Nov. 29 (Bloomberg) -- The California Public Employees’ Retirement System is seeking to sue bankrupt San Bernardino over missed pension payments, the second potentially precedent-setting fight the fund picked with a California city this year.
San Bernardino can’t use U.S. bankruptcy law to justify its failure to make at least $5 million in payments, Calpers, the biggest U.S. public-employee pension fund, said in court papers filed Nov. 27. The motion relies on arguments the fund is also making in the bankruptcy of Stockton, California, and may be a warning to other cities struggling with high pension costs, said James E. Spiotto, a bankruptcy attorney and partner at Chapman & Cutler LLP in Chicago.
“You don’t know if they are trying to send a message to others through San Bernardino, which is to be respected,” Spiotto said yesterday in a telephone interview.
Other cities and municipal bond investors may fear that Calpers’s strategy will lead to long and costly legal battles that leave less money to pay for essential services such as police and fire protection while driving up borrowing costs, Spiotto said.
Bondholders would be penalized if Calpers gets its way, Matt Fabian, managing director of Municipal Market Advisors, a research firm in Concord, Massachusetts, said.
“The issue is, do Calpers obligations supersede unsecured bondholders?” Fabian said in a telephone interview. “There’s an awful lot of unsecured bondholders in California. If you put pension obligations to Calpers as secured and senior to unsecured debt, in effect those bonds have been downgraded.”
In the Stockton and San Bernardino cases, Calpers is arguing that pension contributions must be made ahead of payments to other creditors because they are so-called statutory liens, or debts that state law requires to be paid. Bondholders and other creditors that oppose Calpers argue that pension debt is a contractual obligation like any other.
San Bernardino City Attorney James Penman and Gwendolyn Waters, a city spokeswoman, didn’t return calls seeking comment on the court filing.
Since initiating bankruptcy proceedings, San Bernardino has skipped $6.9 million in payments to Calpers, the pension fund said in an e-mailed statement. The $241 billion fund has continued to pay pensions to the city’s retirees, according to the statement.
“This legal action would allow us to collect the employer contributions from San Bernardino, which are required by state law, to maintain the integrity of the San Bernardino pension plan for its public employees and retirees and to avoid needless procedural disputes and additional legal costs,” Anne Stausboll, Calpers chief executive officer, said in the statement.
Earlier this week, San Bernardino passed a provisional spending plan for use in bankruptcy. Under the so-called pendency plan, the city would put off paying $13 million to California’s retirement system and $3.4 million for pension bonds.
The city has $90 million of outstanding debt repaid from the city’s general fund, according to an Aug. 29 council report. Its unfunded pension liability is about $143 million, according to court papers. To help curb spending, the city has fired school crossing guards, closed three branch libraries and cut 41 non-uniformed police jobs, the city said in budget memos.
The County of San Bernardino voted to authorize any legal action that may be needed to collect $1.5 million in landfill fees owed by the city, county spokesman David Wert said. The county, which has about 2 million residents, is run by a separately elected board of supervisors who represent the unincorporated areas of the region.
The Stockton fight is further along and may set a precedent for how Calpers payments are treated, Spiotto said. That decision will be made by the federal judge overseeing Stockton’s bankruptcy case in Sacramento.
Calpers also may set a legal precedent in the San Bernardino case if it wins the right to fight the city outside bankruptcy court, Kenneth N. Klee, who helped rewrite Chapter 9 of the U.S. Bankruptcy Code in the 1970s as a lawyer working for Congress, said in an e-mail. Once a city or private company enters bankruptcy, creditors can’t seize property or sue for payments without permission from the judge overseeing the case.
Calpers claims that it is exempt from that requirement because it is a governmental agency. The fund may have a hard time winning that argument because it isn’t exercising traditional police powers, Klee and Spiotto said.
“If participants in the Calpers system fail to timely make payments, then Calpers will be unable to provide an actuarially sound retirement system,” the pension fund said in a filing in U.S. Bankruptcy Court in Riverside, California.
In August, San Bernardino became the third California city to file bankruptcy in less than three months. The city of more than 200,000 people lies about 60 miles (97 kilometers) east of Los Angeles. A fiscal emergency, brought on by a $46 million budget shortfall, forced it to stop paying some creditors and seek court protection, the city said.
San Bernardino filed for bankruptcy under Chapter 9, which is reserved for governmental agencies. Companies use Chapter 11, which allows them to cancel pensions, often shifting the burden to the government’s Pension Benefit Guaranty Corp.
The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).