San Bernardino, deemed eligible for bankruptcy, may take knife to pensions

By Jennifer Medina, New York Times News Service

Wednesday, Aug. 28, 2013 | 10:57 p.m.

LOS ANGELES — A federal bankruptcy court judge granted the city of San Bernardino eligibility for bankruptcy protection Wednesday, raising the possibility that the city will propose a plan to dig itself out of debt by cutting money promised to the public pension system.

The ruling by Judge Meredith Jury came despite opposition from the powerful California Public Employees’ Retirement System, more commonly known as CalPERS.

San Bernardino, a working-class city of 240,000 about 60 miles east of Los Angeles, declared Chapter 9 bankruptcy last summer, saying it had effectively run out of money to pay for day-to-day operations, in large part because of pension obligations.

Lawyers for CalPERS had argued that the city should not treat pension funds like other creditors. For the past year, CalPERS has also argued that the city has not provided enough documentation for the court to rule in the bankruptcy case and that the city had ignored warnings about a financial crisis for years and filed for bankruptcy as a matter of convenience.

In her ruling Wednesday, however, Jury said that it had been clear for months that San Bernardino was insolvent and that only its most recent financial predicaments were relevant.

“Because they didn’t do something then, doesn’t mean they can’t now,” Jury said in the Riverside, Calif., courtroom. “The city desires and needs to formulate a plan; it is their only hope.”

All of the 10,000 creditors are better served by allowing the bankruptcy to go forward, Jury added.

“I can’t see anything other than dissolving the city if they can’t reorganize under Chapter 9,” the judge said. “They can’t make cash where it isn’t. If they got all the money they want — who isn’t going to get paid? All the employees? I don’t know, how does that help CalPERS if the employees aren’t paid?”

“The citizens of this city deserve a chance,” she said.

A similar court battle is brewing in Detroit, which in July became the largest city in the country’s history to file for bankruptcy.

City officials there have said that they will need to cut current and future pension benefits in bankruptcy. But public unions say that pension benefits are protected by Michigan’s Constitution. A federal bankruptcy judge is to hear initial oral arguments in the Detroit case Sept. 18.

While the rulings in the San Bernardino case do not necessarily set a precedent for Detroit, the cases center on the same federal laws. Municipal finance experts say the issue of how public pension funds are handled after cities declare bankruptcy could find its way to the Supreme Court.

Last year, San Bernardino stopped making biweekly payments to CalPERS, making it the first California city to do so. At roughly $260 billion, CalPERS is the biggest pension fund in the country and is San Bernardino’s largest creditor.

Stockton, a Northern California city that declared bankruptcy in 2012, has continued to pay all money owed to the pension system, but the judge in that case has said the pension fund is likely to become a key issue for the city in its restructuring plan.

Many employees in San Bernardino left just before the city declared bankruptcy last year and received payments from the city, which CalPERS argued gave preferential treatment to some employees and was a sign that the city was not acting in good faith. Jury said that while the decision might not have been financially wise, it did not impede the city’s ability to declare bankruptcy.

“The employees of the city weren’t stupid,” she said. “Anybody that had any other options was going to leave.”

In a statement, CalPERS said that it would participate in the bankruptcy proceedings and at the same time “aggressively pursue all past due contributions” and would consider appealing.

“These payments are statutorily required and necessary to deliver on the pension benefits promised to San Bernardino employees as a form of deferred compensation,” the statement said. “They have worked for and earned these benefits.”