Another Municipality To Follow In Detroit’s Footsteps

Erica Phillips with the Wall Street Journal reports that a federal bankruptcy judge on Wednesday ruled that a city in California is eligible for Chapter 9 bankruptcy – meaning that the city (San Bernardino) could soon follow in the footsteps of Detroit, which filed for bankruptcy in July.

San Bernardino’s issues, like so many other municipalities, seem to revolve around debt obligations related to pension plans. Phillips writes that Calpers, the city’s public pension fund, gobbled up around 80 percent of its budget.

That is, until city officials stopped making payments after it filed for bankruptcy protection last year.

Despite what Phillips characterizes as “strong dissent” from a Calpers lawyer, who argued against the judge’s decision to allow San Bernardino to enjoy bankruptcy protection, the judge granted eligibility nonetheless.

This lawyer’s objections are similar to a creditor’s objections in Chapter 11 small business bankruptcy. These objections generally revolve around unpaid claims. Indeed, the Calpers lawyer said that they would “aggressively pursue all past due contributions,” as Phillips quotes.

Nonetheless, bankruptcy protection is bankruptcy protection, and small businesses (like municipalities in Chapter 9 cases) can use Chapter 11 to reorganize and restructure their debts, even over the objections of creditors.

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Another Municipality To Follow In Detroit’s Footsteps