San Bernardino may have to pay pensions before police protection

San_Bernardino_city_sealDec. 26, 2012

By Wayne Lusvardi

Do pension payments have the first claim to a bankrupt city’s revenues, even over providing essential police and fire protection?  This is the half-trillion-dollar question currently before a Federal bankruptcy court concerning the insolvency of the city of San Bernardino.

The California Public Employee Retirement System petitioned the court that:

1. The City of San Bernardino is not eligible to file for bankruptcy;

2. CalPERS has sovereign police powers exceeding that of the bankruptcy court, which allow it to seize city funds even over paying the salaries for police and fire protection or making municipal bond payments; and

3. Bankruptcy only applies to unpaid claims before a bankruptcy action was filed, not the city’s failure to make pension payments to CalPERS after the bankruptcy filing.

The early news report of a preliminary decision by federal Judge Meredith Jury was that CalPERS may have to get in line with other creditors in the bankruptcy.  Municipal bankruptcy case law has always made the first obligation of a city to provide essential police and fire protection and all other obligations came after that.

But this may be about to change. The judge may have rejected CalPERS’s assertion that it had the right to seize revenues from San Bernardino for $8 million in unpaid pension bills.  But the judge indicated that the bill must be paid up before the bankruptcy court case is over.

Pensions Over Police?

If the bill must be paid, that could place pensions in a priority or equal position to providing essential police and fire protection.

CalPERS asserts that San Bernardino has a $14.7 million cash surplus that could be used to pay its pension bills.  The city counters that it has already borrowed from “special funds” (affordable housing, water, utility funds) and has a $19 million budget deficit.

Jury ruled on Dec. 21 that CalPERS cannot go around the bankruptcy court and collect past due pension payments from San Bernardino. CalPERS asserted that it had police powers that were superior to the bankruptcy courts powers.  It claimed its police powers were like garnishing wages for unpaid taxes or unpaid child support.  Police powers are the right of governments to enforce laws and regulations to protect public safety, health and welfare.

However, in this case the protection of the public’s safety would have been jeopardized. That is because CalPERS could have left San Bernardino without enough funds for adequate police and fire protection. The judge ruled that the bankruptcy court had superior jurisdiction over any implied police powers of CalPERS.  But the judge did not rule yet on CalPERS’ claim that San Bernardino should not have been permitted to file bankruptcy in the first place.  Nor did the judge rule that unpaid pension bills had less priority than paying for essential public services or making bond payments.

What’s At Stake?

There is plenty at stake on the outcome of this case.

Nothing will be able to stop a wave of pension write-downs and write-offs by other cash strapped cities in California if the court rules that pension payments are less of a priority than paying for essential services or bond debts.  About 10 percent of California’s 482 incorporated cities have declared fiscal distress, according to Moody’s bond rating firm. What ultimately would be on the horizon for CalPERS pensioners and future retirees is a day of reckoning for California’s unsustainable public pension levels in at least 50 cities, assuming that economic recovery continues; more than that if a new recession hits..

On the other hand, if CalPERS wins its claim for first priority for pension payments, the bond market may react negatively with much higher interest rates for borrowing or refusal to issue any more bonds to financially distressed cities. Bonds allow cities to stretch their tax dollars further. Bonds are like a home mortgage that allows a family to afford to own a home without having to save to purchase it in cash.  But perhaps the end game for both CalPERs and insolvent cities would be determined by municipal bond issuers who would simply require that it be written in bond documents that bond payments take priority over pension claims.  The municipal bond industry already believes it has priority over pension-system payments.

Fiscal emergency

The way this case is headed appears to be that the city will be ordered to pay up its past due pension obligations.  This would leave the city without adequate protective services and force a fiscal emergency.  The city’s only recourse, other than pension reform, might be to place an emergency measure on the ballot for voter approval of, say, a 100 percent increase in property taxes.

San Bernardino has a CalPERS annual payment of about $28.8 million and collects about $29.5 million in property taxes and $16.3 million in sales taxes.  But even if voters were extorted to vote for a large increase in property taxes to maintain protective services, it would likely be met by a substantial devaluation in home values (bringing in less revenue on the devalued properties) that would offset the tax increase higher bond interest rates.

