Exclusive: Pension fund slams San Bernardino for "sham" bankruptcy

LOS ANGELES/ SAN FRANCISCO Sat Dec 15, 2012 12:18am EST

Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012.

Credit: Reuters/Lucy Nicholson

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LOS ANGELES/ SAN FRANCISCO (Reuters) - A high-stakes legal battle intensified Friday as the largest U.S. pension fund filed court papers denouncing the financially troubled California city of San Bernardino for what it called a "sham" bankruptcy and accused the city of "criminal behavior" in withholding payments to the pension plan.

The filing by the California Public Employees' Retirement System, or Calpers, came 10 days after San Bernardino city officials traveled to Sacramento to plead with top Calpers executives for more time to make its payments.

At issue is whether the pensions of government workers take precedence over other payments in a municipal bankruptcy - which could have ramifications for municipal creditors, including Wall Street bondholders, as more cities and towns have trouble meeting their obligations.

No agreement after the Calpers and San Bernardino meeting was reached, and Calpers officials told Reuters they have little latitude to allow San Bernardino — or any other city that pays into its pension fund — to alter the payment schedule.

In a closely related action, bond insurers who are responsible for the debt of Stockton, California, filed papers in that city's bankruptcy case denouncing Calpers' efforts to be treated differently from other creditors. Stockton has continued to make payments to Calpers while halting payments to some bondholders.

Both cities went bankrupt in the wake of the housing bust and years of financial mismanagement, and the two comparatively rare municipal bankruptcy cases are expected to set important precedents as to who gets paid when a government goes broke.

But while Stockton was well prepared when it filed for bankruptcy protection last June, San Bernardino's finances and government operations are in deep disarray as political factions battle one another, according to an ongoing Reuters investigation. The city filed for bankruptcy on August 1 with no plans as to how it would meet its obligations.


Calpers, which manages $241 billion in assets and serves many California cities and counties, said in its legal filing that San Bernardino appears to have been operating for more than a decade without necessary financial controls and lacks even basic mechanisms such as monthly cash-flow reports.

Calpers said San Bernardino's proposed plan for operating in bankruptcy, filed last month, was "no plan at all."

"It is merely an attempt to buy time, at the expense of Calpers and other post (bankruptcy) petition creditors," Calpers said in arguing the city was not entitled to bankruptcy protection. Calpers has already filed actions in state court, which could end up arbitrating the situation if bankruptcy protection is denied.

Calpers accused the city of "criminal" conduct for not making pension payments that are part of employee compensation agreements.

In markedly aggressive language, Calpers said the city had "buried its head in the sand," rather than deal with a long-standing financial crisis.

"The city gravely needs to get its house in order... Ten years of history suggest that the city is not going to implement meaningful change until forced to do so. This court needs to hold the city's feet to the fire."

Calls and emails to San Bernardino's city manager and budget chief went unanswered. Most city employees do not work on Fridays.

San Bernardino, a city of 210,000 about 60 miles east of Los Angeles, is broke and can barely make payroll, city officials have said. It has not made its $1.2 million biweekly payments to Calpers since the bankruptcy filing and now owes at least $8 million, in addition to a long-term debt to the fund that the city pegs at $143 million.

Calpers argues that under California law it has primacy as a creditor, asserting that it is in essence an "arm" of the state and must continue to be paid in full, even in a bankruptcy.

Wall Street bondholders and insurers vehemently disagree, arguing that federal bankruptcy law trumps state authority and should allow them to fight with Calpers in court as equal creditors.

Both sides have told Reuters they are willing to fight this issue all the way to the U.S. Supreme Court, which could take years.


In a filing late Friday in the Stockton case, bond insurers Assured Guaranty Corp and Assured Guaranty Municipal Corp argued that Stockton should not be eligible for bankruptcy because the city "cannot provide sufficient, persuasive and credible evidence of insolvency."

The bond insurers also hammered the city for not seeking concessions from Calpers.

Stockton aims to unfairly restructure its finances "on the backs of those from whom it previously borrowed hundreds of millions of dollars," the insurers' lawyers said in their objection.

A Calpers spokesperson said the bond insurers were aiming to "cover their business losses by raiding the retirement funds of hard working employees who serve the people of California."

Stockton, a city of 300,000, in June became the largest city to file for bankruptcy in U.S. history after its leaders said deeper spending cuts would endanger public safety services.

