition to being director for the Center of State and Local Leadership at George Mason University, Frank Shafroth is Director of Legislative Affairs and Intergovernmental Relations for the Municipal Securities Rulemaking Board (MSRB). Mr. Shafroth has more than 30 years of experience on Capitol Hill including serving as chief of staff to Congressman Jim Moran (D-VA), and worked on legislation reauthorizing Chapter 9 many years ago.


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