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San Bernardino 1, Calpers 0


San Bernardino just received the judicial go-ahead to declare bankruptcy more than a year after its initial bankruptcy filing. The ruling, delivered by a federal bankruptcy court on Wednesday, concludes a long legal battle between the city and Calpers, which was fighting to keep the city out of bankruptcy in order to keep its funds flowing into the pension coffers. It now looks like Calpers will have to get in line with the city’s other creditors, meaning it will probably have to take a haircut just like everyone else.

The judge’s reasoning behind the ruling was simple, as the New York Times reports:

All of the 10,000 creditors are better served by allowing the bankruptcy to go forward, Judge Jury added.

“I can’t see anything other than dissolving the city if they can’t reorganize under Chapter 9,” the judge said. “They can’t make cash where it isn’t. If they got all the money they want—who isn’t going to get paid? All the employees? I don’t know, how does that help Calpers if the employees aren’t paid?”

The bankruptcy of one of California’s biggest cities is a major story in its own right, but even more important is what this tells us about Detroit, the country’s largest municipal bankruptcy case. Followers of that saga will note that Detroit’s pension funds are using tactics very similar to those of Calpers, fighting in court to keep the city out of bankruptcy. The Times is careful to note that the two cases are different, and that San Bernardino’s case is not precedent-setting for Detroit. But this is nonetheless an early indicator for how federal bankruptcy courts might treat these cases moving forward—and it gives Detroit’s public pension funds plenty more to worry about.

[Downtown San Bernardino image courtesy of House10902]

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  • Kavanna

    Actually, the San Bernadino case is a precedent for Detroit and confirms that the Detroit pension funds are crazy if they think they can stop the Detroit bankruptcy or get special treatment. It isn’t going to happen, and they’d better prepare.

    The real news with regard to Detroit is the treatment of general obligation (GO) bondholders as holders of unsecured debt. If *that* is confirmed, it will break new ground in municipal bankruptcy. GOs have traditionally been considered secured by general tax revenue and viewed as usually the highest quality debt.

    Now, it’s revenue bonds from essential services that form the best part of the muni debt space. Lowering the security of GO bonds would be mark a new era in the bond markets.

    Pensioners getting the shaft, OTOH, is old hat.

    • Doug

      I’m not a municipal bond lawyer, so what do I know. But in my experience as a corporate lawyer, a secured debt is one that is secured by a pledge or mortgage of specific property. GO bonds do not entail any such pledge or mortgage. From my admittedly non-expert perspective, a GO bond looks just like any other corporate bond, where the debtor is obligated to pay from its general revenues, but not at all like a secured bond.

      • Burn_the_Witch

        I think this is all irrelevant due to the precedent set by the GM and Chrysler bond debacle. The Feds will be asked to step in at some point, the will then step in, and then it’s anybodies guess as to what will happen.

        • M_Becker

          Don’t look for the feds to step in, at least with money. They stepped in to the GM/Chry BK and made sure their union allies at the UAW were well cared for and they screwed a bunch of state pension funds in the process.

          • Kavanna

            I stand corrected with my imprecision about GO bonds. What I meant to write was that they used to be viewed as “almost as good” as bonds secured by specific revenue. Obviously, in the future, GOs will be viewed more skeptically. That’s a profoundly important development in the muni space, because it means credit conditions will continue to get harder for many municipalities.

            P.S. The Feds are unlikely to bail out munis directly. However, the federal courts and Congress will have a big influence on bankruptcy resolutions.

  • MattJ

    Does Calpers get to reduce the pensions of San Bernardino retirees?

  • dennylee60

    My question is when Calpers takes a haircut in San Bernardino, does it turn around and force the rest of the state to pay them back?

  • teapartydoc

    Predatory Wall Street whatever. Sweden has all the answers. People have a right to whatever we decide to make up for now. And the Middle Class. (I just noticed that there were no left-wing posts, yet, and wanted to provide ‘balance’.)

    • wagnertinatlanta

      Pretty good, but not incoherent enough and you didn’t scream about bankers, Bush or Wall Street.

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