San Bernardino just scored a victory in court in its struggle with Calpers, California’s state pension system. After entering bankruptcy this summer, San Bernardino had ceased payments to the pension fund, claiming that it doesn’t have the money to meet its pension obligations and still pay salaries for essential city services. In response, Calpers took the city to court demanding that the pensions be paid in full, bankruptcy or no.
On Friday, a federal bankruptcy judge ruled decisively in favor of the city, rejecting Calpers’ argument that pension obligations supersede any decision made by bankruptcy courts. Reuters reports:
The motion by Calpers was denied without prejudice, Judge Meredith Jury said. While Jury said the bankruptcy court clearly had jurisdiction, a Calpers attorney said the pension fund may nonetheless ask a state court to intervene in the matter.
San Bernardino has not made its $1.2 million twice monthly payments to Calpers since it filed for bankruptcy in August. It now owes at least $8 million to the pension system in addition to a long term debt that the city pegs at $143 million.
“Unless I have been misled the city has limited funds on a daily and monthly basis, it is using the limited funds to pay salaries,” Jury said in her opening remarks. She based her ruling largely on the potentially disastrous impact a state collection action could have on the struggling city.
It’s a commonsense decision: a city’s first obligation is to provide the essential services on which its residents depend. All other obligations, bonds, pensions and everything else, come after that — or the city will collapse and everyone will be the loser. Pension funds and the labor leaders who stand behind them don’t like this truth, because it means that the unrealistic promises labor has made its members are shown to be unreliable. At some point, workers ask why they are paying dues to people who mislead them about their financial prospects in retirement.
San Bernardino has won the first round, but this fight is far from over. Calpers has already pledged to take its case to the Supreme Court if need be to claim its money. There’s a lot at stake—if this judge’s decision stands there will be nothing stopping every seriously strapped city in California, and there are many, from cancelling their payments as well.
Cities and their lawyers across the state are watching closely.