San Bernardino facing ‘quick judgment’ on bankruptcy

Bankruptcy CourtJune 6, 2013

By Wayne Lusvardi

At a hearing yesterday in federal bankruptcy court, Judge Meredith Jury sounded like she was ready to rule that the insolvent city of San Bernardino could file for Chapter 9 bankruptcy protection — despite the opposition of the California Public Employees Retirement System.

She invited the city to apply for a “quick judgment” on Aug. 28 on the disputed issue of which takes precedence: The city’s action to protect itself from debtors and contractors while maintaining city services such as police and fire protection. Or CalPERS’ claim that pensions are paramount over everything, including providing for public safety.

Jury clearly was losing patience with CalPERS’ months-long stall tactic that has asserted San Bernardino was not insolvent, but was hiding funds from CalPERS, debtors and the bankruptcy court. If the city really is insolvent, then the court could completely restructure its finances, including contracts with unions on pensions and other matters. However, such a restructuring could spark constitutional challenges on whether a federal court can exercise so much power over what has been a state and local matter.

Jury said she did not see much relevance in CalPERS’ continued demands for more information from the city.  Jury was pushing to “get past this hump” of determining whether San Bernardino was insolvent and thus eligible to file for bankruptcy.  The San Bernardino Public Employees Association and other unions have stopped insisting the city actually was solvent, therefore not eligible to file for bankruptcy protection. That left only CalPERS insisting the city remained solvent. 

CalPERS nonetheless is continuing to assert the city has been acting in bad faith by failing to prioritize its debts to put CalPERS’ pension obligation first over all other obligations. However, City Attorney James Penman said after Wednesday’s hearing, “CalPERS obviously lost—they lost every round.”

At issue in the August 28 hearing will be whether public-employee pensions, which according to some interpretations are guaranteed under the California Constitution, take precedence over municipal obligations to provide essential public services.

It is not settled in law yet whether the state Constitution or Federal Bankruptcy Law is paramount.  Aug. 28 may be the moment of truth.

Shell governments

If CalPERS prevails, then San Bernadino and other city governments essentially will become shells that provide few or no services, but only send checks to pensioners.

State and municipal governments have been holding on to their guaranteed pension plans instead of shifting to individual retirement accounts, such as 401(k)s, in the hope that an economic recovery would bail them out.  Municipal bond expert Meredith Whitney recently has warned about California cities becoming pension funds that only secondarily provide public services to communities.

And on Wednesday, the same day as the San Bernardino court hearing, the U.C.L.A. Anderson Business School economic forecast said of the current economic uptick, “It’s not a recovery.  It’s not even normal growth. It’s bad.”  California is adding jobs faster than every state but Utah.  But they are mostly high-tech jobs, tourism, and the professional and business services industries. Tight lending standards are retarding a recovery in the construction sector, which San Bernardino is heavily dependent on.

If the economic recovery stalls, then the pension crisis again will become acute in more cities than San Bernardino and Stockton, which last year also declared bankruptcy.  

New Governmental Accounting Standards Board rules to be rolled out next year are going to make it harder for state and local governments to hide pension problems.

The funny numbers prevailing too long in governments are about to be scrutinized by judges and accountants.



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