Bankruptcy News
Retirees Accept Pension Cuts in Rhode Island Town's Bankruptcy
December 30, 2011
By: John
Clark
In a landmark agreement, retired police and firefighters in Central Falls,
Rhode Island, have accepted pension cuts as part of the town's historic bankruptcy
filing.
If the bankruptcy trustee accepts the proposed deal, Central Falls' public
employees would represent the first workers to ever accept pension cuts during a
municipal bankruptcy, according to a recent report from the New York Times.
For many towns on the brink of financial collapse, unfunded pension accounts
represent one of the largest sources of debt. In bankruptcy, though, towns are
reluctant to drop pension funds because of potential battles with labor unions.
If, however, the Central Falls deal goes through, experts believe that more
municipalities will seek to lower their pension costs during
bankruptcy. Despite the unpopularity of such a decision, major corporations
have also sliced payments to retirees in an effort to cut costs.
Recently, airlines, steel manufacturers, and auto suppliers such as Delphi
have all axed pension plans in bankruptcy court. In the past, though, cities
haven't touched pension accounts in bankruptcy because most of these funds are
constitutionally protected by state
laws.
The Central Falls case may be an exception, however, because the retirees
have voluntarily agreed to accept the proposal. Of course, towns are also
reluctant to cut pension funds because such actions might have a negative effect
on bondholders, who would be wary of borrowing from a defaulting city in the
future.
But despite these pressures to maintain the funds, Central Falls appears to
be on its way towards eliminating a significant amount of retirement benefits,
although it has promised its retirees more short-term money in exchange for
long-term debt relief.
Until now, pension funds looked to be bankruptcy-proof. In another recent
municipal bankruptcy filing by Vallejo, California, the town was completely
broke but its bankruptcy left employees' pensions untouched. Instead, Vallejo
eliminated city services, public benefits, and payments to bondholders.
At the time, it seemed that pension funds were immune from austerity
measures. The proposed deal in the Central Falls bankruptcy, however, threatens
to upset the status quo.
And if the bankruptcy court recognizes the deal, retirees in other
debt-ridden towns across the country could stand to lose a significant amount of
money.
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