Pension Debt Overwhelms Bankrupt San Bernardino, California, and It Becomes the Third California City to Seek Bankruptcy Protection; Other Cities in California are Also in Deep Fiscal Trouble

Pension Debt Overwhelms Bankrupt San Bernardino, California

August 2, 2012

Reuters - San Bernardino, the third California city to seek bankruptcy protection since June, is saddled with huge pension debt and will produce details of those unfunded obligations within 15 days, its mayor said on Thursday.

The city filed for bankruptcy protection on Wednesday, citing over $1 billion in estimated liabilities and up to 25,000 creditors, many of whom are the city's own employees.

The city, 65 miles east of Los Angeles, also listed estimated assets as over $1 billion.

Patrick J. Morris, San Bernardino's mayor, said in a telephone interview that the bulk of the city's debt was due to "unfunded liabilities related to pension and benefits" for the city's employees, and "obligations to employee groups in labor contracts."

In the past two months, the cities of Stockton and Mammoth Lakes have also filed for Chapter 9 bankruptcy protection, a special bankruptcy provision for municipalities.

Stockton, which like San Bernardino has suffered from the housing crash that was particularly acute in southern California, filed for bankruptcy in June, becoming the largest U.S. city to do so.

Other cities in California are also in deep fiscal trouble.

Richard Larkin, senior vice president and director of credit analysis at bond underwriting firm HJ Sims and an expert in municipal bonds, concluded in a recent study that "because of the fiscal environment in California ... many of those defaults yet to come this year are likely to be in California."

In late July, San Bernardino reported that it had $56 million in indebtedness payable from its general fund, the main budget, including payments on a $50 million pension bond.

There is an additional $195 million in unfunded pension obligations, $61 million in unfunded retiree healthcare, and $40 million of workers compensation, compensated absences and general liabilities.

The city is not alone in struggling to meet pension obligations, particularly for police and firefighters. In other California cities and in municipalities nationwide, retirement costs promised to city employees in good times are wreaking havoc with budgets in the wake of the housing market crash and high unemployment.

The city of about 210,000 residents declared a fiscal crisis last month after a report that local government had tapped out its reserves and projected that spending would top revenue by $45 million in the fiscal year that began on July 1.

Wednesday's initial filing to place the city under Chapter 9 bankruptcy protection was mainly designed to stop creditors from suing the city for unpaid debt.

The filing of bankruptcy protection halts legal actions against the city until the bankruptcy case is over.

There is no guarantee that a judge will approve the bankruptcy request. Of the roughly 640 Chapter 9 filings since 1937, about a third have been rejected.

Mayor Morris said he was confident that the city would get bankruptcy protection because its finances were in such dire straights.

"We can't make payroll," he said.

The three California bankruptcy cases will be closely watched by investors because they will be test cases of whether cities in financial trouble can be allowed to renege on their bond debt and pension obligations.

Already in Stockton a big creditor is arguing that the city should not be afforded bankruptcy protection.

Assured Guaranty, a Bermuda bond insurer, complained this week that Stockton is reneging on its debt obligations to investors while continuing to make payments to CalPERS, California's state pension system.

Related:

California is Bankrupt and One of the Reasons is Its Taxpayer-funded Education System (Another is Its State Pension System)