WASHINGTON — Congress should consider creation of a special federal bankruptcy court to help states and localities deal with insolvent public pension systems, says James Spiotto, managing director of Chapman Strategic Advisors.
His proposal is part of a four-pronged approach to the growing problem of underfunded state and local retirement systems in a paper scheduled for delivery here on Tuesday at the Brookings Institution’s 7th Annual Municipal Finance Conference.
Spiotto said in an interview that the main takeaway from his paper is that states and localities can’t continue to postpone resolving their pension problems.
“If you do that and crowd out essential services and infrastructure, you are going to wind up losing population, corporations and losing your tax base,” he said.
His proposed Pension Fund Bankruptcy Court would be composed of judges who understand municipal finance.
“You want a specialized court because this is a specialized problem,” Spiotto said, adding that the idea is something he’s “been kicking around” for some time, but hasn’t presented to any members of Congress.
Deficits in state pension plans grew by $295 billion in fiscal 2016 to $1.4 trillion, Pew Charitable Trusts reported in April.
Retirement systems in five states — Colorado, Connecticut, Illinois, Kentucky and New Jersey — were under 50% funded, Pew reported.
Another nine in Arizona, Hawaii, Massachusetts, Minnesota, Mississippi, New Hampshire, Pennsylvania, Rhode Island and South Carolina were funded at 60% or less.
Only four states — New York, South Dakota and Wisconsin — were at least 90% funded.
Spiotto suggests that, in addition to having access to a new federal bankruptcy court, financially troubled municipal pension systems also should consider filings prepackaged Chapter 9 bankruptcy reorganizations.
These pre-packaged plans, which he envisions being confirmed by a court in 45 to 90 days, would be similar to the prepackaged Chapter 11 reorganizations used by corporations to save time and money.
“Municipalities authorized by their states to file Chapter 9 should consider using such an approach to provide effective pension reforms where efforts at voluntary reform fail and state courts are hostile to reform efforts,” Spiotto wrote. “This prepackaged Chapter 9 municipal debt adjustment plan can provide the needed pension obligation reform to save the municipality, its taxpayers, public workers, retirees and creditors.”
States, however, are not eligible for filing for Chapter 9 and less than half the states allow their municipalities to file for Chapter 9.
Spiotto has two other alternatives that could be accomplished at the state level.
One is to create model guidelines for state constitutional amendments. The other is to create a Government Oversight, Refinance and Debt Adjustment Commission (GORDAC) to assist where public pension reform is otherwise legally or practically impossible.
“GORDAC would be created by state legislation as a quasi-judicial commission initiated through either voluntary petition by affected parties,” Spiotto writes.
Spiotto’s GORDAC is an amalgam of the best practices in states that already have taken action through the creation of control boards or other oversight bodies.
Twenty out of 26 major court decisions on state and local pension reform since 2009 have upheld reductions in retirement benefits with many of them citing the higher public purpose of assuring funding for essential government services, Spiotto’s paper notes.
But courts in Illinois, California, Oregon, Montana and Arizona have ruled against certain cuts for various reasons that Spiotto’s paper details.
The paper explains that the reasons for underfunding of state and municipal pension plans includes economic downturns, lack of economic growth, population losses, flight of businesses and the increased costs of public services.