Earlier this year, the pension plan of a U.S. territory in the Pacific Ocean became the first public U.S. pension fund to file for bankruptcy. The fund — for the Commonwealth of the Northern Mariana Islands — had been in financial trouble for years, largely because the government of the islands hadn't kept up with the payments it was required to make into the fund.
The legal case hinged on a single important question: Is a pension fund separate from the government or part of it? Under U.S. bankruptcy law, commonwealths and states themselves cannot file for bankruptcy.
The CNMI may be small, but this case has ramifications for much larger pension funds all across the U.S. that are facing shortfalls.
As law professor David Skeel told us recently, this case could set a key precedent for other funds.
"Folks who do not want pension funds to be able to file for bankruptcy or to restructure are probably watching with terror, " said Skeel. "Folks who think there is no alternative but to figure out a way to restructure the pension, I think, are watching to see if this is another avenue."
Right now, it looks like this other avenue is blocked. A U.S. bankruptcy judge in Hawaii has issued a tentative ruling to dismiss the case.
The judge wrote that the Northern Mariana Islands Retirement Fund is "a 'governmental unit' " and therefore "not eligible for relief under Chapter 11 of the Bankruptcy Code."
But what he said after that is intriguing. He took time in his ruling to defend the trustees of the fund for pursuing this route:
"The trustees of the Fund should be praised, not criticized, for commencing this case. 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. Congress did not intend that the Bankruptcy Code could solve all problems, least of all the financial problems of governmental units."
The attorney for the fund, Brad Huesman, told the local paper, the Saipan Tribune, that the fund hasn't decided whether or not it will appeal the ruling. He says the pension fund is weighing its options.
One option that is reportedly being discussed is dissolving the fund and having the CNMI Department of Finance take over responsibility for paying out the benefits. The fund's administrator, Richard S. Villagomez, hates that idea.
"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,' " Villagomez told the Marianas Variety.
This new option — the government of the CNMI taking over the fund — could foreshadow what may happen to other struggling pension funds here in the continental U.S.
Dick Ingram, executive director of the Illinois Teachers Retirement System, recently told us if his pension fund ran out of money, it would just become part of the state. That's similar to what's being proposed in the CNMI.
"The state law says the state has to pay the benefits if we can't, so at that point we become just an administrator and send them the payroll and they pay it," said Ingram.