December 30, 2011
By: John Clark
In a landmark agreement, retired police and firefighters in Central Falls, Rhode Island, have accepted pension cuts as part of the town's historic bankruptcy filing.
If the bankruptcy trustee accepts the proposed deal, Central Falls' public employees would represent the first workers to ever accept pension cuts during a municipal bankruptcy, according to a recent report from the New York Times.
For many towns on the brink of financial collapse, unfunded pension accounts represent one of the largest sources of debt. In bankruptcy, though, towns are reluctant to drop pension funds because of potential battles with labor unions.
If, however, the Central Falls deal goes through, experts believe that more municipalities will seek to lower their pension costs during bankruptcy. Despite the unpopularity of such a decision, major corporations have also sliced payments to retirees in an effort to cut costs.
Recently, airlines, steel manufacturers, and auto suppliers such as Delphi have all axed pension plans in bankruptcy court. In the past, though, cities haven’t touched pension accounts in bankruptcy because most of these funds are constitutionally protected by state laws.
The Central Falls case may be an exception, however, because the retirees have voluntarily agreed to accept the proposal. Of course, towns are also reluctant to cut pension funds because such actions might have a negative effect on bondholders, who would be wary of borrowing from a defaulting city in the future.
But despite these pressures to maintain the funds, Central Falls appears to be on its way towards eliminating a significant amount of retirement benefits, although it has promised its retirees more short-term money in exchange for long-term debt relief.
Until now, pension funds looked to be bankruptcy-proof. In another recent municipal bankruptcy filing by Vallejo, California, the town was completely broke but its bankruptcy left employees’ pensions untouched. Instead, Vallejo eliminated city services, public benefits, and payments to bondholders.
At the time, it seemed that pension funds were immune from austerity measures. The proposed deal in the Central Falls bankruptcy, however, threatens to upset the status quo.
And if the bankruptcy court recognizes the deal, retirees in other debt-ridden towns across the country could stand to lose a significant amount of money.
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