Exclusive: San Bernardino Paid $2 Million in Cash-outs Before Bankruptcy Filing

December 21, 2012 – In The News
Reuters Online

The California city of San Bernardino paid $2 million in cash-outs to employees for unused vacation and sick time in the three months before declaring bankruptcy on August 1, according to data reviewed by Reuters.

City officials chalked up the payment spurt to coincidence and other factors. Still, the payments may run afoul off a core provision of the bankruptcy code that imposes strict rules on the types of payments that can be made immediately prior to a bankruptcy, according to bankruptcy lawyers who are not involved in the case.

In a court hearing scheduled for Friday, the city is expected to argue that it needs bankruptcy protection and relief from payments owed to the California Public Employees Retirement Systems and other creditors. Yet in July alone, the city paid $1.2 million to 22 employees for unused sick and vacation time, with more than half of that paid out the day before the bankruptcy filing.

Rhonda Haynes, the city’s acting human-resources director, said the timing of the payouts was a coincidence. Other city officials also suggested that general anxiety among older workers over the city’s finances led to a boost in retirements. Legal analysts said the cash-out immediately prior to bankruptcy filing were troubling and could be a breach of the federal bankruptcy code.

Michael Sweet, a bankruptcy attorney with Fox Rothschild who is not involved in the San Bernardino case, said, “this looks like they were trying to take care of certain employees, and that is precisely what the bankruptcy code is designed to protect - preferring one creditor over another.”

Hanynes said the city has no formal written policy governing cash-outs. “Normal practice” was that once an employee retired and received their final paycheck, the retiree would automatically receive a cash-out payment for unused sick and vacation time under the terms of their employment with the city, she said.

The retirement spike could also have been a result of some older employees’ choosing to retire in light of the city’s well-known financial woes.

The city council voted to suspend cash-outs to its workers shortly after it filed for bankruptcy and to award them on a case-by-case basis.

The city of 210,000, about 60 miles east of Los Angeles, filed for Chapter 9 bankruptcy protection citing $46 million deficit for this fiscal year.

Friday’s hearing will be the first time San Bernardino’s biggest creditors – the California Public Employee’s Retirement Systems (CalPERS) and Wall Street bondholders and insurers – will meet to argue their case before the judge overseeing the city’s bankruptcy application.