The judge in the San Bernardino bankruptcy case has urged the city to devise an “end game” plan.  That may mean bringing pension reform before the voters. Or it could mean gambling on the CalPERS-backed plan to condemn “underwater mortgages” to generate more property taxes from a revival of the San Bernardino County housing market. But once again, condemning mortgages would only mean shifting upside down mortgage debts onto all property owners in the county, resulting in a countywide decline in home values.

CalPERS may win in bankruptcy court through extorting a property tax increase to pay for police protection, or through upside down mortgage eminent domain.  But the real estate and bond markets are waiting to have their say in the matter. And there will be no appeals court.

 

 

24 comments

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  1. Rex the Wonder Dog!
    Rex the Wonder Dog! 26 December, 2012, 17:10

    But the judge indicated that the bill must be paid up before the bankruptcy court case is over.

    Judge Jury never made any such ruling or indication. She mentioned, before the issue has been briefed in any manner, that CalTURDS MAY need to be paid in full. MAY being the key work.

    Stop trying to play gypsy seer and relax,

    Reply this comment
  2. Donkey
    Donkey 26 December, 2012, 17:15

    There is nothing “essential” about fire protection that can not be cut by 2/3’s in every city in California by the use of volunteers.

    Policing is another issue, but could be replaced with a training plan that uses volunteers to identify possible criminals that could be arrested by regular officers at a later date. The fact is the PIC is a manufactured industry of the LE RAGWUS that did not even exsit in the mid 1980’s.

    In either way all pay, benefits, perks, and pesnsions need to be cut for all RAGWUS feeders. With past and current pension capped at no higher the $50,000 a year no matter the job title held! 🙂

    Reply this comment
  3. jimmydeeoc
    jimmydeeoc 26 December, 2012, 18:19

    Dont get me started on this, Donkey.

    I see what these “heroes” do all day in Orange County, and usually it’s not much. Everytime Mama-san has heart palpitations they roll a truck – or two. Then it’s back to the grocery store, or a stop at Chipoltle.

    True…they do some very dangerous work from time to time….but the headcount is waaaaaaaaay out of whack.

    I mean, do we really need a $150k/year guy giving the Fireman Fred presentations to 3rd graders?

    It’s one of the biggest GD scams goin’.

    Reply this comment
  4. Rex the Wonder Dog!
    Rex the Wonder Dog! 26 December, 2012, 19:43

    jimmydeeoc says:

    Dont get me started on this, Donkey.
    I see what these “heroes” do all day in Orange County, and usually it’s not much.

    Please, NTHEOC is a hero who deserves 🙂

    Reply this comment
  5. Hondo
    Hondo 26 December, 2012, 20:04

    One way or another, there will be major reductions in public safety due to the extreme demands of the public unions. The correct solutions have been pointed to above by Donkey. As a former paid and unpaid firefighter, I know that the majority of fire calls for service in this country are answered by volunteers. And they do a fine job and won’t let someone drown like the pros did in Alameda because of the union.
    According to our constitution, anyone can make a citizens arrest of a criminal if they ‘see’ the crime take place with their own eyes. Local law enforcement could train and empower these ‘militias'(its in the constitution for this reason) to cover their own neighborhoods. That would effectively double or triple the number of law enforcement on the streets with a minimum of costs. Or the local sheriffs could simply ‘deputize’ a well trained group of individuals. Most of these people would come from the military where they have strict weapons training. They would be black, gay, female, asain, Amerindian, even white. Just like our society.
    But the public unions, I imagine, have a clause in their contracts that prohibits these volunteers. It’s all about the union, not public safety. But then we citizens would have no choice but to enforce the constitution. Fire there asses and take THEIR guns.
    Hondo……..

