Thanks to Michael Corkery of the Wall Street Journal for his article entitled “Bondholders Win in Rhode Island” on Page C1 on August 4, 2011.

Central Falls, Rhode Island, is the second city in the US to file for Chapter 9 Bankruptcy. Chapter 9 Bankruptcy protection is a provision in the Bankruptcy code that gives protection to municipalities and cities. Since Central Falls became insolvent and unable to pay its debt it was forced to make some tough decisions.  In an effort to keep public service utilities running and companies investing in city bonds government pensions were cut by 34%.  A new law was enacted that made city officials personally accountable for not paying bondholders statewide.  Any official who impedes these payments can be held personally liable and even removed from office.  Without the new law outside investment would be very rare and the local economy would likely fall into even more of a precarious state.

What does that mean to you?

Citizens of Jefferson County, Ala, could be the next victims of a potential similar law.  If one were inacted pension holders may receive decreased benefits under a municipal bankruptcy reorganization.

It should be noted that under NY Bankruptcy laws pensions are 100% exempt from creditors (meaning no one can touch them in bankruptcy).