In a case with similarities to Detroit's, a federal bankruptcy court judge granted the city of San Bernardino eligibility for bankruptcy protection on 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 New York Times reports 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.
"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 on 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.
In her ruling on Wednesday, Judge 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,” Judge 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, Judge 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.
