The California Public Employees’ Retirement System is trying to rewrite the rules for bankrupt cities, claiming that it should get paid before almost everyone else, including bondholders.
The biggest U.S. public pension fund would set a legal precedent should courts adopt Calpers’s position that, as an arm of the state, it is exempt from rules that apply to other creditors in the Chapter 9 bankruptcy cases of San Bernardino and Stockton. A Calpers victory would threaten public services in a city trying to reorganize in bankruptcy, or in an extreme case, cause a city to disincorporate, attorney James E. Spiotto said in an interview.
“Chapter 9 was never intended to cause the liquidation of a municipality or the reduction of services,” said Spiotto, who isn’t involved in the San Bernardino and Stockton cases. “What Calpers is doing is threatening the basic tenet of Chapter 9.”
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