* Judge: city was clearly insolvent
* Calpers considering options for appeals
By Tim Reid
RIVERSIDE, Calif., Aug 28 A U.S. federal judge
on Wednesday granted bankruptcy protection to the California
city of San Bernardino, paving the way for a precedent-setting
battle between bondholders and California's giant public pension
The case is being closely watched by other U.S. cities,
including Detroit, which declared the biggest U.S. municipal
bankruptcy last month, where budgets are burdened by soaring
Judge Meredith Jury of the U.S. Bankruptcy Court for the
Central District of California ruled that San Bernardino was
eligible for Chapter 9 bankruptcy protection despite opposition
by the California Public Employees' Retirement System, or
Calpers. The $260 billion pension fund is the city's biggest
creditor and America's largest pension fund.
"I am ruling as a matter of law that the city is eligible,"
Jury said. "I don't think anyone in this courtroom seriously
thought the city was anything but insolvent."
A city must be insolvent and have proof to have negotiated
in good faith with creditors to be eligible for Chapter 9
Michael Gearing, an attorney appearing for Calpers, called
Jury's decision a "dangerous precedent" that will encourage
other cities to "create a crisis because they have a large
number of creditors."
Amy Norris, a Calpers spokeswoman, said in an emailed
statement: "Calpers is considering its options for appeals."
San Bernardino, a city of 210,000 located 60 miles east of
Los Angeles, filed for bankruptcy protection in August 2012,
citing a $46 million deficit and arguing that it had effectively
run out of cash to meet its daily obligations.
The city must negotiate with its creditors and produce a
final bankruptcy plan on which the judge will ultimately have to
rule. Whether pension and other debt payments, including to
holders of $50 million in pension obligation bonds, will have to
be treated equally or not will remain a key issue - one that
could eventually reach the U.S. Supreme Court.
LIKE OTHER CREDITORS?
Calpers argues that it should not be treated like other
creditors and must be paid in full because California state law
says the fund must always be fully paid, even in a bankruptcy.
Bondholders argue that federal bankruptcy law trumps state
statutes and say Calpers should be forced to fight with other
creditors over how much they are paid under an exit plan.
Another California city, Stockton, which was also found
eligible for municipal bankruptcy protection in April, is
expected to present an exit plan in September. Creditors will be
asked to vote on the plan.
The judge overseeing that case said dealing with Stockton's
obligations to Calpers will probably be unavoidable under an
In an unprecedented move, San Bernardino stopped paying its
$1.2 million bimonthly employer payments to Calpers for a year
after declaring bankruptcy, the first California city to halt
payments to the fund.
It resumed paying Calpers last month but continues to renege
on payments to other creditors, including holders of $50 million
in pension obligation bonds.
Calpers said the city still owes the fund $14.3 million in
arrears and that it will "aggressively pursue all past due
contributions, resulting interest and penalties."
"These payments are statutorily required and necessary to
deliver on the pension benefits promised to San Bernardino
employees as a form of deferred compensation," the powerful
pension system said.
But the judge questioned who will provide for those
"If Calpers gets all the money they want, under what they
say is their statutory right, who isn't going to get paid? All
the employees? How is that going to help Calpers?" she said.
The case is In re San Bernardino, 12-bk-28006, U.S.
Bankruptcy Court, Central District of California (Riverside).