(November 18) RIVERSIDE—U.S. Bankruptcy Judge Meredith Jury, who is overseeing the city of San Bernardino’s Chapter 9 bankruptcy filing, on November 15 rejected a request by the city’s largest creditor to challenge the city’s bankruptcy eligibility at the U.S. 9th Circuit Court of Appeals.
That creditor, the California Public Employees Retirement System, has disputed San Bernardino’s contention that it is in dire fiscal straits since shortly after the municipality’s filing of its August 2, 2012 bankruptcy petition. San Bernardino, which currently has a $25 million annual obligation to the retirement system, withheld more than $14 million  in pension fund payment from July 2012 until July of this year. The city wants to continue to make partial payments until such time as it gets back on its feet financially.
In responses to the city’s filings, the retirement system has said that San Bernardino possesses untapped assets that could be liquidated and is simply skipping out on its financial responsibility. It has said San Bernardino is not eligible for bankruptcy.
Jury has consistently ruled that San Bernardino is as insolvent as it claims. In August, she ruled that the city’s bankruptcy should be granted pursuant to a pendency plan by which the city continues to pay its employees and other expenses critical to its day-to-day operations but services its other debts on the basis of the limited financial means available to it.
In dissenting from Jury’s rulings, the California Public Employees Retirement System, known by its acronym CalPERS, has maintained that it has special status among the city’s creditors and that the city cannot be excused from making good on its obligations to the pension fund. CalPERS maintains that it is a creature of the state government, and as such merits a first place in line among those to whom the city is in arrears. Jury has rejected those arguments. In its dissent CalPERS requested leave to appeal. San Bernardino responded by arguing that remaining in bankruptcy court before Jury is the appropriate venue for coming to terms with all of its creditors, including CalPERs, in accordance with a still confidential and tentative plan for structured repayments which the city council approved in October. The plan is now subject to court-supervised mediation and the city claims a CalPERS’ appeal at this point is counterproductive to the mediation process.
Jury found that bringing the 9th Circuit into the matter would be “duplicative and not an efficient use of judicial resources.”
Unlike San Bernardino, two other large California cities that have filed for bankruptcy protection – Vallejo and Stockton – are continuing to make payments to CalPERS. In San Bernardino, which is now staggering under the end result of extremely generous salary and benefit packages granted to city employees as the result of aggressive public employee union pressuring of the city’s elected leaders, city officials are now exploring whether the city can use bankruptcy to reduce its pension obligations.
CalPERS, which perceives that San Bernardino prevailing in that effort would set a precedent that would be applicable up and down the state and compromise its ability to continue to deliver retirement benefits to all of its members, is digging in for a battle royal.  Consequently, CalPERS did not accept Jury’s ruling as the final say in the matter and has taken its request to a U.S. District Court judge.