Bankrupt San Bernardino Threatens to Sue California Over Taxes

March 13, 2013 – In The News
Thomson Reuters News & Insight

Bankrupt San Bernardino is threatening to sue the state of California over demands it owes millions of dollars in property taxes, the latest complication in the city's quest to fix its fiscal problems in federal bankruptcy court.

The city’s bankruptcy is a national test case on whether the pensions of government workers take precedence over other payments in a municipal bankruptcy. It is a high stakes issue for pension plans and their beneficiaries, and for Wall Street bondholders who lend money to governments.

San Bernardino filed for bankruptcy protection in August, citing a $46 million deficit for the current fiscal year. It continues to state that it can barely make payroll. A federal bankruptcy judge has yet to rule on the city's eligibility for bankruptcy protection, but in the meantime bankruptcy court protections against collection actions remain in place.

Michael Sweet said the city had good grounds to dispute the state's financial demands, but they nonetheless it could complicate the process.

"This certainly makes it tougher for the city," Sweet said. "To the extent the city has to expend resources, be it their monetary or staff hours dealing with the state, those are resources that can't be spent on creditors."