Public Pension Fund Not Eligible for Bankruptcy Protection

June 18, 2012 ( – A federal bankruptcy judge has issued a tentative ruling in favor of dismissing the bankruptcy case of the Northern Mariana Islands Retirement Fund.

U.S. Bankruptcy Judge Robert J. Faris of the U.S. District Court for the Northern Mariana Islands first noted that only a person may be a debtor in a Chapter 11 case, and a person does not include a governmental unit such as a Commonwealth.  

Faris also found that the retirement fund is an instrumentality of the government unit, noting that the government formed the fund as a means of carrying out the government’s obligations to its current and retired employees, and “[p]roviding compensation and benefits to government employees is a quintessential governmental function.”  Faris said this is particularly true in the Commonwealth, where government employees’ and retirees’ pension rights enjoy constitutional protection.  

The fund argues that many entities provide retirement benefits and administer retirement plans, but Faris rejected this argument because, unlike the other entities to which the fund refers, the fund administers a plan that benefits only the government’s employees and retirees.    

In addition, Faris noted, the Commonwealth has significant ongoing influence over the fund.  The governor appoints its trustees, the legislature specifies (and from time to time changes) to whom the fund must pay benefits and in what amounts, and the government provides (or is supposed to provide) virtually all of its funding and resources.

The retirement fund filed for Chapter 11 Bankruptcy in April (see “Public Pension Files for Chapter 11 Bankruptcy”).  

Faris said the trustees of the fund should be praised, not criticized, for commencing this case, which he called a creative attempt to find a solution to the dilemma of having obligations to retirees of a government which has persistently failed to pay its debt to the fund.    

However, he said he was inclined to rule that the case cannot succeed.  “Congress did not intend that the Bankruptcy Code could solve all problems, least of all the financial problems of governmental units,” Faris wrote in his opinion. “The dismissal of this case will leave the Fund and its beneficiaries at the mercy of the Commonwealth government, but Congress intended that the elected branches of the local government, rather than a federal court, should address such problems.”  

Faris’ opinion is here.