Over objections from CalPERS, a judge last week declared that the city of San Bernardino is eligible for bankruptcy, paving the way for a historic showdown over the sanctity of public employee pensions.
The ruling by U.S. Bankruptcy Judge Meredith Jury means San Bernardino officials will now negotiate a payment plan in the coming weeks with CalPERS and other creditors. Experts say the city is expected to develop a plan that would “impair,” or reduce the amount of money paid to CalPERS. That would translate into lower pension benefits for retirees and current employees – shattering decades of precedent over public pensions in California.
“The feeling is they’re going to have to impair pension obligations because that’s their largest liability,” said Karol Denniston, a San Francisco lawyer and expert on municipal bankruptcies. Any plan ultimately will require the judge’s approval.
A similar fight is brewing in Stockton, which filed for bankruptcy protection in spring 2012, a few months before San Bernardino. At the same time, officials in California are closely watching Detroit’s largest-ever municipal bankruptcy, which could well result in reduction of pension benefits, Denniston said.
The state-appointed emergency manager for Detroit has raised the possibility of slashing pensions by 90 percent, and while a more moderate reduction is likely, that is likely to influence the outcome in the two California cities, Denniston said. Although the Detroit case was filed just recently, the case is being fast-tracked by the bankruptcy judge and a resolution is likely to come sooner than in the California cases.
“That’s going to shift the dynamic,” said Denniston, who is representing a group of Stockton taxpayers in that city’s bankruptcy case.
At stake is whether bankruptcy trumps state law. The California Public Employees’ Retirement System has said the pension benefits promised to employees and retirees represent a legal obligation guaranteed by state law. The sanctity of pensions is one reason employees enter the public sector, particularly in cities like Sacramento.
Stockton officials have continued making their regular contributions to CalPERS, triggering a court fight with the city’s Wall Street bond creditors. That dispute remains unresolved.
San Bernardino took the opposite tack, temporarily halting payments to the big pension fund after filing for Chapter 9 bankruptcy protection in August 2012. The city resumed payments in July of this year – but still owes CalPERS about $14 million from last year and has indicated it wants to restructure its relationship with CalPERS to reduce payments going forward. San Bernardino is supposed to pay the pension fund $24 million a year, said CalPERS spokesman Brad Pacheco.
CalPERS and San Bernardino have been butting heads for months. The pension fund tried to sue the city last fall but was denied permission by the bankruptcy judge.
Last week, at a hearing in U.S. Bankruptcy Court in Riverside, lawyers for CalPERS argued that the city wasn’t eligible for bankruptcy. Michael Gearin, an attorney for CalPERS, told the judge that it would create “a dangerous precedent” to let San Bernardino remain in bankruptcy. He said other cities with financial difficulties would be tempted to flee to bankruptcy court to take advantage of the legal buffers created by the Chapter 9 municipal bankruptcy laws.
But the judge said it was clear that San Bernardino was deserving of bankruptcy protection. “I can’t see anything other than dissolving the city if they can’t file under Chapter 9,” Jury said, according to an account in the Riverside Press-Enterprise.
In a statement issued last week, the big pension fund said it’s considering an appeal.
“We are disappointed with the judge’s ruling but CalPERS will continue to participate in the bankruptcy process in good faith. CalPERS will also continue to work with the city of San Bernardino so it can hopefully resolve its financial problems and also deliver promised benefits to their city employees and retirees,” the fund said. “However, CalPERS must and will continue to aggressively pursue all past due contributions These payments are statutorily required and necessary to deliver on the pension benefits promised to San Bernardino employees as a form of deferred compensation. They have worked for and earned these benefits.”
Denniston, however, said it’s likely CalPERS will have to accept lower payments, given San Bernardino’s pressing financial problems.
“It’s kind of crazy to say, ‘Pay us 100 percent, we don’t care what happens,’” the bankruptcy law expert said.