Federal judge rebuffs CalPERS, OK’s San Bernardino bankruptcy

Federal judge rebuffs CalPERS, OK’s San Bernardino bankruptcy

Emergency room - wikimedia

In a victory for taxpayers, a federal judge ruled Wednesday that the City of San Bernardino is eligible to file for bankruptcy. That trumped the claims of the California Public Employees Pension System that the court had the paramount right to force the city to raise taxes to fund pensions.

This the first municipal bankruptcy domino to fall in California after the 2008 financial crash that tested which law was paramount: Federal bankruptcy law or the California Constitution that guarantees public retirees a defined pension benefit.

City Attorney Jim Penman penned a letter that was read aloud in the courtroom. The letter succinctly summed up the city’s financial insolvency issue, “It’s an emergency room, not a health spa.”

Bankruptcy judge rules city purse is not Cal-PURSE

U.S. District Judge Meredith Jury ruled that it was clear the city was broke and that bankruptcy was the only option for financial survival of city government.  Jury said, “I can’t see anything other than dissolving the city if they can’t file under Chapter 9” of the federal bankruptcy law. “The city deserves a chance.”

CalPERS had accused the city of hiding funds and filing for bankruptcy as a delay tactic to postpone payments into the CalPERS pension fund.  Michael Gerin, legal counsel for CalPERS, accurately summed up the direness of the ruling for CalPERS, saying it would “set a dangerous precedent.”  However, the judge’s decision is hardly a precedent when other municipal bankruptcy cases in Vallejo and Orange County preceded the judge’s decision. In both those cases, federal bankruptcy courts sorted out matters.

CalPERS’ attorney also warned that the city was likely to game bankruptcy as a way to avoid paying creditors.

But Penman, the city attorney, retorted that bankruptcy is an “extremely painful process” for the city and to “suggest any city would subject itself to the process unless it had to is simply disingenuous.”

The city must now proceed to pound out what is called an “adjustment plan” with the help of the court-appointed mediator, Judge Gregg Zive of the Federal Bankruptcy Court in Reno, Nevada.  San Bernardino has 200 creditors, some of which supported the bankruptcy option, such as Wells Fargo Bank and Ambac Assurance Company.  If the decision had been that San Bernardino was not eligible for bankruptcy, CalPERS could have filed a lien on city assets under state law.  CalPERS is owed some $13 million in arrears in pension payments that are still mounting.

Mass of municipal bankruptcies

A year ago, Moody’s credit rating service warned of a “mass of municipal bankruptcies.”   Moody’s specifically cited the San Bernardino bankruptcy case and said the greatest share of municipal bankruptcies would come from California.  Moody’s pointed out that about 10 percent of California’s 482 cities had declared a fiscal crisis.  USA Today listed Atwater, Azusa, Compton, Fresno, Hercules, Monrovia, Oakland, San Jose and Vernon as vulnerable to bankruptcy.

Despite Gov. Jerry Brown’s triumphant declaration of a recovery of the state’s finances, there is a denial that the state could also be insolvent in the future if it faces up to its proverbial “wall of debt,” estimated at $1.26 trillion.  

Next comes an inevitable court appeal on the way to financial surgery without anesthesia for CalPERS.

28 comments

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  1. Ted Steele, CEO
    Ted Steele, CEO 30 August, 2013, 16:39

    Not all bad news for anyone here! Judge Zive is excellent and just the guy we need in hammering out the plan!

    Reply this comment
  2. Ted Steele, CEO
    Ted Steele, CEO 30 August, 2013, 17:03

    …and I note a retiree as well!

    Reply this comment
  3. SeeSaw
    SeeSaw 31 August, 2013, 13:39

    Chapter 9 gives SB control over its own recovery plan, with approval of the Judge. If SB wants to do what is right, it will pay CalPERS what it owes, because that is in its contract with CalPERS, which is an arm of the State of CA. After it gets that issue settled, it can move on with its bankruptcy workout plan.

    Reply this comment
  4. Rex the Wonderdog!
    Rex the Wonderdog! 1 September, 2013, 13:49

    U.S. District Judge Meredith Jury ruled that it was clear the city was broke and that bankruptcy was the only option for financial survival of city government. Jury said, “I can’t see anything other than dissolving the city if they can’t file under Chapter 9” of the federal bankruptcy law. “The city deserves a chance.”
    ============
    BAM!!!!!!!!!!!!! Teddy just went DOWN, and out for the 10-count 😉

    Reply this comment
  5. Rex the Wonderdog!
    Rex the Wonderdog! 1 September, 2013, 13:50

    U.S. District Judge Meredith Jury ….
    ==
    She should marry someone named Executioner, then she would be “Judge Jury-Executioner” 🙂

    Reply this comment
  6. Rex the Wonderdog!
    Rex the Wonderdog! 1 September, 2013, 13:51

    This is the beginning of the end of the public pension scams………………….

