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Tuesday, August 14, 2012

What if?

The sorry state of city of San Bernardino's finances become clear when one reads the following: Pension costs lead to San Bernardino's debts.

San Bernardino owes the California Public Employee Retirement System (CalPERS) over $143 million.  Furthermore, it owes almost $50 million more in other pension liabilities.  This is in a city that has a $166 million 2012/13 budget, which the city manager says needs to be cut by $46 million in order for San Bernardino to remain solvent.

San Bernardino filed for Chapter 9 (municipal) bankruptcy on August 2, 2012.  This will allow it to renegotiate debt and/or interest rates with creditors at the discretion of the court.  However, both the city attorney and employee representatives predict that the outstanding pension obligations will be paid.  The question is by whom.

The citizens of San Bernardino have already seen decreasing city services with a another massive cut coming in the near future.  More frightening is the idea that the city could essentially shut down with not a single service provided, and it would still be over a year and a half before their pension obligations were paid off.  Taxpayers have the dubious distinction of being the only asset, in the form of their future tax payments, that San Bernardino has.  However, this asset can vote at both the ballot box and with their feet, and it may decide that the sins of politics past is not their burden to bear.

Where does this leave the retirees and current city employees?  The sanguine comments by the city attorney and employee representatives is supported by the conventional thinking about the sanctity of public pension obligations: they are a contractual obligation that must and will be paid.  However, all San Bernardino's creditors will have to stand before the bankruptcy judge and make their case.  CalPERS most likely will push itself to the head of the line and retirees and current employees will get what they were promised.  But what if that doesn't happen, if not in San Bernardino's case, another bankrupt city's?  A judge may acknowledge that a bankrupt city is in a death spiral that can not be halted unless all contractual obligations are on the table and everyone is forced to take less.

People will continue to adamantly deny that this will ever happen, but are you willing to bet your retirement on it?

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