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US judge's ruling in Detroit bankruptcy could be felt in California

San Bernardino Bankruptcy

Grant Hindsley/AP

A U.S. judge's ruling could effect the bankrupt city of San Bernardino, which is in mediation with its largest creditor, the California Public Employees' Retirement System.

When a city files for bankruptcy, it’s hoping to get relief from its financial obligations.

Public pensions have always been seen as the one thing that’s untouchable, but that could change after a judge ruled Tuesday that Detroit can make cuts to – or impair – its pension plans.

“This is a huge deal,” said Karol K. Denniston, a San Francisco-based bankruptcy lawyer who usually works on the side of cities. “The world has shifted because one judge in a federal court bankruptcy system has found those obligations can be impaired.”

Denniston says overnight, the decision weakened the hand of pension holders.

“Monday night you were like, ‘In California, I have very strong vested rights in my pension obligations,”’ said Denniston. “When you woke up Tuesday morning, you heard a judge say those are contract obligations and can be impaired.”

One place the ruling could be felt is in the bankrupt city of San Bernardino, which is in mediation with its largest creditor, the California Public Employees' Retirement System, or CalPERS.

CalPERS says the city owes over $17 million in back payments after it stopped paying its pension obligations for a year after the city filed for bankruptcy, making it the first city in California to halt payments to the largest pension fund in the U.S.

The city argues CalPERS shouldn’t receive special treatment.

“There are groups of our creditors that believe they shouldn’t have to be engaged in this conversation about the pain to be shared,” said San Bernardino mayor Patrick J. Morris.  “CalPERS believes they shouldn’t have to have a conversation with us about this matter of shared pain.”

Morris once described San Bernardino's payments to CalPERS as “the giant whale in the general fund deficit that eats the city’s services and destroys the city’s financial viability.”

He doesn’t expect the ruling to have any legal impact on his city’s current fight. But he still calls the decision important.

“It is in a sense an affirmation of our ability to make the adjustments that we think we must make to bring us out of bankruptcy as a healthy city,” said Morris.

CalPERS disagrees, saying the decision in Michigan doesn’t apply to California because CalPERS is not a city pension plan.

“We’re an arm of the state and we were formed to carry out the state’s policy regarding public employees,” said CalPERS spokesman Brad Pacheco. “The bankruptcy code in California and the constitution is clear that it can’t interfere in that relationship between the state and its municipalities.”

Corey Glave, a lawyer representing San Bernardino firefighters, said he is not concerned about the ruling.

“It doesn’t worry me,” said Glade. “California has different laws and statues. The Detroit decision is only binding in Detroit.”

Ron Oliner, a lawyer representing San Bernardino police officer, agrees.

“I’ve been interested to read politicians in San Bernardino opining even before the ink was dry on this decision rendered only yesterday,” said Oliner. “But from my perspective it really doesn’t change anything in San Bernardino.”

Only one thing seems clear: This fight is far from over.

The judge’s decision has already been appealed and legal experts say this issue could likely go all the way to the  U.S. Supreme Court.

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