Saturday, December 22, 2012 – 08:30 a.m.
San Bernardino received a reprieve in U.S. Bankruptcy proceedings yesterday. Even though a temporary one.
A U.S. Bankruptcy Judge ruled the city, for the time being, can’t be sued for past due and ongoing obligations it owes its pension fund, the California Public Employees Retirement System (CalPERS).
However, it’s what else U.S. Bankruptcy Judge Meredith Jury did say that should make CalPERS and the city’s pension plan members sleep a little easier this Christmas holiday. While not making a formal finding, Jury indicated the city’s pension obligations were a “legal” not “contractual” obligation, and the city’s lack of payment was a violation of Califoria law. A distinction that would place pensions above all other creditors.
The statement by Jury would indicate the court most likely cannot reduce obligations, such as pensions, which are legally mandated under state law. But the court can affect contracts through a process known as a “cram down”.
In a “cram down” the court forces down the amount the city contractually owes its pre-petition creditors.
The city’s unsecured pension obligation bondholders may as well bend over and hope they can get 10 or 20 cents on the dollar. But the city had better plan on paying up, when it comes to the pension fund itself.