The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. –Tenth Amendment to the U.S. Constitution
The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State. –Eleventh Amendment to the U.S. Constitution
(November 5) SAN BERNARDINO—In the battle that is raging between the city of San Bernardino and the state’s public employees’ pension system, the pension system is now striving to align itself with the state of California and citing both the Tenth and Eleventh Amendments to the Constitution in seeking to limit the city’s claim of protection from its creditors under the bankruptcy code.
The city of San Bernardino, which has been in a precarious financial position for years because of overspending, a stagnating economy, dwindling revenues and escalating costs including overly generous salaries paid and benefits provided to its municipal employees, last year filed for Chapter 9 bankruptcy protection.
While other large California Cities that have filed for bankruptcy such as Vallejo and Stockton have chosen to continue to make good on their commitments to their employees’ pension programs, San Bernardino has engaged in the exploratory strategy of testing whether it can withhold scheduled payments from CalPERS, the California Public Employees Retirement System, just as it would any of its other creditors under the rubric of its bankruptcy filing. Indeed, for thirteen months, from July of 2012 to July of 2013, San Bernardino failed to make a single payment to CalPERS, withholding more than $14 million in that time frame.
CalPERS is actually San Bernardino’s single largest creditor. In the pendency plan it put together as part of its bankruptcy filing, the city did not differentiate between CalPERS and any of the scores of entities it owes money to. The city maintains that if it is to get back on its feet financially, it must defer payment to a whole host of those it is in arrears to so that it can map its way out of the financial abyss it had sunk into. By restructuring the totality of its debt, city officials maintain, the city can streamline its function, eliminate its structural deficit, balance its budget and eventually, over the long haul, repay its creditors.
A handful of those creditors, however, have challenged the bankruptcy filing. Among those is CalPERS. In addition, CalPERS has consistently maintained that even if the bankruptcy were to be sanctioned by the court, which it has, that under state law, it should be excluded from the category of creditors that a municipality can withhold payments from.
Despite the opposition to its bankruptcy filing, U.S. District Judge Meredith Jury has ruled that the city’s debt restructuring shall proceed and she has delivered decisions favorable to the city in terms of the withholding of payments to its creditors. With regard to CalPERS, Jury held that requiring the city to expend its scant revenue to cover retirement costs would undercut San Bernardino’s effort to get back on its feet financially.
Another of Jury’s rulings extended to state controller John Chiang’s effort to withhold from San Bernardino $15 million in property tax revenue after the state controller’s office and the state Department of Finance determined that San Bernardino had inappropriately transferred $108.4 million of its former redevelopment agency’s real properties, cash, and invested funds to the city’s economic development corporation and further determined the city is hanging on to another $420.5 million of assets that should have been transferred to a so-called successor agency after the state’s shuttering of redevelopment agencies statewide in 2011.
When the state withheld the $15 million in tax revenue from the city, the city sued the state in March to prevent the state from withholding the tax revenue. Judge Jury ruled that the state could not withhold the revenue.
Just as CalPERS objected to Jury’s ruling in favor of the city relating to the retention of money owed to the state public employee pension system, the state is dissenting to Jury’s ruling forcing the state to turn over to the city the $15 million in property tax it is due while the city is withholding from the state $528.9 million it claims it is due from the city.
In an amicus curiae brief filed on November 1 in Jury’s court, lawyers for the CalPERS cited the 10th and 11th Amendments to the U.S. Constitution in asserting the state of California has immunity from the city’s bankruptcy filing in much the same way CalPERS is not subject to the imposition of a bankruptcy court mandate to accept nonpayment from the city. The principle in both instances is that both the state and CalPERS have a priority claim to San Bernardino’s available money above all other of the city’s creditors under California law and those amendments prevent using the federal court from intervening to disrupt California law or its judicial processes.
The Tenth Amendment states that the federal government cannot go beyond the powers granted in the Constitution. Under it, states and local governments have on occasion asserted exemption from various federal regulations, especially in the areas of labor and environmental controls, and have had some success preventing federal agencies and courts from overriding the authority and power reserved for and asserted by states.
The Eleventh Amendment prevents federal courts from overriding the determinations of lawsuits made by state courts.
Because municipalities are political divisions that are chartered by and fall under the authority of the state, they have a different relationship to agencies or extensions of the state such as the controller’s office, the state Franchise Tax Board, the Department of Finance or creatures of the state such as CalPERS than do other entities or creditors that are subject to federal bankruptcy law, CalPERS’ lawyers maintain.
“By characterizing [the city of San Bernardino’s] proceeding as merely one to prevent an action to collect on a debt, the bankruptcy court gave short shrift to the serious federalism concerns that this proceeding raises,” the brief states. “The Tenth Amendment, and our Federalism, does not take a back seat to Congress’s Article I powers.”
The city has argued that “the exception to sovereign immunity … plainly applies to this case and negates any sovereign immunity on the part of [controller’s office and the California Department of Finance].”