    Reply this comment
  6. Eyeamok
    Eyeamok 27 December, 2012, 05:21

    The answer is simple, San Berdo just needs to CONFESS in Bankruptcy Court to Fraud.Collusion,and Conspiracy to Defraud, Produce the records showing that EVERY ELECTED OFFICIAL involved in the negotiation of said Contracts was and did collect MONEY from every Public Employee Union they were supposedly negotiating with on behalf of the CITIZEN TAXPAYERS, then detail using simple 5th grade math that Every Pblic Employee Contract is by Definition a Ponzi Scheme and are “Mathematically Inpossible” to fulfill. The Public Employee Unions Contracts will be VOIDED in their entirety. CAPLERS will be out of business and maybe, just maybe The Judge will do the right thing and IMPRISON THE WHOLE BUNCH. Bernie Madoff is a piker compared to this bunch.

    Reply this comment
  7. Donkey
    Donkey 27 December, 2012, 06:25

    Eyeamok, I like it!! You get post of the week honors!! 🙂

    Reply this comment
  8. DAN
    DAN 27 December, 2012, 06:43

    EYEAMOK FOR GOVERNOR!

    Reply this comment
  9. eyeamok
    eyeamok 27 December, 2012, 07:42

    Ya Know, I have been saying this for YEARS and nobody ever listens. But I assure you I am CORRECT in my Assertion that THIS WILL WORK. Finding 1 true Statesmen, let alone a united group of Statesmen instead of Statist’s is the hard part.

    Reply this comment
  10. NTHEOC
    NTHEOC 27 December, 2012, 08:04

    LMAO!!!!!! You guys are killing me……

    Reply this comment
  11. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 27 December, 2012, 10:13

    Hmmm…
    Poor Poodle— he wants 1 for 14 ™ ! so bad.
    Could it be true?
    0 for 15 ™!
    Time will tell….

    Reply this comment
  12. Rex the Wonder Dog!
    Rex the Wonder Dog! 27 December, 2012, 19:47

    Teddy, where can I send my rent check????????

    Reply this comment
  13. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 28 December, 2012, 09:00

    mmmm…I live in his head…….

    mmmmm…..0 for 15 ™! soon?

    Reply this comment
  14. Rex the Wonder Dog!
    Rex the Wonder Dog! 28 December, 2012, 13:57

    I have it already made out- I can even change the name to Uhaul or Queeg if you want 😉

    Reply this comment
  15. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 29 December, 2012, 09:58

    mmmmm 0 for 15 ™….I can smell it.

    Reply this comment
  16. Rex the Wonder Dog!
    Rex the Wonder Dog! 29 December, 2012, 21:13

    Uhaul or Queeg?

    Reply this comment
  17. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 29 December, 2012, 21:52

    lol

    0 for 15 ™!
    coming soon to a CWD near you!

    Reply this comment
  18. Rex the Wonder Dog!
    Rex the Wonder Dog! 29 December, 2012, 23:08

    Pea brain, how many ties ru going to post that copy and paste job???

    Reply this comment
  19. Ted Steele, Navigator
    Ted Steele, Navigator 31 December, 2012, 13:45

    Oh man! The poor Poodle! He is praying he does not cross the Rubicon into the abyss of…

    wait for it…

    0 for 15 ™!
    lol

    Reply this comment
  20. Rex the Wonder Dog!
    Rex the Wonder Dog! 31 December, 2012, 17:01

    I dominbate the Stealing Troughers mind 😉

    Now copy and paste Troll 😉

    Reply this comment
  21. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 31 December, 2012, 20:45

    Hmmmm—- San Berdo…….he’s slipping away into—–0 for 15 ™ !

    Reply this comment
  22. Rex the Wonder Dog!
    Rex the Wonder Dog! 1 January, 2013, 00:36

    I dominate the copy and paste Troll
    🙂
    BAM!!!!!!!!!!!!!!!

    Reply this comment
  23. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 1 January, 2013, 11:01

    and….he still has no answer for the forest of failed predictions he has made!

    Now

    here it is folks

    for 2013

    wait
    for
    it

    0 for 14 ™! lol Happy New Year!!!

    Reply this comment
  24. Rex the Wonder Dog!
    Rex the Wonder Dog! 1 January, 2013, 14:28

    Wow, I can spin you all day long 😉

    Reply this comment

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