22 April 2014

Hopes And Fears In San Bernadino

I've posted here, here, and here about a fundamental problem that faces many cities in California: out-of-control pension obligations. California law makes pension obligations sacrosanct; they cannot be modified. But what if the cost of those pensions becomes unsustainable? Tough, says CalPERS, the California Public Employees Retirement System. State laws says cities have to pay and that's all there is to it; current employees and citizens can pound sand.

Does Chapter 9 municipal bankruptcy offer an escape hatch? Applying Michigan law, Judge Rhodes overseeing the Detroit bankruptcy has said yes (which is on appeal to the Sixth Circuit Court of Appeals) and so did the bankruptcy court in the Vallejo bankruptcy applying California law. On the other hand, other cities like Stockton, California have chosen not to cut back on their payments to fund the pensions of retirees.

But what does all this mean in practical terms? Go here to read about the possibility that the city of San Bernadino might take up the challenge to fight CalPERS and so ultimately to reduce pension payments. Given that payments demanded by CalPERS have increased five-fold in the past dozen years ($5 million in 2000; $26 million in 2012), the ability of the city to pay and provide at least minimal services to current citizens are on a collision course.

And if that's not enough, go here to read an astute post about Stockton's case. All the players but one have agreed to take cuts in favor of leaving pension obligations alone. But the one who is sticking to its guns might derail the entire carefully-crafted plan. After all, the Fidelity Funds argue, to pay CalPERS a greater percentage of its claim is "unfair discrimination," and the Bankruptcy Code prohibits such treatment. (The murky difference between mere "discrimination" and forbidden "unfair" discrimination was one of the subjects of our panel discussion at last week's symposium at Widener Law School.)

Stay tuned. The fun is far from over.

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