* Bankrupt city faces $15 million payment demand from state
* City calls move illegal and threatens to sue
* Dispute relates to wind-down of redevelopment agencies
By Tim Reid
March 12 Bankrupt San Bernardino is threatening
to sue the state of California over demands it owes millions of
dollars in property taxes, the latest complication in the city's
quest to fix its fiscal problems in federal bankruptcy court.
The bankruptcy of the city 65 miles east of Los Angeles is a
national test case on whether the pensions of government workers
take precedence over other payments in a municipal bankruptcy.
It is a high stakes issue for pension plans and their
beneficiaries, and for Wall Street bondholders who lend money to
In letters dated February 21 and March 4, the California
Department of Finance demanded the city pay $15.2 million in
property taxes related to its former redevelopment agency. If
the city does not pay the money by April 3, the state could dock
the funds from San Bernardino's future sales and property tax
revenues, the letters state.
In response, San Bernardino's city attorney said in a letter
to California's state controller, John Chiang, that the threat
to withhold tx revenue is "illegal" and a "willful violation" of
federal bankruptcy law, which protects debtors from creditors'
demands during proceedings.
If California does not withdraw its threat to dock future
city revenue, "the city will have no choice but to institute
proceedings" against the state controller and other state
officials, James Penman, San Bernardino's city attorney, wrote
in a March 8 letter.
San Bernardino filed for bankruptcy protection in August,
citing a $46 million deficit for the current fiscal year. It
continues to state that it can barely make payroll.
A federal bankruptcy judge has yet to rule on the city's
eligibility for bankruptcy protection, but in the meantime
bankruptcy court protections against collection actions remain
The bankruptcy court proceedings are still in an early
stage, with the city and its creditors -- notably Calpers, the
public employee retirement system -- wrangling over the
production of financial records.
San Bernardino halted its twice monthly pension payments to
Calpers in August, an unprecedented step for a city. Calpers
argues that it takes primacy over other creditors in the
bankruptcy, something Wall Street bondholders dispute.
CITY "GASPING FOR AIR"
The judge overseeing the case has voiced sympathy with the
city's argument that it has scant human resources to deal with
voluminous record demands and has given the city more time to
comply. The city's finance chief quit his post in February, and
has not been replaced.
The state finance department move follows a letter last week
from California's state controller, alleging that San Bernardino
misdirected over $500 million in assets and cash after its
redevelopment agency was dissolved.
San Bernardino's RDA was one of about 400 eliminated last
year across California as a result of legislation spearheaded by
Governor Jerry Brown. The goal was to free up property tax
revenues controlled by the RDAs for use in funding schools and
San Bernardino's dispute with the state over RDA funds is
not an isolated case, said Karol Denniston, an expert in
municipal bankruptcy at Schiff Hardin law firm in San Francisco
who is not involved in the San Bernardino case.
Many cities have received demands from the state over the
allocation of RDA funds and are disputing them, she said. What
makes San Bernardino unique is that it is the only one of these
cities in bankruptcy.
"The state coming after San Bernardino is consistent with it
coming after everybody else - but San Bernardino is in
bankruptcy and is gasping for air," Denniston said.
"For San Bernardino, this is impossible to address. There
are cities not in bankruptcy having trouble dealing with this,
in terms of the audits and the manpower involved."
H.D.Palmer, a spokesman at the California department of
finance, said the department was aware that San Bernardino was
seeking bankruptcy protection.
He said the state was willing to work out a structured
payment with the city, but that under state law once an audit
had determined the money was owed it had to be paid.
Michael Sweet, a bankruptcy attorney with Fox Rothschild who
is not involved in the San Bernardino case, said the city had
good grounds to dispute the state's financial demands, but they
nontheless could complicate the process.
"This certainly makes it tougher for the city," Sweet said.
"To the extent the city has to expend resources, be they
monetary or staff hours dealing with the state, those are
resources that can't be spent on creditors."