Municipal Bankruptcy
A San diego Bankruptcy Attorney comments on municipal bankruptcy...
From my San Diego bankruptcy law office, I blogged recently about the need for San Diego to consider a municipal bankruptcy. It seems that idea hasn’t lost all traction. Check out this story from the voiceofsandiego.org: http://voiceofsandiego.org/government/article_0418be36-1aa3-11df-840f-001cc4c03286.html
The thesis of the story seems to be that, “[I]t appears legally possible for a city to reduce pension benefits through bankruptcy. No one has tried it before, but someone will. That bankruptcy will be a costly war with an uncertain outcome.”
In other words, the talk right now is that if San Diego does declare bankruptcy, the $2.1 billion pension obligation will remain untouched. What’s the point, however, in going bankrupt if the largest obligation remains unaffected? Good question. State law mandates that no municipality may affect its pension debt through bankruptcy. Bankruptcy is federal law, however, and that opens the door – however slightly – for a judge to, in fact, do something with that pension debt. I would imagine the federal Supreme Court would chime in to resolve the issue, but the concept is out there and the legality of it is uncertain. The declaration of bankruptcy itself might incentive the pension holders to reduce their debt from $2.1 billion or restructure it somehow. The threat of bankruptcy, then, can itself be a motivator, even if the question of affecting the $2.1 billion is an unknown. Stay tuned.
