Carolyn W. Kane ckone@bswlaw.com Fax: 203.772.

4008

a

.,

• Brenner, Saltzman & Wa.llman LLP

A TTORNEYS AT LAW

MEMORANDUM

TO:

Jerome Saqnella, Pension Administrator and Chair of City of New Haven City Employees Retirement Fund

FROM:

RE:

Carolyn W. Kone

Funding of CERF by City of New Haven/lmpact of Bankruptcy on Payment of Pension Benefits

DATE:

October 21 , 2010

I. Introduction

In an email dated August 31, 2010, you requested that I address three

questions:

1. Whether the City is required to fund retirement benefits for CERF

employees?

2. If the City were to file for bankruptcy, how would such bankruptcy filing

affect members' rights to their pension benefits?

3. If the State were to assume control of the City's finances, could the State

reduce members' pension benefits?

This memo addresses each of these questions.

271 Whitney Avenue • New Haven, Connecticut 06511 • 203.772.2600 • Fax: 203.562.2098 • www.bswlaw.com

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II. Discussion

A. The City's Obligations to Fund CERF

Under the various collective bargaining agreements that set forth the CERF plan,

the City is required to fund CERF. These plans include Article I, Section 4, which reads

as follows:

The City of New Haven shall pay to the Retirement Board such amounts to fund the benefits provided by this Article as shall be determined by the Retirement Board based on sound actuarial principles. For each fiscal year the City's payments shall be a percentage of the estimated total payroll of all participating members of the Retirement Fund. The City's payment shall also include the total administrative and other expenses of the Retirement Fund for each year.

Accordingly, the City is required to fund the benefits provided under CERF.

The City and the unions that represent its employees could delete this provision

in future collective bargaining agreements. In such case, retirees who retired under

collective bargaining agreements that included the language quoted above would be

entitled to have the City pay to the Retirement Board funds necessary to fund their

benefits, but members who retired under subsequent contracts that did not include this

language may not have the same rights. See Walker v. City of Waterbury, 601 F. Supp.

2d 420, 424, n.2 (March 6, 2009), aff'd 361 Fed. A. 163 (2010)(noting issue that retirees

may be only entitled to the benefits in the collective bargaining agreement in effect at

the time of their retirement, but not deciding issue); Poole v. City of Waterbury, 266

Conn. 68, 93 (2003)(holding that collective bargaining agreement in effect when

plaintiffs retired granted them vested rights to continued medical benefits);

B. The Impact of Bankruptcy on the City's Obligation to Fund CERF

Under Chapter 9 of the Bankruptcy Code, 11 U.S.C. § 901, a municipality can

file for bankruptcy if the following conditions have been met: (i) the municipality has the

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authority to file for bankruptcy under state law; (ii) the municipality is insolvent': which is

defined as an inability to pay debts as they become due; (iii) the municipality desires to

effect a plan to adjust its debts; (iv) the municipality has engaged in negotiations with its

creditors (including its unions) prior to filing bankruptcy; and (v) the bankruptcy petition

is filed in good faith. 11 US.C. § 109(c). In Connecticut, a city such as New Haven has

the authority under state law to file for bankruptcy. In re City of Bridgeport, 128 B.R.

688, 699 (Bankr. D. Conn. 1991).

In bankruptcy, a municipality can reject an executory contract. 11 U.S.C.

109(c)(4). Although there is very little case law in this area, at least one court has held

that a municipality may reject a collective bargaining agreement (which includes an

obligation to fund a pension pian), if the contract burdens the municipality, the equities

favor rejection and the parties have made reasonable efforts to negotiate their

differences prior to rejection. In re Vallejo, 403 B.R. 72, 74 (Bankr. E.D. Calif. 2009).

See also In re County of Orange, 179 B.R. 177, 184 (8ankr. C.D. Calf. 1995).

Additionally, at least one court has held that pensions contributions that a municipality

in bankruptcy failed to make both prepetition and post petition would not be entitled to

administrative priority status but rather would be considered general unsecured claims.

In re: City of Pritchard, Alabama, No. 09-150000 (8ankr. S.D. Ala March 10,2010).

Accordingly, it appears that under these authorities if the City were to file a bankruptcy

petition, it could stop funding CERF.

1 In In re City of Bridgeport, 129 B.R. 332 (Bankr. D.Conn. 1991), the Bankruptcy Court dismissed the petition for bankruptcy filed by the City of Bridgeport because the Court found that Bridgeport had not established that it was insolvent, i.e. that it was unable to pay its debts as they became due in its current fiscal year or based on an adopted budget, in its next fiscal year.

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If the obligation to fund a pension plan is rejected, the members have unsecured prepetition claims for damages. § 502(g). A municipality is required to propose a plan of adjustment which must be approved by half of the creditors in number and 2/3 of each class of claims. Even if the creditors do not approve the plan of adjustment, the bankruptcy court can approve the plan if it finds that one class of creditors has approved the plan and the plan is fair and equitable. If the plan is not approved by the creditors or the court, the court can dismiss the petition.

Accordingly, if the City of New Haven were to file bankruptcy, reject its collective bargaining agreements, including its pension funding obligations, and have a plan of adjustment approved, the members would have unsecured claims for damages that would be paid pursuant to the terms of the approved plan.

C. The Impact of a State Take-Over of the City's Finances

Because of the Home Rule provisions of the Connecticut statutes, in order for the State to take over responsibility for the City's finances, including its contributions to CERF, a special act would be required, as was the case when Waterbury's finances were placed under the supervision of the Financial Planning and Assistance Board (the "Oversight Board") pursuant to Connecticut Special Act No. 01-1, 2001 Conn. H.B. 6952 (Reg. Sess.) and when Bridgeport's finances were placed under the supervision of The Bridgeport Financial Review Board pursuant to Special Act No. 88-80.

The extent that an oversight or review board could stop funding CERF would depend upon the provisions of the special act enacted to implement the take over of the City's finances and any vested rights of the members. While members who already are retired under collective bargaining agreements, most likely could not have their rights

reduced, even by an oversight board, see Poole, 266 Conn. at, 93, the Connecticut Legislature could grant broad rights to an oversight board to reject ongoing contracts, such as under Special Act 01-1, which permitted the Oversight Board to manage Waterbury's unfunded pension liabilities, set aside certain contracts under certain circumstances, approve or reject all collective bargaining agreements, approve or reject all modifications and amendments to agreements and impose binding arbitration of labor contacts. New contracts entered into after the Oversight Board assumed authority over Waterbury's finances reduced the employees' pension accrual rate, changed vesting rules and rules regarding eligibility to collect pension benefits and required the completion of 25 years of service. In contrast, Special Act No. 88-80 which created the Bridgeport Financial Review Board excluded collective bargaining agreements from its coverage and only affected new contracts rather than existing contracts. Accordingly, the extent to which an oversight board could alter the pension rights of current employees would depend upon the authority granted by the General Assembly to the oversight board.

Finally, whether or not powers to reject requirements that the City fund pension benefits would impair the constitutional rights of the unions not to have their contracts impaired under the Fifth and Fourteenth amendments to the United States Constitution and Article I, § 10 has not been decided.

Please let me know if you have any questions.

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