U.S. Bankruptcy Judge Steven Rhodes, as part of his ruling on Tuesday, Dec. 3, that Detroit was eligible for bankruptcy, decided that pensions can be altered just like any other contract, eliminating a protection that employee unions long have held to be ironclad.
A municipal bankruptcy expert said the ruling strengthens San Bernardino’s position and those of other cities struggling with rising pension costs.
“It is the beginning of a very powerful tool for municipalities trying to put themselves on sound financial footing and avoid bankruptcy,” said Karol Denniston, a San Francisco attorney and expert on bankruptcy law.
San Bernardino was ruled eligible for bankruptcy in August, a year after it filed for Chapter 9 protection. The city began mediation talks with its creditors last month but continues to battle with its largest creditor, the California Public Employees Retirement System, which is seeking to appeal the eligibility.
CalPERS officials have accused the city of using bankruptcy as a delay tactic to avoid paying its pension obligation. When the city filed for bankruptcy, it halted pension payments for a year and owes CalPERS about $15 million, according to the agency.
Police and fire unions have opposed the city’s imposition of salary and benefit cuts last January, accusing city officials of failing to negotiate in good faith.
San Bernardino Mayor Pat Morris said while there are differences in the cases, there also are similarities between Detroit and San Bernardino. The Detroit unions have accused the city of failing to negotiate in good faith as part of the challenge to eligibility, but Rhodes found it was impractical to do so because of the emergency conditions.
In both cities, representatives of unions and the pension systems argued that public pensions should be protected above other creditors. The bankruptcy process allows for debtors to restructure their debts, often reducing their payments to creditors.
Morris said the Detroit ruling is another “arrow in the quiver of cities who are in desperate circumstances,” such as San Bernardino.
“Basically, it says that all issues are on the table,” Morris said. “It’s saying nothing is sacred.”
San Bernardino has about $160 million to $180 million in unfunded liabilities because of pension benefits, mostly for police and fire, that it cannot afford, he said.
Morris said the city’s intent is to be fair to its retirees and respect pensions as best it can.
“The question always is what is fair,” he said. “What is fair has to be put up against the question of affordability. What is fair and what is affordable may be two different numbers.”
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