(Reuters) – A U.S. federal judge on Wednesday granted bankruptcy protection to the California city of San Bernardino, paving the way for a precedent-setting battle between bondholders and California’s giant public pension system.
The case is being closely watched by other U.S. cities, including Detroit, which declared the biggest U.S. municipal bankruptcy last month, where budgets are burdened by soaring pension costs.
Judge Meredith Jury of the U.S. Bankruptcy Court for the Central District of California ruled that San Bernardino was eligible for Chapter 9 bankruptcy protection despite opposition by the California Public Employees’ Retirement System, or Calpers. The $260 billion pension fund is the city’s biggest creditor and America’s largest pension fund.
“I am ruling as a matter of law that the city is eligible,” Jury said. “I don’t think anyone in this courtroom seriously thought the city was anything but insolvent.”
A city must be insolvent and have proof to have negotiated in good faith with creditors to be eligible for Chapter 9 municipal bankruptcy.
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