Explaining Southern California's economy

San Bernardino v. CalPERS — and now maybe the bankruptcy court

 bankrupt pensions

Steven Cuevas / KPCC

The Inland Empire city filed for bankruptcy protection last summer.

The Economist provides a crisp assessment of the simmering battle between bankrupt San Bernardino and and CalPERS, the biggest public pension fund in the U.S. I've written a lot about San Bernardino's troubles and the Very Big Question of how hard the broke city will fight CalPERS. But The Economist article is well-worth reading as a summary of the risks of tangling with the money managers in Sacramento. 

Here's a taste:

As part of their bankruptcy arrangements, Vallejo, an old port town near San Francisco, and Stockton, in the Central Valley, slashed workers’ pay and stiffed bondholders but made good on their CalPERS payments. In September Compton, a struggling city south of Los Angeles, did fall behind on its obligations; it was quickly brought into line by a lawsuit.

San Bernardino has proved less of a pushover. An unlovely, crime-ridden city at the heart of the Inland Empire, the suburban sprawl east of Los Angeles, it followed Stockton into bankruptcy this summer. The city’s particular troubles go back decades, but much of its story followed familiar contours: overbearing unions, political dysfunction and financial commitments made during good times that could not be met in bad. In one respect, though, its behaviour has been strikingly original. Since its declaration in August, San Bernardino has not paid CalPERS its full dues.

[...]

The problem is simply that CalPERS is, by some distance, San Bernardino’s biggest creditor, and the city cannot cut services any further without jeopardising basic safety. The fund, like all creditors, will eventually receive what it is owed, the mayor adds, but the city needs breathing space. (It wants to resume payments in 2013-14.) On November 30th it filed a proposed emergency budget with a bankruptcy court. Among the cuts and deferrals were $13m-worth of payments to CalPERS.

The San Bernardino bankruptcy has always been pretty hairy. It hit so fast that, unlike Stockton, San Bernardino moved directly to a fiscal emergency, rather than engaging in a state-mandated mediation process with creditors. (Stockton, by the way, still declared bankruptcy, but mediation prepared the ground for an less costly Chapter 9 and pre-arranged deals with its debtholders.)

The showdown with CalPERS could, in some respects, simply be an extension of what increasingly looks like a chaotic situation with San Bernardino's city government. Case in point: Reuters broke the news on Thursday that prior to declaring bankruptcy — while pleading that it didn't have the cash to make its payroll — San Bernardino paid out $2 million to "employees for unused vacation and sick time."

The problem is that these payouts could be a violation of Federal bankruptcy code. San Bernardino officials, according to Reuters, say the payouts were the result of retirements at the end of the city's fiscal year — quite possibly driven in part by an awareness of the impending bankruptcy!

The San Bernardino saga continues. In fact, the city is back in bankruptcy court on Friday. That's to deal with the CalPERS dust-up, but if the city did run afoul of bankruptcy law, the issue is germane. Why? Again, The Economist sums it up:

Californian state law is clear that cities must meet their CalPERS obligations. But bankruptcy is a federal matter, and so CalPERS’s opponents may find themselves resting their argument on the supremacy clause of the constitution, which asserts the primacy of federal over state law in the instance of a clash. Municipal bankruptcies are so rare that there is little legal precedent.

There may soon be precedent — and them some. Because CalPERS is unlikely to let this one go without a fight.

Unlikely? Make that inconceivable.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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