I've posted a number of thoughts about the status of municipal (Chapter 9) bankruptcies of Stockton and San Bernadino, California (here and here). An entire panel at the recent American Bankruptcy Institute 2013 Annual Spring Meeting was devoted to the topic of municipal bankruptcies. Panelists included Judge Meredith Jury to whom the San Bernadino case has been assigned.
There are many differences between the San Bernadino and Stockton cases but one of the most significant is that San Bernadino has not been paying CalPERS while Stockton has, much to the irritation of the bondholders who have seen nothing. But that's about to change.
According to Reuters, San Bernadino's 2013-2014 budget provides for payment to CalPERS of the city's ongoing pension obligations although not the substantial arrearages.
Financial decisions by the cities are immune from Bankruptcy Court review. From concern about the Tenth Amendment, Congress insured that courts would have no supervisory role for municipal expenditures, which distinguishes Chapter 9 from the traditional Chapter 11 business reorganization law. However, the Bankruptcy Court must ultimately pass on a municipality's "plan for adjustment." And one of the requirements for approval is that the plan be "fair and equitable" with respect to a class of claims impaired by the plan. In other words, the plan cannot discriminate between similarly situated claims.
But that the rub: Are the claims of CalPERS and the holders of municipal bonds similarly situated? To state that the parties' views of the answer to this question are opposed would be an understatement, and ultimately we will find out when Stockton or San Bernadino get around to filing a plan and the court holds a hearing on its confirmation. Judge Jury, of course, did not give any hint of her opinion at the conference. I hope to look into the question and will let folks know my conclusion in due course.
There are many differences between the San Bernadino and Stockton cases but one of the most significant is that San Bernadino has not been paying CalPERS while Stockton has, much to the irritation of the bondholders who have seen nothing. But that's about to change.
According to Reuters, San Bernadino's 2013-2014 budget provides for payment to CalPERS of the city's ongoing pension obligations although not the substantial arrearages.
Financial decisions by the cities are immune from Bankruptcy Court review. From concern about the Tenth Amendment, Congress insured that courts would have no supervisory role for municipal expenditures, which distinguishes Chapter 9 from the traditional Chapter 11 business reorganization law. However, the Bankruptcy Court must ultimately pass on a municipality's "plan for adjustment." And one of the requirements for approval is that the plan be "fair and equitable" with respect to a class of claims impaired by the plan. In other words, the plan cannot discriminate between similarly situated claims.
But that the rub: Are the claims of CalPERS and the holders of municipal bonds similarly situated? To state that the parties' views of the answer to this question are opposed would be an understatement, and ultimately we will find out when Stockton or San Bernadino get around to filing a plan and the court holds a hearing on its confirmation. Judge Jury, of course, did not give any hint of her opinion at the conference. I hope to look into the question and will let folks know my conclusion in due course.
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