The California Public Employees’ Retirement System won’t be allowed to sue San Bernardino, California, to collect more than $5 million owed by the insolvent city, a judge ruled.
U.S. Bankruptcy Judge Meredith M. Jury made the ruling at a court hearing today in Riverside, California, that is being watched by other cities struggling with high pension costs across the country. If Calpers is allowed to sue and wins a monetary judgment, “the impact on the city’s ability to reorganize would be astronomical,” she said.
The judge sided with San Bernardino and its bondholders, who claim the city can’t afford to fund vital public services and also pay past-due obligations to Calpers, the biggest U.S. public pension fund.
“This city has limited funds and at the present time is using those limited funds to pay salaries to city employees who are providing services today,” Jury said. Forcing payments to Calpers “would be the death knell” for the city, she said.
The ruling may 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.
“The country is really watching California, and California is watching San Bernardino,” Ron Oliner, an attorney for the city’s police union, said in court.
The city filed bankruptcy on Aug. 1, claiming a cash crisis prevented it from negotiating with creditors first, a requirement under California law. Calpers has challenged the legality of the filing and asked Jury to throw the case out.
Jury will decide whether to hold a mini-trial to decide whether to throw out the bankruptcy case after the city provides Calpers with more financial documents and the pension fund has a chance to question city finance officials.
Jury gave Calpers one reason to think it may win on a related issue that may loom even larger later in the case, saying it appears to her that the debt owed to the pension fund may have a higher priority than other claims.
Calpers argued that its debt should be treated as an administrative claim, which means it would be paid before most other creditors, including unsecured bondholders owed about $124.3 million and other creditors owed about $142 million for various public projects. It also means Calpers would need to be paid as soon as the city exits bankruptcy, which precludes the city from stringing the debt out over a longer period.
“Sooner or later, the city is going to have to make those deferred payments,” Calpers attorney Michael J. Gearin said in court.
Before the city can develop a plan to adjust its debts to match its revenue, the court must decide whether Calpers is correct, Jury said. That decision will affect all other aspects of the case, she said.
“Calpers is not just a general unsecured creditor in the big scheme of things,” Jury said. She said she plans to ask both sides to file legal papers about the question of Calpers’s priority among creditors and to eventually hold a hearing.
“That is a victory for Calpers,” pension fund attorney Michael B. Lubic said in an interview during a break in the hearing.
After the hearing, during which Calpers complained it didn’t have access to basic financial data, Mayor Patrick Morris and City Attorney Jim Penman said in an impromptu press conference that the city will hire more finance department employees to help it provide information to creditors and to help develop a so-called plan of adjustment. That plan, if approved by the court, would cut the city’s debt to a sustainable level.
San Bernardino, a city of about 213,000 people 60 miles (97 kilometers) east of Los Angeles, said it’s so strapped for cash that it must put off $13 million in payments to Calpers or risk public safety. Calpers said the city’s unpaid pension dues may hit $19 million by July, when San Bernardino said it can resume the payments.
About 400 miles north, creditors of Stockton, California, 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 case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).