San Bernardino is Bankrupt

A federal bankruptcy judge has ruled that the city of San Bernardino is insolvent and that the procedure will continue. CALPERS, the California state pension fund had argued that the city should be forced to meet its obligations to the employee pension fund insolvency notwithstanding. The message to take away from this case is that there is no Santa Clause and that the courts will not abet municipal unions in their attempts to wring the last dollar out of over burdened taxpayers. CALPERS has promised to appeal the case.
Here is where liberal political rhetoric meets not only federal law but the iron law of economics as dictated by the late Milton Friedman. There is no such thing as a free lunch. Eventually the bill comes due and as the court in this case is saying the holders of secured debt are first in line. The courts can hardly rule otherwise unless they intend to put an end to municipal borrowing altogether. Without the rule of law to enforce agreements commerce cannot exist beyond the bartering stage. When a political entity such as the city San Bernardino pledges the full faith and credit of its government and its taxpayers it is bound by that promise and cannot choose to put unsecured creditors ahead of unsecured creditors.
In this instance California has taken, for once, a states' right stance. It argues that state law should prevail over federal bankruptcy law and the law enacted by the hooligans in Sacramento would favor CALPERS. Not quite. The state of California and its municipalities are free to issue subordinated debt but it is not their right to misrepresent it as secured debt. Ad populum arguments don't pay the rent. As the bankruptcy proceeds and bond holders are paid CALPERS will be reduced to scrambling with the other unsecured creditors such as the vendors that the city has stiffed with empty promises and bad debt. Prosperity cannot be legislated. Future labor contracts must include one hundred percent funding of less generous pension plans rather than pie in the sky plans of dubious soundness.