LOS ANGELES -- San Bernardino was granted extra time by U.S. Bankruptcy Judge Meredith Jury to make its case for bankruptcy at a hearing held Monday.

The city’s attorneys had filed a status report late Friday asking that the city receive more time to file a pendency plan and that the judge postpone until Dec. 21 a court date to hear arguments about whether the city should be eligible for bankruptcy.

The judge granted the postponement. The city now has until Nov. 30 to respond to objections to its eligibility for bankruptcy from California Public Employees' Retirement System and a city employees union. The city creditors have until Dec. 14 to file responding documents.

“While the city has made expenditure reductions that substantially reduce its staggering $45.8 million budget deficit, the city still faces a severe cash flow crisis and structural budget imbalance,” the city’s attorneys argued in the brief. “Absent Chapter 9 protection, the city would be unable to pay its employees, go into uncontrolled default of its obligations for critical city assets such as police cars, fire trucks, and refuse trucks, and could not provide basic essential services to ensure the health, safety and welfare of its citizens.”

The city has made $29.7 million in cuts reducing the projected deficit for the current fiscal year to $16.03 million, according to court documents.

City officials said in the document they could present a pendency plan to council members as early as Nov. 19.

The city will face an uphill battle in convincing the judge of its eligibility to be in bankruptcy, according to Karol Denniston, a partner in the San Francisco office of law firm Schiff Harding.

“The union has argued persuasively that everyone knew they were running out of money,” Denniston said. “So if you knew for months before you drove off a cliff into fiscal emergency, does that quality as a bankruptcy?”

Denniston said she found the union’s argument regarding whether the city self-created a situation in which they ran out of money in order to avoid AB 506 convincing.

The standard for eligibility under fiscal emergency is that a city was managing itself well, but events beyond its control created a situation where it could not pay its bills, she said. San Bernardino will have to convince the judge that was the case for the city when it made an end run around AB506, the state law that requires cities to go through a mediation process with creditors before declaring bankruptcy.

“I think there are a lot of persuasive facts that San Bernardino said we are taking the fiscal emergency off-ramp – and they created the emergency,” Denniston said.

Denniston found the city’s decision to postpone arguments wise, because it gives the city additional time to negotiate with creditors – and to convince the pension fund and union to withdraw objections to its bankruptcy eligibility.

San Bernardino is not only making itself a test case for when a city should be eligible to file bankruptcy, but also whether or not payments to the California Public Employees' Retirement System can be negotiated.

Moody’s Investors Service said in a report released Friday that San Bernardino’s and Compton’s disputes with the pension “could open the door for courts to decide whether pension contributions can be legally suspended or modified if a California local government is in financial distress/and or bankruptcy,” Moody’s said.

San Bernardino has missed $5.3 million in payments to CalPERS since July. Compton owes the pension fund $2.6 million, but the city plans to catch-up on its payments in December through efforts including the issuance of a $10 million TRAN, City Manager Harold Duffey said.

Denniston had told the Bond Buyer in an earlier report that she thought San Bernardino’s failure to make its CalPERs payments could be a method by the city to get the pension fund to the table.

Before San Bernardino’s CalPERS payment suspension, the bankrupt cities of Vallejo and, more recently, Stockton had left their obligations to CalPERS unimpaired at the expense of unsecured creditors including bondholders. The judge in the Stockton bankruptcy did uphold the city’s right to stop paying health benefits to city retirees, according to the Moody’s report.

San Bernardino has about $90 million of outstanding pension obligation bond debts and owes another $200 million for securities issued by the city’s now-dissolved redevelopment agency. The city missed a $3.3 million pension obligation bond payment on July 31. The city also failed to make a $1 million interest payment due Oct. 1 on 2005 taxable pension bonds.

On Tuesday, Standard & Poor’s suspended the BBB long-term rating on three series of the San Bernardino Joint Powers Finance Authority’s tax allocation bonds based on a lack of timely information from the successor agency. The rating agency said it could reinstate the rating if it receives the information it needs in a timely fashion.

The rating had been placed on negative credit watch based on clean-up legislation passed by the state legislature to a measure that dissolved the state’s redevelopment agencies earlier this year.

Based on a disclosure report published Oct. 11, the authority withdrew $147,971 and $96,250 from the series 2010A and 2010B debt service reserve funds to make each respective debt service payment on Oct. 1, 2012. The 2010A and 2010B DSR funds have $539,926 and $213,404 respectively remaining after this transfer.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.