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Pension Meltdown
San Bernardino Takes on Calpers Again

Detroit’s bankruptcy thrust California cities like San Bernardino and Vallejo out of the spotlight of municipal bankruptcies. San Bernardino may be stepping back under the spotlight, however, as it prepares for its second fight in three years with Calpers, the state’s public employee pension fund.

On the verge of bankruptcy in 2012, San Bernardino decided to stop paying its required contributions to Calpers. Although the city was able to enter bankruptcy over Calpers’ objections, it ultimately surrendered and resumed contributing to the fund in 2013. Now new Mayor Carey Davis is picking another fight over the $17 million in back payments the city owes to Calpers for the year it didn’t contribute (August 2012 to July 2013). Calpers says it ought to be paid the full amount, while the city wants its debt to the fund to be reduced as part of the bankruptcy proceedings, arguing that Calpers should take a hit just like the city’s other creditors.

As the New York Times notes, Calpers is such a large fund that it can easily absorb the loss. The bigger question is whether this would set a precedent for other cities facing bankruptcy both in California and elsewhere. If others follow San Bernardino’s lead and stop paying when the going gets tough, pension funds throughout the country could face serious problems.

The stage is set for yet another court battle pitting federal law against state law. The federal government permits cities to reduce their expenses during bankruptcy, while states have long protected pensions from cuts. We all know how this panned out in Detroit, and if San Bernardino prevails, we could soon see more cities filing for bankruptcy in order to discharge pension expenses. For now, all eyes are on California.

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  • bigfire

    It’s time like this Calpers resembles nothing less than the protection rackets in the movie Goodfellas:

    Warning, the video is not work safe. Language is appropriate for the mafiosos, not unlike Calpers.

  • Andrew Allison

    You neglected to mention that what Detroit eventually did was cut a sweetheart deal with the Unions at the expense of the bondholders.

  • SAWZ

    CalPERS is an arm of the State of CA–not a standard creditor. That is why it is important that CalPERS not cave in–no negotiating–if it did that, the fund would be wiped out in a few years.

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