    Reply this comment
  7. Ulysses Uhaul
    Ulysses Uhaul 1 September, 2013, 21:49

    The RAGWUS still have tricks up their sleeves…..you just don’t get it….your ruled….just pay!

    Reply this comment
  8. Rex the Wonderdog!
    Rex the Wonderdog! 2 September, 2013, 00:04

    What did the judge say, if they pay the pensions they could NOT pay the employees. The city would cease to function.

    Reply this comment
  9. Tax Target
    Tax Target 2 September, 2013, 08:18

    Wow – Kalifornsky got Trumped. ‘Tis wonderful to watch. This way the Kalifornsky disease won’t infect the rest of the country.

    Reply this comment
  10. Ted Steele, CEO
    Ted Steele, CEO 2 September, 2013, 08:57

    Poodle—- LOL——relax little buddy! It’ll be ok!

    Reply this comment
  11. Ulysses Uhaul
    Ulysses Uhaul 2 September, 2013, 23:11

    Even Rizzo still working appeals….this will be a long slog….why wouldn’t retirees fight for their pensions….

    And doomers….the earth ain’t falling or something….your on the hook for pensions…pay up and stop whining.

    Reply this comment
    • John Seiler
      John Seiler 3 September, 2013, 09:29

      Taxpayers are “on the hook for pensions”? Just wait till the next recession when dozens of cities, including L.A., go bankrupt, and the state of California becomes insolvent. Pensioners will get what’s in the funds, nothing more because there won’t be any money. They’ll get about 40% of what’s expected. Government retirees should know better than the rest of us that you can’t trust the government.

      Reply this comment
      • Ted Steele, CEO
        Ted Steele, CEO 3 September, 2013, 20:17

        John,

        What about that 267 bil dollar growing pool of retiree’s money?

        Reply this comment
      • michael
        michael 21 September, 2013, 14:54

        They need to pay PERS and stand behind their contractual obligations. They also need to reform what they are paying new employees and make that amount more reasonable. Dont forget the city was completely funded for several years and failed to put aside money for PERS even though the employees continued to pay their share.

        Reply this comment
  12. Rex the Wonderdog!
    Rex the Wonderdog! 3 September, 2013, 08:18

    Teddy, you got knocked out lil one, now go google, copy, and paste some of your case law 😉

    Reply this comment
  13. Rex the Wonderdog!
    Rex the Wonderdog! 3 September, 2013, 16:54

    John Seiler is 100% on the money, next downturn and it is all over……ask Meredith Whitney.

    Reply this comment
  14. Ted Steele, CEO
    Ted Steele, CEO 3 September, 2013, 20:12

    Poodle– Huh?

    Are you ok?

    Reply this comment
  15. Ulysses Uhaul
    Ulysses Uhaul 3 September, 2013, 20:22

    Doomers will be reduced to wearing rags…..contracts are contracts…..doomers will pay….

    Reply this comment
  16. S Moderation Douglas
    S Moderation Douglas 4 September, 2013, 10:38

    Increases in pension costs, if any, will be a small fraction of the state budget. Not worth “moving” for. Unless you LIKE cutting off your nose to spite your face.

    Reply this comment
    • John Seiler
      John Seiler 4 September, 2013, 12:21

      Douglas: In the past year, CalSTRS said it needs $4.5 billion a year more from the general fund, for 40 years, to stave off insolvency. Brown didn’t included it in his budget, but conceded it would need to be taken care of soon. Meanwhile, interest keeps compounding. That’s just one fund, and it’s not “a small fraction of the state budget,” but about 5 percent of it.

      http://www.sacbee.com/2012/12/24/5073796/legislature-cant-put-off-reckoning.html

      Reply this comment
      • S Moderation Douglas
        S Moderation Douglas 5 September, 2013, 13:33

        Less than 2%, the state budget is over $230 billion.

        Even at 5%, that would be about $25+ a month for me. IF….IF the whole amount came from increased taxes (rather than increased employee contributions or formula changes.

        NOT worth moving.

        firehost burns my butt.

        Reply this comment
      • S Moderation Douglas
        S Moderation Douglas 6 September, 2013, 21:29

        Less than 2%. The total state budget is over $230 billion.

        And the whole $4.5 billion doesn’t have to come from increased state spending.

        Probably not worth moving for, considering that odds are about one in five you could move a state with HIGHER effective taxes and/or lower average income.

        Reply this comment
    • Ted Steele, CEO
      Ted Steele, CEO 5 September, 2013, 06:42

      They NEVER move Douglas–its all talk.

      Reply this comment
  17. Queeg
    Queeg 4 September, 2013, 21:00

    Yeah…..this is a travel article……wondered why Queeg was so happy….the phone is ringing off the hook! Doomers hitting the road…..so liberating for them as they fill our till……more travel articles….please!

    Reply this comment
  18. The Ted Steele Conceptual Abstraction Unit
    The Ted Steele Conceptual Abstraction Unit 5 September, 2013, 09:24

    Queegster– we missed ya!

    Reply this comment

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