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Now let's talk of financial crisis in a place even smaller than Greece, which could also have wide consequences. A small chain of islands in the Pacific Ocean, a U.S. territory with a population of just over 53,000, made headlines recently. Its public pension fund filed for bankruptcy.

NPR's Caitlin Kenney of our Planet Money team explains what went wrong and what that bankruptcy may mean for hundreds of thousands of American retirees.

CAITLIN KENNEY, BYLINE: The Northern Mariana Islands are about 4,000 miles west of Hawaii. They look like the kind of tropical islands you see in the movies - bright blue water, white sand beaches.

SIXTO IGISOMAR: I literally mean white sand. It will hurt your eyes when you're on the beach because the sun just reflects off it.

KENNEY: This guy was born in the islands. His name is Sixto Igisomar, and he's an American. The Commonwealth of the Northern Mariana Islands is a U.S. territory. They call it the CNMI for short. And just like a lot of U.S. states, the commonwealth has a pension plan for its government employees. Igisomar used to run it.

IGISOMAR: We always say that the CNMI pension plan is the best pension plan within the United States, because the benefits were very good.

KENNEY: They used to say that. Today the pension fund has declared bankruptcy, saying it won't be able to pay out everything it promised. How did this happen? Part of the problem is what Igisomar just said - the benefits were very good. Too good, says Ruth Tighe. She is a former employee of the commonwealth's energy office.

RUTH TIGHE: At the time when I retired, there was a law on the books that said you only had to work for three years. And if you worked for the government for three years, you could retire and start collecting your pension at age 62.

KENNEY: Also, the fund would continue to pay benefits to your spouse and children long after you died. Even if you had adopted those children after you retired. Many retirees did this. They adopted their own grandchildren. This generosity might have caused problems in the best of times.

But things got worse. In the mid 2000s, the economy of the islands started to collapse. And the government started paying less and less into the pension fund. In 2006 and 2007, the government suspended its payments into the fund. So imagine the fund's position: more people are retiring, the amount the fund owes is getting larger; at the same time the amount coming in is getting smaller and smaller.

That left Igisomar in a bind. He couldn't get more money from the government and by law he couldn't change the amount of money he had to give out.

IGISOMAR: The pension plan was placed into the constitution. There's no way you can change it. There's no way you can amend it. There's no way you can just stop it. So we started entertaining the issue of bankruptcy.

KENNEY: In bankruptcy court the fund would be able to negotiate with the retirees - get them to accept less money. The case is in front of a judge right now, and there is a big question at the center of it, a question that has ramifications for states and state employees all across the mainland. Is a pension fund separate from the government or part of it?

DAVID SKEEL: That is the $64,000 question.

KENNEY: David Skeel is a law professor at the University of Pennsylvania. He says according to U.S. law, commonwealths and states cannot file for bankruptcy. The pension fund is arguing, we work for the commonwealth of the Northern Mariana Islands, but we are not part of it.

SKEEL: They need to show separateness. They need to show they are not just a branch of the commonwealth but they really are a separate entity.

KENNEY: Skeel says pension funds all across this country are watching this case to see what the court decides.

SKEEL: If this case ends up concluding that a pension fund can file for bankruptcy, I think we will have some pension funds thinking about it and at least considering taking that plunge.

KENNEY: After all, there are a lot of state pension funds that are facing financial troubles similar to these tiny islands. They've promised a lot to their retirees, but it's unclear whether or not they'll be able to keep those promises.

Caitlin Kenney, NPR News.

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