U.S. Bankruptcy Judge Meredith Jury on Tuesday, December 6 gave tentative approval of San Bernardino’s bankruptcy exit plan, nearly four-and-a-half years after the 213,000 population county seat’s August 1, 2012 filing for Chapter 9 bankruptcy protection.
The exit strategy was mapped out by lawyers for the city and agreed to, in some cases begrudgingly, by most but not all of the city’s creditors, employees, retirees, bondholders and current and past vendors.
Entities owed money by the city will get varying fractions of what they were once promised. Some fared better than others, with certain bondholders and unsecured creditors due to be paid a mere one percent of what they once had coming to them. Others will get a slightly higher payout on a graduated scale. Those that forged the best deal were city employees, retirees and the California Public Employees Retirement System, known by its acronym, CalPERS. In the first year after the filing was made, the city withheld more than $14 million owed to the state pension system. By the 14th month after the filing, that arrearage had grown to over $16 million Eventually, in May 2014, the city paid $1.5 million to CalPERS as a down payment toward erasing that debt, and agreed to pay nearly $600,000 a month for the two years between July 2014 and June 2016, as well as committing to shell out five annual payments of $400,000 to cover interest and late payment penalty assessments and fines.
Among the city’s creditors that did not fare as well was Luxembourg-based EEPK, holders of the pension bonds, and Ambac Assurance Corp, which indeminfied some of those bonds. When the city failed to provide them with the same terms of repayment as CalPERS, they sued. asserting the bonds and whatever fees associated with them fall under the same pension obligation as the payments to CalPERS. That lawsuit was settled in March 2016 on the basis of an agreement by which the city is to pay not 100 percent but rather 40 percent of what is owed to EEPK and Ambac.
One class of creditors that were really stiffed were litigants and claimants against the city, including ones who had prevailed in certain lawsuits, among them those alleging they had endured civil rights violations relating to excessive use of force by the police department. Those entities and the lawyers representing them will get just a penny on the dollar for the first $1 million in judgments against the city.
City employees and retirees did relatively well under the plan, which preserves pension benefits for current and former workers, though current employees will be called upon to make a greater contribution toward those pension plans, some benefits were reduced or modified. Employees will have to contribute more to their pension plans and the same level of benefits given to employees in the past will not be available for new employees.
A majority of the city’s creditors agreed to the plan, though some stragglers have refused to compromise or are otherwise insisting that the pittance the city has offered does not truly qualify as a compromise.
Chapter 9 of the the United States Bankruptcy Code provides a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. In a Chapter 9 case, the bankruptcy court is generally limited to determining if the debtor is eligible for filing a Chapter 9 case; confirming a plan of debt adjustment; and ensuring implementation of the plan. At the time San Bernardino declared bankruptcy in August 2012, it had endured two decades of consistently dwindling revenues, expenditures drastically exceeding income, and deteriorating financial numbers that resulted in $80 million in unfunded liabilities and a $49 million annual operating deficit.
Saying the “city came in in financial chaos and it’s leaving in a much better place,” U.S. Bankruptcy Judge Meredith Jury observed that the pain of coming to terms with the city’s financial problems was being doled out generally. “Nobody is walking away from this proceeding without having taken some kind of hit,” she said.
Jury added her perspective that the city was at last making progress after years of spinning its wheels. She said it appeared the city’s leadership had come to terms with the situation and that city officials were no longer squabbling with one another, as was the case four years ago. “This is a very important day for the city,” she said.
Within 30 days, Jury said, her tentative confirmation order whould become official.