The Northern Mariana Islands Retirement Fund filed for Chapter 11 bankruptcy protection last month in what is thought to be the first ever by a public pension plan.
According to the bankruptcy filing in the U.S. District Court for the Northern Mariana Islands, the public defined benefit plan is only 38.8% funded due to low investment returns and a benefit structure that has been increased without increases in funding. The pension fund currently holds $268.4 million in assets, with $911 million in liabilities. The restructuring of the plan will undoubtedly set a precedent, especially at the present time, with local government budgets and defined benefit plans under pressure. The manner in which the court deals with retirees, disabled individuals and others entitled to payments will be critical.

In an article in Pensions & Investments by Darla Mercado, the retirement fund has been plagued “by the commonwealth’s inability to make its share of contributions to the pension plan, according to court documents and [a recent] letter to participants. The feud between the retirement fund and the commonwealth over the government’s responsibility to chip in for employer contributions to the pension plan goes back to 2006. While the commonwealth court decided in favor of the retirement plan in 2009, the local government has been unable to make the mandated $231 million payment, and now the amount it owes to the pension plan has ballooned to $325 million, according to bankruptcy court filings.”

The report continues, stating that part of the predicament has been the generosity of the pension plan, which was designed to serve only retirees and their spouses but grew to extend benefits to three generations of heirs. Although the fund has now stopped disbursing benefits to descendants of pensioners, it is predicted to only be able to pay the current benefit rate for two additional years before  failing in 2014; this according to court documents. Officials at the pension fund have petitioned the court to continue making payments to beneficiaries, but to reduce the rate at which it currently pays benefits.

In the interim, the pension plan has created Pension Holdings Corp., which has enough money to pay two months of benefits to beneficiaries, who can continue collecting funds while the plan discusses with creditors terms for making future payments.

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