* San Bernardino eligibility ruling likely Aug. 28
* Like Detroit, city has taken on pension funds
* Calpers only party opposing San Bernardino’s bankruptcy
quest
By Tim Reid
LOS ANGELES, Aug 25 (Reuters) – The city of San Bernardino
is expected to learn on Wednesday if it is eligible for
bankruptcy protection despite the opposition of California’s
powerful public pension system – an important test for the
federal law used by Detroit and other U.S. cities burdened by
pension payment costs.
Most observers expect federal bankruptcy judge Meredith Jury
to rule that cash-strapped San Bernardino, 60 miles east of Los
Angeles, is eligible for Chapter 9 protection, a year after it
declared bankruptcy having effectively run out of cash to meet
its day-to-day obligations.
A city of just 240,000, San Bernardino could be a precursor
for what is shaping up as a central issue in the far bigger
bankruptcy case of Detroit: whether an insolvent city can cut
already-promised pensions for its workers and pay less into its
public retirement funds.
In an unprecedented move, San Bernardino halted its biweekly
payments to the California Public Employees’ Retirement System
(Calpers) for an entire year after declaring bankruptcy last
August.
San Bernardino has now resumed payments to Calpers,
America’s biggest pension fund and San Bernardino’s largest
creditor, but no city has ever halted employer payments to
Calpers before. The $260 billion pension fund is the only party
objecting to San Bernardino’s bankruptcy, saying that pension
funds should not be treated like other creditors. Calpers may
appeal the eligibility decision.
In Detroit, which last month filed for the largest municipal
bankruptcy in U.S. history, estimated at $18.5
billion, the state-appointed emergency manager, Kevyn Orr, has
already called for cuts to current and future pension benefits
in any bankruptcy plan. Unions representing
workers have objected to the bankruptcy by arguing that it
contravenes benefits’ protection enshrined in Michigan’s state
constitution.
LIKE A LAB TEST FOR DETROIT
In both San Bernardino and Detroit, the idea of cutting back
pension payments has set up a high-stakes battle between Wall
Street bondholders and state pension funds over how they are
treated when cities run out of money – an issue that could
eventually find its way to the U.S. Supreme Court.
“There is a real parallel between San Bernardino and
Detroit,” said Michael Sweet, a bankruptcy attorney with Fox
Rothschild in San Francisco, who is not representing any party
in the San Bernardino or Detroit cases.
“Both cities have shown an appetite to take the pension
issue head-on. If the judge rules San Bernardino eligible for
bankruptcy, it opens the way for the city to propose a plan that
could impair Calpers – which could put this little city ahead of
what is happening in Detroit.”
Calpers has taken the opposite stance in the case of
Stockton, another California city, which was found eligible for
bankruptcy in April. Stockton has kept current
on all payments to the pension fund.
The judge overseeing the Stockton case has said that the
question of whether Calpers remains to be paid in full under a
bankruptcy plan could become an important issue when the city
presents its exit plan.
James Spiotto, a municipal bankruptcy specialist and a
partner at Chapman & Cutler in Chicago, said the issue for San
Bernardino – and other cities in bankruptcy – is simple: it
comes down to what they can feasibly pay creditors under a
bankruptcy plan.
“If San Bernardino has to pay everything it owes to Calpers
– can they survive as a municipality?”
(Editing by Tiziana Barghini and Matthew Lewis)
