Bloomberg News

San Bernardino Union, Calpers Affirm Chapter 9 Objections

December 15, 2012

The California Public Employees’ Retirement System and the union for San Bernardino, California, public employees reiterated their objections to the city’s petition for bankruptcy protection.

The San Bernardino Public Employees Association and Calpers filed separate replies yesterday in U.S. Bankruptcy Court in Riverside, California, in support of their earlier objections to city’s eligibility for Chapter 9 restructuring.

The union claims the bankruptcy case was improperly filed because the city claimed there was a fiscal emergency in order to bypass a law that mandates municipalities engage in a “neutral evaluation” process with debt holders for 60 days, in an attempt to reach a resolution out of court.

“The city had advanced knowledge of its fiscal condition and imminent bankruptcy, yet the city let seven months pass without engaging in mediation with its creditors,” the union said. “The city’s preference for bankruptcy over the neutral evaluation process shows that the city has not given its citizens and workers every reasonable effort to avoid the consequences of Chapter 9.”

In July, the city declared a fiscal emergency under an exception to the California law that it claims allowed it to forgo negotiations. Officials said the city wouldn’t be able to pay its obligations within 60 days and that its financial situation would put residents at risk.

Fiscal Emergency

San Bernardino realized in June it “was fast approaching the edge of a massive fiscal cliff with no viable way to raise revenue and cut spending fast enough to avoid falling off the edge,” the city said in a court filing. City officials announced the fiscal emergency to provide essential service to residents, according to the Aug. 31 filing.

“It is painfully obvious that the city’s fiscal affairs are in disarray,” Calpers said in its filing yesterday. “The little information that has been produced to Calpers by the city to date suggests that the city has been operating for more than a decade without necessary financial controls, without fundamental reporting mechanisms, and in a manner that violates its own charter and state law.”

Paul Glassman, a lawyer representing the city, didn’t immediately return a call to his firm’s office after regular business hours yesterday seeking comment on the filings.

San Bernardino filed for municipal bankruptcy Aug. 1, the third California city since June, after disclosing a $46 million shortfall in its budget. The city of 209,000 about 60 miles (97 kilometers) east of Los Angeles, listed assets and debt of more than $1 billion in a court filing.

Under Chapter 9 of the U.S. Bankruptcy Code, governments, unlike corporations, must first prove to a judge that they are eligible to be in bankruptcy before they can use the court process to try to cut debt through actions such as canceling contracts.

The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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