Bankrupt San Bernardino Gears Up For CalPERS Face-Off

October 17, 2012 – In The News

Since July 31, 2012, San Bernardino has postponed payments totaling nearly $5.3 million to CalPERS in an effort to meet payroll obligations and provide essential city services, according to the city’s cash flow report. The city filed for bankruptcy in August after years of budget wrangling and unsustainable pension costs that contributed to a $45 million budget shortfall. Its bid to defer millions of dollars in payments to the California Public Employees’ Retirement System could set the stage for several other municipalities to file for Chapter 9 and prompt a major legal battle over whether obligations to the nation's largest public pension fund can be impaired in bankruptcy.

Michael Sweet believes that cities will likely still view bankruptcy as a last resort and will first try to negotiate a compromise with stakeholders before filing for Chapter 9.

“A decision would define the parameters of a subsequent discussion that may take place about how cities are going to deal with the pension contribution commitments that were made when times were better,” he said. “But the court’s decision, in and of itself, won’t likely provide the escape hatch to get out of this mess.”

Cities in California gave incredibly generous commitments to their workforce in terms of the benefits that they would be providing, but now those promises are coming home to roost, according to Sweet.

“Many local governments can no longer afford to provide the level of service people expect while still meeting all of the obligations that they made to cover various employee benefits, such as contributions to CalPERS,” he said. “Whether cities in bankruptcy are allowed to impair the pension contributions is one of the biggest issues in this cycle of Chapter 9 cases.”