The American Interest
Analysis by Walter Russell Mead & Staff
The Showdown Begins: Calpers Sues Bankrupt City

The showdown between bankrupt San Bernardino and the Calpers pension fund we discussed last month is now underway.

Sam Bernardino, now bankrupt, has suspended payments to Calpers, the largest government worker pension fund in California and the county. The city is already so broke it is having trouble paying for normal services and is worried that it will be completely unable to meet its other obligations if Calpers insists on being paid in full and on schedule.

But Calpers wants its money anyway. In effect, it is demanding that pensions trump not just other creditors but also the city’s responsibility to provide vital services like police, fire, and education. Anxious to avoid setting a precedent that would allow other bankrupt cities to suspend their payments, Calpers is suing the city in a state court. Reuters reports:

Under the U.S. bankruptcy code, all legal actions against a debtor city by creditors are stayed until the bankruptcy has been approved, or thrown out.

In the legal motion filed to the bankruptcy judge overseeing the San Bernardino case shortly before midnight on Tuesday, Calpers asked for that stay to be lifted so it could redeem its debt in a state court. It also said even if the stay was not lifted, it would still seek redress in a state court.

Calpers expressly stated that it was “concerned about inappropriate preferential treatment that might be given to other creditors” in San Bernardino’s bankruptcy. Calpers has long argued that pension contributions cannot be touched, even in a bankruptcy.

The ramifications of this case could spread beyond California:

The move by Calpers is the opening battle that could see the case move all the way to the U.S. Supreme Court, America’s highest court, said Karol Denniston, a Californian bankruptcy expert who authored part of the state’s bankruptcy code.

All municipal bankruptcy cases, including San Bernardino’s, are adjudicated in federal court. Calpers is in effect asking that the state law governing its contractual relationship with debtor cities not be trumped in federal court, Denniston said.

The legal point will be tested in court. Given the nature of our court system, it will likely be a while before we have a definitive answer. But the larger point—that poor decisions in the past on compensation for public employees is putting cities and states all over the country in the position of having to stiff the geezers or cut back on necessary services to everyone—is already crystal clear.

Published on November 28, 2012 1:31 pm