By Dale Kasler
Published: Wednesday, Sep. 4, 2013 – 12:00 am
Last Modified: Wednesday, Sep. 4, 2013 – 7:41 am

Over objections from CalPERS, a judge last week declared that the city of San Bernardino is eligible for bankruptcy, paving the way for a historic showdown over the sanctity of public employee pensions.

The ruling by U.S. Bankruptcy Judge Meredith Jury means San Bernardino officials will now negotiate a payment plan in the coming weeks with CalPERS and other creditors. Experts say the city is expected to develop a plan that would “impair,” or reduce the amount of money paid to CalPERS. That would translate into lower pension benefits for retirees and current employees – shattering decades of precedent over public pensions in California.

“The feeling is they’re going to have to impair pension obligations because that’s their largest liability,” said Karol Denniston, a San Francisco lawyer and expert on municipal bankruptcies. Any plan ultimately will require the judge’s approval.

A similar fight is brewing in Stockton, which filed for bankruptcy protection in spring 2012, a few months before San Bernardino. At the same time, officials in California are closely watching Detroit’s largest-ever municipal bankruptcy, which could well result in reduction of pension benefits, Denniston said.

The state-appointed emergency manager for Detroit has raised the possibility of slashing pensions by 90 percent, and while a more moderate reduction is likely, that is likely to influence the outcome in the two California cities, Denniston said. Although the Detroit case was filed just recently, the case is being fast-tracked by the bankruptcy judge and a resolution is likely to come sooner than in the California cases.

“That’s going to shift the dynamic,” said Denniston, who is representing a group of Stockton taxpayers in that city’s bankruptcy case.

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