First Public Pension Fund Files For Bankruptcy: Will Yours Be Next?

[Valin]

Via Meadia: Walter Russel Mead

4/28/12

 

A $231 million public employee pension fund has filed for Chapter 11 bankruptcy protection. The assets on hand cannot pay the $931 million in claims the fund faces, and the trustees plan to “restructure” their obligations under bankruptcy law. In other words, they will be cutting the benefits they pay to a level the fund can afford.

 

This is a first in US courts; the fund, based in the Mariana Islands, is a relatively small one, and the Northern Marianas are not exactly at the heart of America life, but this news deserves wider attention than it has so far received.

 

Courts are where messes made by cowardly politicians go to get resolved; when legislators and governors won’t tell either employees the truth about the unsustainable commitments they have made, bankruptcy court is one of the options at the end of the road. In bankruptcy court, retirees will suddenly discover that the promises they thought were airtight, and which they’ve built their life plans around, were not so solid after all. Pensions can be reduced by court order, without union negotiation, without legislative votes. You could get a letter in your mailbox one fine day telling you that your pension has been cut by 20%, 40% or even more.

 

Right now, the Mariana plan is an outlier. For one thing, until very recently, the fund continued to pay benefits to the children and grandchildren of deceased retirees. But the difference between the Mariana plan and some state and local pensions in the US is uncomfortably small. The Mariana plan is estimated to be funded at 38.8 percent of the level needed to pay all promised benefits; the second largest public pension fund in the country (the California State Teachers’ Retirement System) has 69 percent of what it needs. The California fund has an estimated shortfall of $64 billion. State and local funds in Illinois and throughout the Midwest are in some cases worse off than the California system.

 

(Snip)