A statement issued by Stockton's spokeswoman said the city's elected leaders and staff must "maintain the city's ability to deliver critical health and safety related municipal services to Stockton residents."

In San Bernardino, the first city ever to deliberately halt payment to Calpers, city officials are in a desperate scramble.

On December 5 senior finance officials from San Bernardino met with Calpers' chief executive officer and chief financial officer at the pension fund's Sacramento headquarters. The meeting lasted about 90 minutes.

According to Calpers officials, the meeting was cordial and the city officials stressed that their plan to defer payments is made in good faith.

But in its court filing Friday, Calpers alleged just the opposite, accusing the city of acting in bad faith in failing to propose a viable plan to meet its obligations.

Calpers officials say it is highly unlikely they can accede to any proposal to defer payments.

"Calpers does not have the power to 'negotiate' the amount of employer contributions owed by the city," Peter Mixon, Calpers' General Counsel, told Reuters. "The city of San Bernardino cannot alter the requirements of state law."

(Reporting by Tim Reid in Los Angeles and Jim Christie in San Francisco. Editing by Jonathan Weber and Lisa Shumaker)

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Comments (5)
cyke1 wrote:
Despite what people thing about the Emergency financial manager law in Michigan, on person appointed the position can do anything including voiding any contracts. This is would be a clear cut and dry case for one, But its not in Michigan so.

Dec 15, 2012 12:56am EST  --  Report as abuse
morbas wrote:
Fairness requires top earners pay more
Citizens need to know the truth about government budgets — national, state and municipal.
The federal budget is $2.3 trillion, the expenditure is $3.8 trillion. Federal plus state plus municipality is $8.06 trillion. The sum total of all personal income is $12.98 trillion. Thus, the governments are operating at 62 percent of total personal income.
The transaction (sales) tax rate has hidden components, business taxes are hidden as production costs. Industry must do this to balance their budgets or go broke.
With a centralized banking system, the federal government can print more money than collected in revenue; states and municipalities cannot. Taxation at state and municipal levels is less progressive than federal, which burdens the lowest income levels with the highest effective rate; and the upper 2 percent with the lowest effective rate. Thus, municipalities borrow more in a recession, as the lower quintiles’ wages are more diminished. We have cities falling into bankruptcy. The solution is national income taxation, and fairness requires top quintile to pay more taxes, using a progressive tax rate.
And here in is a mathematical solution. Incomes less than $20,000 are not taxed, surtax is used for $20,000 through $200,000 at 30 percent, and surtax is used for above $200,000 at 90 percent. Couples freely share incomes. All other forms of taxation are not allowed, including business taxes. With this taxation method, the citizen tax rate is less than the 2011 federal income tax for incomes less than $250,000. This, with the bonus of no state and municipality taxation.
Oh, but the gentile aristocracy objects. After all, they have invested millions in lobbying to reduce the 1960 91.5 percent at $400,000 to the present 15 percent at infinity, while all lower incomes’ top rate is 35 percent.
And gentile aristocract Grover Norquist, neither elected nor popular, has effectively filibustered corrective revenue measures. To the founders of the Constitution, he is the sum of all fears. The president’s plan is a small step in the right direction. The time for corrective action has arrived. Fairness requires the top quintile pay more taxes.
Diclaimer, the above solution is an outline to prosperity.

Dec 15, 2012 5:35am EST  --  Report as abuse
Pamina wrote:
For decades, unscrupulous financiers have used dazzling results from the field of computational finance to convince gullible public officials that risk can be eliminated. It’s basically just a new facade on the money-printing-machine scam.

The problem is that the public officials have covered their hare-brained bets with public money. In any sane society, the courts would admonish the public officials and tell the financiers to stuff it, with a warning not to try the same thing again.

Instead, judges and regulators seem willing to at least consider throwing over the public good in order to satisfy, let’s not bandy words here, the con artists. What’s really insane is when, if the law is on the public’s side, the law is abrogated to make speculators whole.

In a sense, the financiers have found a way to eliminate risk, at least their own risk. It is not some complex mathematical formula but rather simple human nature: The con artist can count on the mark not to blow the whistle, because to do so would cause the mark great embarrassment and shame.

Dec 15, 2012 12:49pm EST  --  Report as abuse
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