Joel R. Glucksman
Partner
201-896-7095 jglucksman@sh-law.comFirm Insights
Bankrupt San Bernardino Favors CalPERS Over Bondholders
Author: Joel R. Glucksman
Date: May 3, 2013
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The city council of bankrupt San Bernardino announced it will resume making payments to the state pension fund – the California Public Employees’ Retirement System, or CalPERS – to the chagrin of the city’s bondholders.
Municipal lawmakers approved a new 14-month budget that will require it to prioritize some creditors over others. The council voted to continue making $1.2 million pension payments on a bi-weekly basis effective July 1. In doing so, however, the city’s budget leaves no room to make payments to the city’s bondholders.
San Bernardino is not the first city faced with the decision of whether to prioritize payments to state pensions or Wall Street bondholders, but its decision to favor the pension fund may have an impact on how other distressed cities manage their own financial troubles. CalPERS is currently San Bernardino’s largest creditor, and called the city’s decision to continue payments a “smart business decision,” Reuters reports.
While the city agreed to resume pension payments, it left a great deal of uncertainty in how it plans to tackle other areas of debt. In what Mayor Pat Morris coined as the city’s “survival budget,” the amounts allocated toward repaying debt may fluctuate or face adjustments as the city continues to seek out solutions and meet its debt obligations.
“This budget of ours that leads us through the next 15, 16 months continues to defer critical obligations that must be acknowledged and paid off,” Morris told the San Bernardino Sun.
San Bernardino filed for bankruptcy law protection under Chapter 9 of the Bankruptcy Code last August. Since that period, it has deferred tens of millions of dollars in debt, and its survival budget focuses primarily on contributing to its state pension fund and covering critical needs for its residents, including police and fire services.
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