The Little City That Could (Maybe?) Versus the 800-Pound Gorilla

San Bernardino, a town in the Inland Empire once best known for being the home of the first McDonalds, made headlines in August 2012 when it filed for Chapter 9 bankruptcy. At the time, it was the largest city to ever file for Chapter 9 protection. According to the 2010 Census, San Bernardino is the poorest city of its population size in California and the second-poorest in the United States, after Detroit. 34.6% of its residents live below the poverty level. Like many of its neighbors in the Inland Empire, San Bernardino was decimated by the subprime real estate loan crisis that started the Great Recession.

When the city filed for Chapter 9 bankruptcy, it had to make several difficult decisions. One of these difficult decisions was to halt payments to CalPERS, the California Public Employees' Retirement System, the largest public pension fund in the United States. Between August 2012 and July 2013, San Bernardino failed to make $17 million of expected pension contributions. Several other California cities have filed for Chapter 9 bankruptcy, but this was the first time a city had ever paid less than its full dues.

Although $17 million is a small drop in the bucket for the 800-pound gorilla that is CalPERS, it is very worried that allowing the arrears to stand will create a disturbing precedent, opening the door to other struggling municipalities using bankruptcy law to justify delaying or withholding payments to the pension system. Bankruptcy negotiations are currently taking place between San Bernardino and CalPERS in the federal bankruptcy court case presided over by (the aptly named?) Judge Meredith Jury. Judge Jury has ordered that the details of San Bernardino's proposed Chapter 9 Plan be kept secret for now, but the city has made public its argument that its creditors, including CalPERS, must all share in the bankruptcy pain.

CalPERS has, for many years, resisted all efforts to allow cities to stop making their required payments. Rosanna Westmoreland, the external communications manager for CalPERS, said that the pension system's hands were largely tied by statutes mandating that all the pension system's participatns make their full contributions on time and that no workers' benefits be reduced. However, it remains unclear whether federal bankruptcy law trumps state pension law. In the Detroit bankruptcy case, a federal judge ruled that federal laws took precedence so that the benefits of Detroit city workers could be reduced in defiance of Michigan law. CalPERS insists that the Detroit ruling does not apply to California law.

Other California cities that have filed for Chapter 9 bankruptcy, such as Stockton and Vallejo, chose to get their fiscal house in order by other means than refusing to stay current on their CalPERS payments. Those cities ultimately had to balance their budgets by firing staff members and trimming public services--moves that were clearly less popular with their residents than deferring CalPERS payments would be. As San Bernardino continues to avoid back-payment of its $17 million, others will be closely watching to see which side will emerge victorious: the little city that could (maybe?) or the 800-pound gorilla.

Sources:

• http://www.nytimes.com/2014/04/21/us/politics/san-bernardino-battles-calpers-pension-demands.html?_r=0
• http://www.reuters.com/article/2013/11/25/us-usa-municiplality-bernardino-idUSBRE9AO0CO20131125
• http://www.laweekly.com/informer/2011/10/17/americas-second-poorest-big-city-is-right-here-in-southern-california-san-bernardino