While much of the attention involving municipal bankruptcies in this country focuses on the City of Detroit, various cities in California are themselves involved in Chapter 12 bankruptcy actions. Issues facing the federal bankruptcy judge in Michigan are not too dissimilar to those facing the bankruptcy judges in California especially when it comes to the fate of pension payments to public workers.
Several cities in California facing insolvency including Vallejo, Stockton and San Bernardino have sought Chapter 12 bankruptcy protection. After filing its bankruptcy case in August 2012, San Bernardino suspended payment of benefits to public pension beneficiaries on the ground that the pension obligations it previously had incurred rose from $5 million annually in 2000 to $26 million by 2012 effectively crowding out other budgetary priorities of the city.
Now San Bernardino is trying to negotiate with creditors, including CALPERS, the California Public Employees’ Retirement System, the agency that administers the state’s massive pension system. CALPERS has long maintained that state law requires that all outstanding pension claims be paid in full. In the Detroit bankruptcy the presiding judge found that federal bankruptcy law pre-empted a Michigan state constitutional provision mandating full payment of earned pension benefits. While that decision may not ever receive the appellate scrutiny necessary to give it binding precedential authority over subsequent municipal bankruptcy cases, advocates for public employees worry that the case in San Bernardino may itself set a poor precedent for the way this issue is handled in the future.
CALPERS is seeking to ensure that 100% of the $17 million that it alleges the City of San Bernardino held back from recipients must be remitted. But the City believes that all creditors, particularly CALPERS, negotiate a settlement so that the municipality can afford to move beyond bankruptcy. Until such submissions are presented to the bankruptcy court hearing San Bernardino’s case and the Court issues a ruling on the matter, litigants in other municipal Chapter 12 bankruptcies will have to wait to see if this bankruptcy may provide some road map for their cases.
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