IE Business Daily

Saturday, June 14, 2014

Elections, Recalls, Charter Amendments, Labor Negotiations, and Pension Reform are all ideas bandied about in the effort to right the financial ship of the City of San Bernardino.

Grandiose promises are always made during elections. Never could they be more meaningless than when a city is heading into bankruptcy and literally is at the fate of a Federal Judge whose only job is to apply federal law in as fair a manner as is possible.

All the factions involved, the city, the state pension system, bond holders who carry the city’s debt, and city employees all are represented in court. Whatever the decision, the Judge’s order will determine the path that San Bernardino will be required to take for the next five years.

In past municipal bankruptcies, bond holders have been left holding the largest share of the bag while the pensions for employees were left unscathed. The California Pension Retirement System (CalPERS) has pushed to make that a precedent, but previous arguments made by other municipalities did not challenge the premise that pension obligations were sacrosanct. (The current precedent is based on a seventy year old court decision that has never been challenged.)

The City of San Bernardino chose to work with bond holders in bankruptcy proceedings to challenge this concept of pension supremacy (which does not exist for private sector pensions) drawing a significant challenge from CalPERS. The City of Detroit, also in bankruptcy, has already witnessed a preliminary decision by a bankruptcy judge that their public pension system would be affected by the bankruptcy, while the judge stated he would minimize it as much as possible for low income pensioners.

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