San Bernardino Hearing May Decide Calpers Creditor Rank

San Bernardino, California, may become the first bankrupt city to force the biggest U.S. public pension fund to wait in line with other creditors while it struggles to regain solvency.

San Bernardino and the California Public Employees’ Retirement System will ask a judge today to decide the legality of the city’s decision to defer about $13 million in pension payments for policemen, firefighters and street cleaners.

Calpers argues that San Bernardino can’t defer its payments to the fund, which uses the money to help cover the monthly pensions of retired city employees. Allowing the deferral would be unfair because Calpers may still be required to pay those retirees $3.75 million a month, the fund said in court papers filed Dec. 17.

“The issue presented is simple: Will this court allow the city to continue to receive ongoing benefits provided to the city by Calpers without paying for them,” Calpers said in its most recent filing.

How Judge Meredith M. Jury answers Calpers’ question will set a legal precedent at a time when pensions for public employees are straining local governments from California to Rhode Island, according to bankruptcy attorneys that specialize in municipal insolvencies.

Calpers is asking Jury for permission to sue the city to force it to make about $7 million in missed payments. In a related request, Calpers is asking Jury to kick the city out of bankruptcy, where it is protected from such lawsuits.

Bondholder Risk

A ruling in favor of Calpers would mean municipal bondholders would face more risk, especially in California, said Richard A. Ciccarone, chief research officer at Oak Brook, Illinois-based McDonnell Investment Management LLC, in an interview.

Should San Bernardino, and the bondholders that support its position, win, Calpers may be forced to compete with other, low- ranking creditors for pension payments. Bondholders in San Bernardino and the bankruptcy city of Stockton, California, argue that Calpers should be treated like any other unsecured creditor in Chapter 9 and face the possibility that it may not be paid in full.

Other struggling cities are watching the San Bernardino bankruptcy, attorney James E. Spiotto said in an interview. Calpers sued the City of Compton in September, accusing the suburb of Los Angeles of missing $2 million in pension payments.

So Strapped

San Bernardino, a city of about 213,000 people 60 miles east of Los Angeles, says it is so strapped for cash it must put off $13 million in payments to Calpers or risk public safety. About 400 miles (644 kilometers) north, creditors of Stockton are fighting Calpers in court as well, arguing that the pension fund shouldn’t be given preferential treatment and urging the city to take an aggressive stance in negotiations.

The city has an unfunded pension liability of about $143 million and is in default on $50.4 million in bonds issued in 2005 to help cover pension obligations, according to court documents and the city budget. If the city paid all of its obligations, including the money owed Calpers, it would have a deficit of $11.9 million overall, according to a memo from acting City Manager Andrea Travis-Miller and finance director Jason Simpson.

Central Falls, Rhode Island, exited bankruptcy earlier this year after cutting pensions and health-care benefits for retirees. The state sided with bondholders in that case, passing a law that allowed them to put a lien on city tax revenue. The city’s bondholders were paid in full, according to court documents.

The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).

To contact the reporters on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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