(December 18)  LOS ANGELES—The California Public Employees Retirement System will get another bite at the apple in trying to establish that U.S. Bankruptcy Judge Meredith Jury erred when she ruled four months ago that the city of San Bernardino qualified for bankruptcy protection.
After years of staving off financial challenges, San Bernardino filed a Chapter 9 bankruptcy petition in August 2012. In its filing, the county seat asserted it had $180 million in ongoing unfunded liabilities and a $49 million annual operating deficit. Shortly thereafter, the state’s public employees retirement system, known by its acronym CalPERS, contested the city’s filing, maintaining San Bernardino has hundreds of millions of dollars worth of assets it could liquidate to make good on its responsibility to its creditors.
CalPERS is San Bernardino’s largest creditor. The city currently has a $25 million annual obligation to the retirement system and it withheld more than $14 million in pension fund payments 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. Even more alarming to CalPERS is the perception that the city is looking down the road at a longer-term solution that would include renegotiating the amount of its commitment to the retirement system, one that would indeed set a precedent in California of reducing the pensions of retired or soon-to-retire city employees.
In addition to opposing San Bernardino’s bankruptcy petition outright, CalPERS has asserted that the pension fund system has a special status among the city’s creditors and that it should go to the front of the line when the city begins to pay those to whom it is in arrears. Jury did not accept that, ruling that CalPERS has no greater or lesser standing than the scores of other entities the city owes money to.
Moreover, 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.
CalPERS wants out of Jury’s courtroom and previously pressed for leave to appeal the matter to another judge, a request Jury denied.
CalPERS took a writ to U.S. District Court in Los Angeles, where Judge Dolly Gee granted the pension fund’s request to appeal Jury’s findings directly to the 9th Circuit Court of Appeals.
Gee’s decision merely gives the California Public Employees’ Retirement System permission to request that the 9th Circuit here the case. The 9th Circuit can turn down the appeal request or agree to hear arguments that Judge Jury was wrong in allowing the city to envelope itself in the blanket of bankruptcy protection.
Jury had been reluctant to allow CalPERS to pursue the appeal because she was hopeful that ongoing mediation sessions involving the city and its creditors before one of her colleagues, U.S Bankruptcy Judge Gregg Zive, were making considerable progress and she was concerned the appeal would divert both the city and the pension fund’s focus to non- productive issues.
As it stands, the Zive-led efforts to reach an accommodation will continue while the 9th Circuit considers whether to hear the appeal.
That appeal and the mediation come in the midst of a profound examination of a basic public financial and policy issue, i.e., the question of whether public pension obligations are to be held as sacrosanct, no matter how generous or reasonable individual pensions are, or whether troubled municipalities can skip out on their commitments to continuously fund the retirement accounts of  their current and past employees.
San Bernardino is at the forefront of that issue, having sought to have its pension fund obligations categorized as indistinguishable from its responsibilities to its other creditors.
In the cases of two other cities in California that have sought bankruptcy protection, Stockton and Vallejo, those cities have chosen to stay current on their obligations to CalPERS.
Seven–ninths of the way across the continent, in Detroit, the Motor City had its bankruptcy petition granted on December 3 as a consequence of having run up a monster debt so humongous it could only be estimated – at an unfathomable $18 billion. The U.S. Bankruptcy Judge  hearing that case, Steven Rhodes, threw public employee unions and pension funds into paroxysms when he  ruled that Detroit is not only eligible for bankruptcy but can also cut pension benefits as part of its strategy to map its way out of the financial abyss it has found itself in. Pensions, just like any other contracts, can be altered, given the exigency of bankruptcy, Rhodes ruled.
Rhodes’ ruling provides a precedent that outfits San Bernardino with more leverage in its match with CalPERS, providing the city with the potential option of abrogating a contract that CalPERS and the city’s municipal employee’s unions considered absolutely ironclad.
Like that of Jury, Rhodes’ ruling is now the target of an appeal request.