Judge to rule on San Bernardino bankruptcy, pensions loom

LOS ANGELES Sun Aug 25, 2013 8:07am EDT

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LOS ANGELES (Reuters) - The city of San Bernardino is expected to learn on Wednesday if it is eligible for bankruptcy protection despite the opposition of California's powerful public pension system - an important test for the federal law used by Detroit and other U.S. cities burdened by pension payment costs.

Most observers expect federal bankruptcy judge Meredith Jury to rule that cash-strapped San Bernardino, 60 miles east of Los Angeles, is eligible for Chapter 9 protection, a year after it declared bankruptcy having effectively run out of cash to meet its day-to-day obligations.

A city of just 240,000, San Bernardino could be a precursor for what is shaping up as a central issue in the far bigger bankruptcy case of Detroit: whether an insolvent city can cut already-promised pensions for its workers and pay less into its public retirement funds.

In an unprecedented move, San Bernardino halted its biweekly payments to the California Public Employees' Retirement System (Calpers) for an entire year after declaring bankruptcy last August.

San Bernardino has now resumed payments to Calpers, America's biggest pension fund and San Bernardino's largest creditor, but no city has ever halted employer payments to Calpers before. The $260 billion pension fund is the only party objecting to San Bernardino's bankruptcy, saying that pension funds should not be treated like other creditors. Calpers may appeal the eligibility decision.

In Detroit, which last month filed for the largest municipal bankruptcy in U.S. history, estimated at $18.5 billion, the state-appointed emergency manager, Kevyn Orr, has already called for cuts to current and future pension benefits in any bankruptcy plan. Unions representing workers have objected to the bankruptcy by arguing that it contravenes benefits' protection enshrined in Michigan's state constitution.

LIKE A LAB TEST FOR DETROIT

In both San Bernardino and Detroit, the idea of cutting back pension payments has set up a high-stakes battle between Wall Street bondholders and state pension funds over how they are treated when cities run out of money - an issue that could eventually find its way to the U.S. Supreme Court.

"There is a real parallel between San Bernardino and Detroit," said Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco, who is not representing any party in the San Bernardino or Detroit cases.

"Both cities have shown an appetite to take the pension issue head-on. If the judge rules San Bernardino eligible for bankruptcy, it opens the way for the city to propose a plan that could impair Calpers - which could put this little city ahead of what is happening in Detroit."

Calpers has taken the opposite stance in the case of Stockton, another California city, which was found eligible for bankruptcy in April. Stockton has kept current on all payments to the pension fund.

The judge overseeing the Stockton case has said that the question of whether Calpers remains to be paid in full under a bankruptcy plan could become an important issue when the city presents its exit plan.

James Spiotto, a municipal bankruptcy specialist and a partner at Chapman & Cutler in Chicago, said the issue for San Bernardino - and other cities in bankruptcy - is simple: it comes down to what they can feasibly pay creditors under a bankruptcy plan.

"If San Bernardino has to pay everything it owes to Calpers - can they survive as a municipality?"

(Editing by Tiziana Barghini and Matthew Lewis)

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Comments (5)
InMotion wrote:
When are people going to stop believing the politicians when they tell them they’re going to cut taxes and everything will be even better? The cities, states and federal gov’t are all in $$$$ trouble and yet keep talking about how lowering taxes is a good thing. The public sector retirees have done nothing to deserve the cutting of their pensions and the bond holders should not have their principal cut. It’s all caused not by ‘overpromising grandiose pensions’ but by failing to fund them in order to cut taxes and spend on other pet projects. When are legislators going to be held responsible for their mis-management of our government entities?

Aug 25, 2013 9:06am EDT  --  Report as abuse
eatingdogfood wrote:
CA CHING, CA CHING, CA CHING !!! YEAH, IT MUST BE THAT TIME OF YEAR AGAIN !!! My Union Boss down at the Town Hall emailed me yesterday and
Told me that this article was hitting the Papers today, and He told Me
to make it Look like I was Working till this Blows Over in a week. I
know the routine !!! In a week, I’ll be back to my usual activity of
Collecting A Paycheck for Doing Nothing !!! Hey, Private Sector
Workers; You really gotta Pony Up more Taxes !!! I need at least a 10 %
raise !!! My Cabin Cruiser at the Dock behind my Vacation House in
Florida needs a New Engine. My wife has been after me for a new car.
She wants a BMW X6 G-Power Typhoon S !!! I told her I can’t afford that
car. So then she says she will accept a Mercedes-Benz CL-Class and
Nothing else !!! I also got Private School Tuition of $ 40,000.00 due
in September. I got Credit Card Expenses coming out my AXX !!! That
new 3000 sq ft extension on my house raised my property taxes $ 15,000.
The maid and the housekeeper want raises. The gardener also wants a
raise. You see Bunky; It ain’t easy in the Public Sector !!! So come
on Private Sector Worker; Pony Up and Pay More Taxes so I can afford to
live here !!! You See; Life Is Not Fair, and the DemoRats will take
care of Everything !!! HAPPY DAYS ARE HERE AGAIN !!!

Aug 26, 2013 9:03am EDT  --  Report as abuse
eatingdogfood wrote:
CA CHING, CA CHING, CA CHING !!! YEAH, IT MUST BE THAT TIME OF YEAR AGAIN !!! My Union Boss down at the Town Hall emailed me yesterday and
Told me that this article was hitting the Papers today, and He told Me
to make it Look like I was Working till this Blows Over in a week. I
know the routine !!! In a week, I’ll be back to my usual activity of
Collecting A Paycheck for Doing Nothing !!! Hey, Private Sector
Workers; You really gotta Pony Up more Taxes !!! I need at least a 10 %
raise !!! My Cabin Cruiser at the Dock behind my Vacation House in
Florida needs a New Engine. My wife has been after me for a new car.
She wants a BMW X6 G-Power Typhoon S !!! I told her I can’t afford that
car. So then she says she will accept a Mercedes-Benz CL-Class and
Nothing else !!! I also got Private School Tuition of $ 40,000.00 due
in September. I got Credit Card Expenses coming out my AXX !!! That
new 3000 sq ft extension on my house raised my property taxes $ 15,000.
The maid and the housekeeper want raises. The gardener also wants a
raise. You see Bunky; It ain’t easy in the Public Sector !!! So come
on Private Sector Worker; Pony Up and Pay More Taxes so I can afford to
live here !!! You See; Life Is Not Fair, and the DemoRats will take
care of Everything !!! HAPPY DAYS ARE HERE AGAIN !!!

Aug 26, 2013 9:03am EDT  --  Report as abuse
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