Government Pension Fund Becomes First in America to File for Bankruptcy

When you think of America you probably think of the fifty states, but America includes territories, such as Puerto Rico and the Commonwealth of the Northern Mariana Islands, as well. The Commonwealth of the Northern Mariana Islands, like many states, is experiencing difficulty in the economic downturn and this difficulty is hurting its government pension plan. The islands’ pension plan used to be one of the most generous in the country but that level of payout is no longer sustainable. The fund’s benefits are so unsustainable that the fund recently filed for bankruptcy, a first for an American public employees’ pension fund.

One of the fund’s overly generous provisions was that a government employee had only to work for the commonwealth for three years in order to meet the employment eligibility requirement for collecting a pension. Another rule was the relatively early retirement age, 62. Thus, if a 59-year-old began working for the commonwealth, he or she could retire at age 62 and receive a pension. These benefits would continue to be paid not only for the employee’s lifetime but also after if he or she had children. Moreover, adopted children received the same benefits as biological children, and so some public employees adopted their grandchildren so that they could get an extra generation of pension benefits.

This system managed to sustain itself in the past but something had to give when the economy slowed. Large industry dwindled and tax revenues decreased as a result. The commonwealth thus had less money to contribute to the pension fund, eventually halting all contributions in 2006 and 2007. With less money going in, there was less money to be paid out but island law prevented the fund administrator from cutting benefits already promised to public employees. With insufficient contributions and massive expenditures, the fund had to file for bankruptcy so that the administrator could adjust the payouts of the fund.

This is no ordinary bankruptcy though. The legal issue that will determine whether the fund may in fact file for bankruptcy is whether a commonwealth pension fund is separate from its commonwealth. If the answer is yes, the fund may file for bankruptcy; if the answer is no, it will not be permitted to file because, as per national bankruptcy law, states and commonwealths may not file for bankruptcy.

While this case is occurring in the Northern Mariana Islands, the outcome of the case could affect any U.S. state. Other U.S. territories and states are experiencing financial troubles, and so other public pension funds may file for bankruptcy if the Northern Mariana Islands fund is permitted to file.