June 15, 2012
By: John Clark
A federal judge tentatively ruled this week that a public U.S. pension fund could not file for bankruptcy, clarifying a previously body of bankruptcy law, according to a recent report from National Public Radio.
A few months ago, the pension plan of the Commonwealth of the Northern Mariana Islands, a U.S. territory located in the Pacific Ocean, made history by becoming the first public U.S. pension fund to try to file for bankruptcy.
The pension fund had long suffered from financial setbacks, mostly because the territory’s government failed to meet its obligations to make payments into the fund. But the filing had problems from the start.
Under U.S. bankruptcy law, states and commonwealths under U.S. control cannot file for bankruptcy. Municipalities can file for bankruptcy, although this is fairly rare.
So the question for the court in the Northern Mariana case was whether a public pension fund is separate from the government or is actually a part of it. If it was deemed separate, pension funds could theoretically file for bankruptcy.
However, this week, a U.S. bankruptcy judge in Hawaii tentatively ruled that the case had to be dismissed because the Northern Mariana Islands Retirement Fund is, for the purposes of filing bankruptcy, a “governmental unit,” and thus not eligible for bankruptcy.
But, in an odd twist the judge said the trustees of the pension should be “praised” for trying to file bankruptcy, given that they found themselves in an “intolerable position.”
The judge also noted that the pension fund for which the trustees were 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.”
Nevertheless, the judge went on to note that, despite the unique financial struggles faced by the pension fund, Congress did not create the Bankruptcy Code to solve “the financial problems of governmental units.”
So, the Northern Mariana pension fund will not be able to file for bankruptcy, although its attorney reportedly said it was considering appealing the decision. Until then, the trustees of the fund will have to discover another path to financial health.
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