Northern Marianas faces Pritchard 'option'

BY ALEXIE VILLEGAS ZOTOMAYOR

Associate editor / reporter 

www.mvariety.net

 

THE Northern Marianas pension agency will be bankrupt if the government fails to shore up its funding to meet pension obligations but neither the Retirement Fund nor the CNMI, which is considered a “state,” can file for bankruptcy to seek relief and the commonwealth may just to end up like Pritchard, Alabama which simply stopped paying retirees their monthly pensions.

The CNMI, as a plan sponsor, stands to assume the pension liabilities of the Retirement Fund, which is projected to run out of money on March 1, 2014.

Variety asked some lawyers if the CNMI municipalities, instead of the central government, can file for Chapter 9.

Attorney Michael Dotts said, “You raise an interesting question. Could Rota, Tinian, and Saipan as municipalities of the CNMI file bankruptcy? There is no precedent for each senatorial district doing so and because the debt is centralized with the CNMI government, I don't think each municipality filing bankruptcy would accomplish the discharge of what is owed to the retirees.”

The CNMI, whose current budget is $120 million, needs at least $70 million a year to pay retirees their pensions.

Elsewhere in the U.S., some cities have been pushed to the brink of bankruptcy due to staggering pension obligations.

According to Dotts, “I am sure Rota, Tinian and Saipan could find law firms willing to try if they pay the attorneys up front to file the bankruptcies like what happened when the Fund itself tried filing bankruptcy.”

Last year, the Retirement Fund sought bankruptcy protection under Chapter 11, but U.S. Bankruptcy Judge Robert J. Faris dismissed the petition claiming that the Fund is a governmental unit and is not eligible to file for Chapter 11 petition.

Dotts said states, such as the CNMI, cannot file for bankruptcy because they have the power to raise taxes to pay their debts.

“The unfortunate solution (and I hate to even mention this as I am a taxpayer) is for the CNMI to impose a new tax to pay the retirees once the Fund itself runs out of cash,” said Dotts.

The CNMI could also impose a sales tax or a property tax, he added.

“Even with Article XII [which restricts land ownership to indigenous people] a property tax is possible,” he said.

Another bankruptcy expert in the CNMI, former Superior Court Judge Attorney Timothy Bellas, said the questions raised by Variety require research.

“Your questions are not ones that I or anyone else deals with on a regular basis in the CNMI. As you know, the NMI Retirement Fund recently unsuccessfully tried to file [for bankruptcy petition] and they hired a Boston law firm, who even though they charged over a $1 million in fees, came up with the wrong opinion according to Judge Farris,” said Bellas.

He said these issues “require substantial research and would constitute a legal opinion which I cannot give you without performing such research.”

While Chapter 9, he said, is normally used for such cases, when the bankruptcy code was written there was no provision made for entities such as the CNMI.

“So the CNMI we now know cannot file but whether the municipal governments can is a different question,” he said.

He told Variety that there is at least one case in federal court that defines the status of the Tinian municipality.

“As long as the CNMI municipal governments meet the other requirements they may be able to,” he said.

“Whether the [Retirement Fund] obligation can be apportioned to them, however, is another large question and cannot be accepted without research. However, my inclination would be to guess ‘no.’ Think about it in the personal context. One person who has some money, land and other assets decides that he cannot file bankruptcy because he would lose all of his assets. So he assigns his debt to another person and then that person who has nothing files a BK case and gets rid of the debt. That is not the purpose of the bankruptcy code which is to give people a ‘fresh start’ who have fallen on hard times.”

The case of Pritchard, Alabama is seen as a legal precedent on whether the constitutionally protected promises to the retirees could be reduced.

CNMI Gov. Eloy S. Inos had indicated in an earlier interview that pension cuts is not an option for the government.

In an earlier interview with Variety, bankruptcy expert and Illinois lawyer James E. Spiotto of Chapman and Cutler LLP said that most municipalities will do almost anything to avoid filing a Chapter 9 bankruptcy because of the market stigma.

Variety learned that there are 12 states in the nation that specifically authorize municipal bankruptcies and another 12 states that conditionally authorize such a legal remedy.

Spiotto said governmental bodies generally prefer to resolve their financial emergencies through other means such as receivership, refinancing and other resolution mechanisms.

He said filing for bankruptcy does not provide any additional tax revenue but has additional costs for the bankruptcy process that only increases liquidity problems.

Citing records, Spiotto said there have been 636 Chapter 9 filings since 1937 out of over 80,000 municipalities. He said in 2011, there were over 11,000 Chapter 11 filings.

Spiotto, a University of Chicago Law School alumnus, said if pension obligations are unsustainable and unaffordable, then “adjustments” may be required to ensure retirees will continue to be paid and public services will continue to be provided.

Spiotto said the other options include raising taxes and refinancing of unfunded obligations.

The hallmark of a good resolution, he added, “is a quick effective permanent fix (not a Band-Aid) that assures workers of the payment of their retirement (possibly with some reduction) with dedicated funding of payments and assurance that essential governmental services are provided.”

The Alabama Supreme Court allowed the city of Pritchard to move ahead with its bankruptcy petition at about the same time the Northern Marianas pension fund filed for Chapter 11 in April last year.

Prichard filed for Chapter 9 bankruptcy protection due in part to its failed municipal pension plan. For more information about the city’s pension woes, go to http://www.nytimes.com/2010/12/23/business/23prichard.html?pagewanted=all&_r=0.