Does declaring bankruptcy allow municipalities to get around statues and state constitutional provisions protecting the pensions of already retired workers? Central Falls, Rhode Island is now putting that issue to the test. It is working its way through a municipal bankruptcy. It is trying to shield bond holders but cut pension benefits for already retired workers. In municipal bankruptcies, already retired workers usually have their benefits protected, as David Skeel shows was the case recently in Vallejo, California. The big legal issue then, according to the New York Times, is that "local officials who want to cut pensions do not, as a rule, want to
shortchange their bondholders for fear of not being able to borrow in
the future -- yet bankruptcy law requires that both types of creditors be
treated equitably." Whether they can do this is the big question not just for Central Falls but for other municipalities drowning in pension debt.
The other issue is whether disability pensions can be cut. This is particularly relevant in Central Falls where 60 percent of Central Falls police officers and firefighters retired on full disability pensions, which are
inflation-protected and tax-free payments. According to the Times, one former 43-year old worker "has become a prominent personal-injury
lawyer and can be seen in television ads shooting baskets and pretending
to fall down a manhole."
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