Pensions and Property Rights in Municipal Bankruptcy

Recent large municipal bankruptcies raise legal and moral questions of the priority in payment of the municipality's pension obligations. Focusing on existing law, we describe the bases on which pension obligations might have priority in bankruptcy. Priority under existing bankruptcy law requires that these obligations be supported by property rights effective outside bankruptcy. Section I identifies and rejects arguments that pension priority can be granted without property rights as part of Chapter 9 reorganization. Section II describes the requirement that pension priority be supported by property rights, identifies how statutory liens or trusts in favor of pensions can create priority, and describes the barriers to using these devices. A conclusion briefly describes revisions to the Bankruptcy Code that would allow pension priority, with or without property rights