April 23, 2013 / 6:06 AM / in 5 years

Bankrupt San Bernardino votes to pay Calpers, not bondholders

* City council passes budget to pay Calpers, not bondholders

* Little debate, mayor worries about other creditors

By Tim Reid

SAN BERNARDINO, CA, April 22 (Reuters) - Bankrupt California city San Bernardino passed a new budget on Monday night that will allow it to resume paying into the state pension fund on July 1 as it continues to renege on other debts including payments to bondholders.

The city council vote comes nearly a year after it halted contributions to the California Public Employees’ Retirement System (Calpers), the United States’ biggest pension fund.

Patrick Morris, San Bernardino’s mayor, has said the city’s other debts “must be taken care of and must be attended to” - but there was no debate about those dues by the council.

There was no discussion either about the city’s arrears to the pension fund, which tops $12 million.

The decision to resume the $1.2 million, biweekly employer contributions to Calpers while continuing to defer pension bond debt will intensify the battle between the pension fund and Wall Street bondholders.

The case has been bogged down in disputes about the scope of documents the city must provide to its creditors. Unlike Stockton, another California city which a judge approved for bankruptcy on April 1, a decision on San Bernardino’s eligibility for Chapter 9 protection still appears some way off.

Both San Bernardino and Stockton are considered test cases in the titanic battle over whether municipal bondholders or current and retired employees will absorb most of the pain when a state or local government goes broke.

Calpers, which manages $256 billion in assets, is San Bernardino’s biggest creditor. Holders of its $50 million in pension bonds count as the city’s second-biggest collective creditor, according to the city’s bankruptcy filing.

Calpers is opposing San Bernardino’s quest for a formal declaration of bankruptcy and it is the only city to have ever halted payments to the fund. Stockton kept current on its payments to Calpers and the pension fund did not oppose that city’s bid for Chapter 9 protection.

Calpers said earlier in April that San Bernardino’s decision to start repaying the pension fund was a “smart business decision.”

Other creditors, including the holders and underwriters of San Bernardino’s pension bonds, have not commented about the city’s budget after calls and emails by Reuters.

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