In a potentially explosive decision, Judge Meredith Jury of the U.S. Bankruptcy Court for the Central District of California has ruled that the city of San Bernardino, California can indeed declare bankruptcy, despite the fact that the city stopped paying the California Public Employees’ Retirement System (Calpers) the money it was owed.
Other cities that are either near bankruptcy or already bankrupt, such as Detroit, may use the decision to eschew making payments to pension organizations. Calpers, which is a $260 billion fund, is America’s biggest pension fund and the largest creditor of the city.
Jury stated, “I am ruling as a matter of law that the city is eligible. I don’t think anyone in this courtroom seriously thought the city was anything but insolvent.” She added, “If Calpers gets all the money they want, under what they say is their statutory right, who isn’t going to get paid? All the employees? How is that going to help Calpers?”
To obtain Chapter 9 municipal bankruptcy, a city must prove insolvency and its good faith dealing with creditors.
The fight between the city’s bondholders, who favor the bankruptcy decision, and Calpers may continue to the Supreme Court. Calpers attorney Michael Gearing said Jury’s decision set a “dangerous precedent” that will strengthen the resolve of other cities to “create a crisis because they have a large number of creditors.” Amy Norris, a Calpers spokeswoman, stated, “Calpers is considering its options for appeals.”
San Bernardino filed for bankruptcy protection in August 2012, then cut its $1.2 million bi-monthly employer payments to Calpers until it resumed paying the pension fund in July of 2013. The city claimed it was facing a $46 million deficit.
The case boiled down to the bondholders of the city arguing that federal statutes trump California state law, which asserts that Calpers must always receive the funds it is owed, even if there is a bankruptcy. Calpers stated, “These payments are statutorily required and necessary to deliver on the pension benefits promised to San Bernardino employees as a form of deferred compensation.”
Although the city is now paying Calpers again, other creditors such as the holders of $50 million in pension obligation bonds are still being denied payment.