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The defined benefit pension plans that are still common for employees of local and state governments are coming under increasing pressure. One of the most significant threats to them is the effort by municipalities to use chapter 9 of the federal bankruptcy code to relieve them of their financial obligations to existing plans. Detroit has attracted the most attention as the largest city to make application to be admitted to bankruptcy. The issue was already on the table in California before Detroit came along. The state constitutions of both California and Michigan have provisions providing protection to the pensions of public employees. It becomes an important issue of whether federal law can trump state law.

Now the first formal ruling has been issued in San Bernadino, CA.

San Bernardino bankruptcy ruling is a blow to CalPERS

Over objections from CalPERS, a judge last week declared that the city of San Bernardino is eligible for bankruptcy, paving the way for a historic showdown over the sanctity of public employee pensions.

The ruling by U.S. Bankruptcy Judge Meredith Jury means San Bernardino officials will now negotiate a payment plan in the coming weeks with CalPERS and other creditors. Experts say the city is expected to develop a plan that would “impair,” or reduce the amount of money paid to CalPERS. That would translate into lower pension benefits for retirees and current employees – shattering decades of precedent over public pensions in California.

“The feeling is they’re going to have to impair pension obligations because that’s their largest liability,” said Karol Denniston, a San Francisco lawyer and expert on municipal bankruptcies. Any plan ultimately will require the judge’s approval.

There is also a bankruptcy filing pending in Stockton and an important court case involving pensions in San Jose. It seems likely that the ruling in San Bernadino will be appealed, since CalPERS has been vigorous in opposing the use of the courts to modify pension plans. What is significant here is that if this ruling is sustained, it would likely apply nationally providing an attractive option for the opponents of public pensions to use in other places.  

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