Federal bankruptcy judge Meredith Jury is expected to rule Wednesday on the city of San Bernardino’s eligibility for bankruptcy protection after it ceased payments to the California Public Employees’ Retirement System (Calpers) last year.
The outcome of San Bernadino’s case could have a huge ripple effect on cities declaring bankruptcy, most notably Detroit.
San Bernardino, a city of 240,000 people 60 miles east of Los Angeles, is paying Calpers again, but it was unprecedented for a California city to cut payments to the fund. Calpers is America’s biggest pension fund, and its $260 billion liability makes it San Bernardino’s biggest creditor.
In Detroit, which filed for an $18.5 billion municipal bankruptcy last month–the largest in U.S. history–people are watching closely to see if San Bernardino can succeed in gaining chapter 9 protection despite its cut in payments. The state-appointed emergency manager, Kevyn Orr, has been publicly championing cuts to current and future pension benefits.
The issue of whether a city can cut pension funds is setting up an incipient fight between Wall Street bondholders and state pension funds that could wind up in the U.S. Supreme Court.
Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco, said:
There is a real parallel between San Bernardino and Detroit. 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.
James Spiotto, a municipal bankruptcy specialist and a partner at Chapman & Cutler, addressed the issue directly, saying, “If San Bernardino has to pay everything it owes to Calpers – can they survive as a municipality?”