In a move as brazen as it is bold, San Bernardino officials are asking that the lion’s share of the city’s creditors and vendors that have been stiffed over the three-and-a-half year duration of the municipality’s tarriance in bankruptcy be paid one cent on the dollar pursuant to its restructuring plan.
The city’s proposal that it pay just one percent of the roughly $50 million it owes to its unsecured creditors must be approved by Federal Bankruptcy Judge Meredith Jury.
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.
The city had liabilities and assets which both total more than $1 billion and somewhere between 10,001 and 25,000 creditors, which include employees, vendors the city has worked with, and litigants who have sued the city, according to the city’s original filing.
Many of the city’s creditors contested the city’s filing, maintaining that it could streamline its ongoing operations and liquidate some of its assets to make those entities it was not paying whole. The most spirited of the city’s challengers in bankruptcy court proved to be the state’s public employees retirement system, known by its acronym CalPERS.
CalPERS is San Bernardino’s largest creditor. At the time of the Chapter 9 filing, the city had a $25 million-and-growing annual obligation to the retirement system and it withheld more than $14 million in pension fund payments from July 2012 until July of 2013. The city sought permission to make continual partial payments to its employee pension system until such time as it gets back on its feet financially. Judge Jury, over the objections of CalPERS and others, granted the city’s bankruptcy petition. After lingering in bankruptcy for nearly two years, the city in June 2014 brokered some fashion of a deal with CalPERS, which at that point maintained the city was at least $16.4 million in arrears to it, prior to interest. In a tersely worded joint announcement at the time, the city and CalPERS announced that the city was to “make certain payments to CalPERS on deferred amounts owing.” Both CalPERS and the city remain deliberately vague about the how much it will ultimately pay the pension fund in the coming years. Published reports pegged the city’s debt to CalPERS at $50.4 million.
The city did take out a $56.8 million loan from Erste Europaische Pfandbrief-und Kommunalkreditbank AG, ostensibly to begin making inroads on its pension and other obligations. How the city can realistically meet its payments to Erste Europaische Pfandbrief-und Kommunalkreditbank AG is an emerging question.
There have been indications the city will eventually make payment in full of past debt and make good on all payments due going forward. But there are practical considerations that would seem to make such a scenario wishful, at best. If in fact CalPERS has accepted taking less money from San Bernardino than it is contractually owed, it is not in the pension system’s interest to acknowledge as much, as this may tempt other cash-strapped cities to move to the bankruptcy option themselves to get out from under their punishing debt to the system.
Thus, the precise recovery CalPERS stands to make is yet not completely clear, though a logical inference is that it will likely receive the greatest percentage of money owed to all of the city’s creditors, something in excess of the fifty percent range. It was disclosed early last year that CalPERS had spent $7.5 million in legal fees in its efforts to preserve its position with regard to the Vallejo, Stockton and San Bernardino bankruptcies.
In November 2014, Jury ordered the city to submit its bankruptcy exit plan by last May 30, which the city did, despite a lack of documentation and audits of its finances during the 2012-13 and 2013-14 fiscal years.
It has now been disclosed that the city wants to treat the remaining unsecured creditors with far more parsimony than it did CalPERS, offering them a mere one percent of what they are owed. If Jury will allow them to do so, city officials maintain they will be able to expunge $49 million of red ink from the city’s ledgers.
This means that literally hundreds of businesses and individuals owed money by the city will, if Judge Jury agrees, need to write off 99 percent of what is owed to them. Those unsecured creditors include vendors of both goods and services as well as individuals who made claims against the city or filed and prevailed in suits in which they alleged and proved that action by the city and/or its employees harmed them and caused them monetary loss. In the most extreme, some of the legal cases involve wrongful death cases which grew out of shootings by members of the police department. Others involve negligence by the city’s public works division and still others involve excessive use of force cases against the police department and its personnel. Some involve cases in which innocent bystanders suffered collateral injury or otherwise were harmed by action taken as officers effected arrests of criminals.
The city is asking that the 1 percent payout cap be applied to all litigants or claimants harmed prior to, or who made those claims or filed lawsuits prior to, August 1, 2012, when the bankruptcy filing was made. It further applies to those who had obtained judgments or settlements prior to that date who had not been paid as of that date.
Over the next three months it is anticipated that there will be an unending parade of irate claimants, victorious litigants, creditors and vendors coming before Judge Jury during hearings in Federal Court in Riverside.
Under bankruptcy law, based upon the relative ability or inability of an insolvent party to raise funds, a judge has the option of allowing letting the indigent entity skip out on its obligations, even when that failure to make good on the debt has a devastating effect on the neglected consignee.
To cut spending, San Bernardino has ended its subsidy of employees’ health costs and outsourced its fire department to the county and created a county fire service assessment district that is coterminous with the city limits. That district is going to collect a parcel tax of $143 on every property in the city and remit that money back to the city. The council this week voted to finalize the outsourcing of trash service, which will allow it to collect a franchise fee from Burrtec, the company it selected to handle refuse hauling in the city.
Not surprisingly, Erste Europaische Pfandbrief-und Kommunalkreditbank AG has recently experienced lender’s remorse, and it is asking Judge Jury to clarify with exactitude what assets the city has, including real property that can be converted to cash, before she approves the city’s bankruptcy exit plan or allows the city to get out from under any of its debt to any and all of its creditors.
Few financial professionals believe Jury will approve the city’s proposal to pay a mere 1 percent of what it owes to its vendors and creditors. They see the request as a first round bargaining position assumed by the city. The city does possess property and assets that could be sold off to raise money that might cover a larger percentage of what those creditors are owed. Jury could also do an evaluation of each claim against the city, determining, through what is termed “a balancing of hardships” if some creditors should be paid more than others.
Still, some cities in bankruptcy have slipped out the back door by paying as little as one percent to those to whom they owed money.
In February 2015, Stockton emerged from a 31-month bankruptcy after U.S. Bankruptcy Judge Christopher Klein acceded to the city paying its unsecured creditors 1 percent of what the city owed them. Franklin Funds, which was owed $35 million in both secured and unsecured debt, appealed that ruling but lost.
Vallejo emerged from bankruptcy in 2011 after agreeing to pay its unsecured creditors 20 to 30 percent of what they were owed. Across the country, in the most celebrated case of municipal bankruptcy to date, Detroit paid its unsecured creditors between 10 and 13 percent in its 2014 bankruptcy emergence.
A status hearing on the city of San Bernardino’s bankruptcy petition will be held at 1:30 p.m. on March 9 at U.S. Bankruptcy Court at 3420 12th St., Riverside.