San Bernardino Seal

By Tim Reid
LOS ANGELES | Sun Aug 25, 2013 8:07am EDT

(Reuters) – The city of San Bernardino is expected to learn on Wednesday if it is eligible for bankruptcy protection despite the opposition of California’s powerful public pension system – an important test for the federal law used by Detroit and other U.S. cities burdened by pension payment costs.

Most observers expect federal bankruptcy judge Meredith Jury to rule that cash-strapped San Bernardino, 60 miles east of Los Angeles, is eligible for Chapter 9 protection, a year after it declared bankruptcy having effectively run out of cash to meet its day-to-day obligations.

A city of just 240,000, San Bernardino could be a precursor for what is shaping up as a central issue in the far bigger bankruptcy case of Detroit: whether an insolvent city can cut already-promised pensions for its workers and pay less into its public retirement funds.

In an unprecedented move, San Bernardino halted its biweekly payments to the California Public Employees’ Retirement System (Calpers) for an entire year after declaring bankruptcy last August.

San Bernardino has now resumed payments to Calpers, America’s biggest pension fund and San Bernardino’s largest creditor, but no city has ever halted employer payments to Calpers before. The $260 billion pension fund is the only party objecting to San Bernardino’s bankruptcy, saying that pension funds should not be treated like other creditors. Calpers may appeal the eligibility decision.

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