San Bernardino, Calpers, cite progress in bankruptcy talks

RIVERSIDE, CA, March 13 Thu Mar 13, 2014 7:44pm EDT

RIVERSIDE, CA, March 13 (Reuters) - Bankrupt San Bernardino and its biggest creditor, the California Public Employees' Retirement System (Calpers), said on Thursday they had made substantial progress in recent negotiations over how much the city will pay the pension fund as part of any bankruptcy package.

The California city, 75 miles east of Los Angeles, has been in court-ordered mediation talks with its creditors since late last year. It filed for bankruptcy in August 2012 with a budget deficit of $45 million.

The case is being closely watched by creditors. Along with the bankruptcy of Detroit - the biggest U.S. city ever to seek Chapter 9 protection - it is likely to set a precedent on whether retirees or Wall Street bondholders should suffer the most when a local government goes broke.

In Detroit, the federal judge in charge of that city's bankruptcy ruled in December that its obligation to pay pensions in full was not set in stone. Detroit's emergency manager has put forward a plan to cut the city's pension payments.

San Bernardino took the unprecedented step of halting its bimonthly employer payments to Calpers, America's largest public pension fund, for an entire year after filing for bankruptcy protection. It resumed payments in July 2013. It owes more than $17 million to Calpers, which has assets of $277 billion.

A key question in San Bernardino's case is whether the city will seek to reduce its monthly payments to Calpers through federal bankruptcy protection.

The pension fund opposes San Bernardino's bankruptcy and has argued that if the city is allowed to cut its pension payments, other cash-strapped California cities will follow suit and declare bankruptcy to reduce their pension obligations.

Michael Lubic, an attorney representing Calpers, said in a hearing on Thursday that significant progress had been made with the city in mediation talks, which are subject to a judicial gag order. Paul Glassman, an attorney representing the city, called it "substantial progress."

Federal judge Meredith Jury, in charge of the case, said until an agreement between San Bernardino and Calpers has been reached, it is essentially impossible for other creditors to know how much of the city's annual budget is left to haggle over.

An attorney representing a city union described Calpers as the "800 pound gorilla in the room."

More mediation sessions are set for April. The San Bernardino case has progressed slowly and it is still not clear when the city will produce a bankruptcy plan.

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