Public Pension Trustees and Bankruptcy

By now, you probably know that a U.S. District Court bankruptcy judge in Hawaii has ruled that the pension fund of the Commonwealth of the Northern Mariana Islands (CNMI), a U.S. territory, cannot file for bankruptcy under Chapter 11 of the Bankruptcy Code. However, you might not know that the judge had some pretty good things to say about the actions of the plan’s trustees.
On May 29th, Bankruptcy Judge Robert J. Faris tentatively found that the Northern Mariana Islands Retirement Fund is a "governmental unit" and not a “person.” Only a "person" may be a debtor in a Chapter 11 case, and since the term "person" does not include a governmental unit, Judge Faris said he was “inclined” to rule that the CNMI pension plan is therefore not eligible for relief under Chapter 11. He went on to say that "Congress did not intend that the Bankruptcy Code could solve all problems, least of all the financial problems of governmental units.” He noted that the dismissal of this case “will leave the Fund and its beneficiaries at the mercy of the commonwealth government, but Congress intended that the elected branches of the local government, rather than a federal court, should address such problems."

However, Judge Faris also said that the trustees of the CNMI plan “should be praised, not criticized, for commencing this case.” As he explained:

“The trustees find themselves in an intolerable position. The Fund for which they are responsible is caught between an irresistible force — obligations to retirees which it cannot pay — and an immovable object — the government, which has persistently failed to pay its debt to the Fund. The trustees' attempt to find a solution to this dilemma is creative and praiseworthy even though I am inclined to rule that it cannot succeed.”

On June 1st, Judge Faris formally dismissed the Chapter 11 petition. But he also once again expressed his serious concerns with the situation, saying that “The way the Fund is being treated is shameful! The way the beneficiaries are being treated is shameful!” according to press reports on the teleconference regarding the motions to dismiss.

Where do things go from here if this ruling stands? Reportedly, one option may be to dissolve the CNMI pension fund and give the CNMI Department of Finance the responsibility to pay benefits. However, as the pension plan’s administrator, Richard S. Villagomez, has been quoted as saying, "Having the fund's assets under the control of the entity that owes it the most money and is responsible for remitting contributions is analogous to the 'fox guarding the henhouse.’"

A recent post on National Public Radio’s blog, “Planet Money,” questions whether this option could “foreshadow what may happen to other struggling pension funds here in the continental U.S.”

Could it?

• Northern Mariana Island Pension Fund Chapter 11 Filing

• NPR “Planet Money” Blog Post

• Saipan Tribune Coverage of Dismissal Teleconference

• CNMI Retiree Blog Notes on Dismissal Hearing