Pensions and Other Entitlements: Pt. 2 (April 28, 2008)

Constitutional law in America is neither consistent nor coherent.  The United States Bankruptcy Courts may be the only forum to adjust pensions and other obligations.  A business can file a petition pursuant to the United States Bankruptcy Code in Title 11 and apply Section 365 to reject pension and other obligations.  Many corporations have rejected pension and other obligations for decades and in recent publicized cases.  Chapter 9 of the Bankruptcy Code allows a municipality to file a petition in bankruptcy and resort to the relief in Section 365.  Orange County, California did it in 1994; Desert Hot Springs, California in 2001; Vallejo, California may do it in 2008; watch San Diego in the next few years.

A separate state of the union is not now afforded an opportunity to file a petition under the Bankruptcy Code even if it is not able to afford to pay its bills.  A new chapter of the Bankruptcy Code, Chapter 15, may need to be added allowing a state to utilize the provisions of Section 365.  The big public policy development will come when everyone realizes that another new chapter of the Bankruptcy Code, perhaps Chapter 17, may need to be added to allow the United States government itself to file a petition under the Bankruptcy Code to utilize the provisions of Section 365.  [See the e-ssay dated January 17, 2005 entitled “America the Bankrupt:  Economics 210 in the Land of the Freeway and the Home of the Brave”.]

Using the Bankruptcy Code is problematic at best.  In effect, the Congress (a legislative body) would pass legislation to allow a Bankruptcy Court (the judicial branch) to make a decision that Congress may be prevented from making itself by another twig of the judicial branch.  Section 365 is binary and only allows a debtor to accept or reject a contract; there is no ready provision to allow a Bankruptcy Court to accept sixty percent (60%) of the pension and other obligations.  Where to file the petition is not clear, the Southern District of New York; the Northern District of Alaska, or elsewhere?  The Bankruptcy Judge has less discretion under the Bankruptcy Code to recognize the decision of the debtor to accept or reject, although he or she may be unwilling to recognize a decision that could threaten his or her pension.

The unfunded and unfounded promises we have made to each other will stagger those who were never consulted.  Or even born.  All government entities in the intermediate term will need to dispense with or limit pension and other obligations.  Addressing the matter in the Bankruptcy Code and in the Bankruptcy Courts is cumbersome and incomplete, yet the approach more easily overcomes the constitutional infirmities that other courts have mistakenly imposed.  At core, as noted previously, the rejection really is not a rejection of pension obligations, it is a refusal to accept obligations the Younger Generation never agreed to undertake nor can reasonably be expected to perform.

Some say: “If we were just informed that our pension and other obligations could disappear or be reduced, we could modify our behavior and decisions now.”  What if someone said: “Your pension and other obligations could disappear or be reduced.”  Despite their protestations, the populace, even when informed, likely will not modify its behavior and decisions.  The answers admittedly are not easy.

Bumper sticker of the week:

There Is No Such Thing As A Free Snack.

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