Pensions In Bankruptcy

Timing is everything. In deciding to launch a blog specifically geared to the public fund fiduciary, we knew there was a broad landscape of legal issues that are now gaining wide scale attention. We intend to touch on many of these issues in subsequent installments. Hopefully, we will have the opportunity to drill down on major issues that are of importance to our clients and readers. Of the many issues that could serve as the first entry, we prepared discussions on two that seemed equally urgent: the fiduciary duty to protect pension records requested under “right to know” laws and the potential impact of bankruptcy filings of local governmental plans. With yesterday’s bankruptcy filing by the city of Harrisburg, Pennsylvania, the decision has been made for us. We value your time and hope you find this discussion, and those that follow, to be worthwhile.

The bankruptcy filing of Harrisburg, Pennsylvania and the recent filing of Central Falls, Rhode Island will raise interesting issues regarding the treatment of public pension funds following a filing under Chapter 9 of the Federal Bankruptcy Code. In general, Chapter 9 of the Bankruptcy Code, 11 U.S.C. § 901 et seq. allows Federal bankruptcy relief for municipalities (defined as “political subdivision or political agency or instrumentality of a state”). As structured, access to Chapter 9 must be expressly authorized by the state in deference to the powers afforded the states under the Tenth Amendment of the U.S. Constitution.

The key tools in a Chapter 9 filing are the rejection of collective bargaining agreements and the imposition of a “plan of adjustment.” In the highly publicized bankruptcy filing involving the city of Pritchard, Alabama in 1999, the Bankruptcy Court approved the plan of adjustment which required a $16.5 million cash infusion to be paid to the city’s pension plan in 2009. In 2005, the city authorized a study of the plan and determined that if contributions were not made as required, the pension plan would become depleted and default on payments to its annuitants. In 2009, the contributions were not made and in September of 2009 the pension checks to retirees were suspended.

What is unclear from Chapter 9, and particularly acute after Pritchard, is what right or recourse exists for retirees if pension checks are, in fact, suspended. Given the increasing reports of distress in local municipalities (and states), it will be interesting to follow the developments in Pritchard, Central Falls and now Harrisburg. It should be noted that the Rhode Island legislature, perhaps in anticipation of the Central Falls filing, enacted legislation to grant municipal bondholders priority over other creditors, including retiree medical and pension annuitants.

Harrisburg’s police plan is under local control; however, its fire and non-uniformed pension plans have been assumed by the Pennsylvania Municipal Retirement System. Nonetheless, the filing of Harrisburg represents a watershed event in the evolving discussion on the impact of the economic downturn of governmental pension plans. The Harrisburg filing may be viewed at: http://online.wsj.com/public/resources/documents/harrisburgbankruptcyfiling10122011.pdf.