October 23, 2013 / 5:37 PM / 6 years ago

California pension fund appeals San Bernardino bankruptcy

* Calpers says judge set “low bar” in granting San Bernardino bankruptcy protection

* Pension fund worried that other struggling cities will stop paying it

By Tim Reid

LOS ANGELES, Oct 23 (Reuters) - The largest U.S. public employee pension fund filed an appeal on Wednesday against a judge’s ruling in August that the city of San Bernardino, California, is eligible for bankruptcy protection.

The California Public Employees’ Retirement System (Calpers), which manages $277 billion of assets, said in its filing: “Never has a bankruptcy court set such a low bar for a municipal debtor to enter the doors of the bankruptcy court.”

Calpers has fiercely opposed San Bernardino’s quest for Chapter 9 bankruptcy protection, because the city suspended its $1.2 million bimonthly payments to the fund for a year after it declared bankruptcy in August 2012.

That move was unprecedented. No California city has ever stopped paying Calpers, and the fund - which administers benefits for over 3,000 city, state and local employers - is worried that such behavior could encourage other cash-strapped cities to follow suit, said Karol Denniston, a bankruptcy attorney in San Francisco.

“Calpers does not want a bankruptcy court to weigh in and apply the bankruptcy code to the non-payments, because that will be precedent, and then other cities could ask bankruptcy courts to restructure their Calpers contracts,” Denniston said.

Denniston said the appeal will not slow down the progress of San Bernardino’s bankruptcy case, and she put the chances of its success as “slim to none”. The appeal was more about setting precedent for potential future cases, she said.

San Bernardino resumed payments to Calpers in July 2013 but the fund says the city owes it $17 million in arrears, plus interest, and that it will aggressively pursue repayment.

Stockton, another California city in bankruptcy, has kept current on its payments to Calpers and has drafted a bankruptcy plan that will fully meet its obligations to the pension fund. Calpers has supported Stockton’s bankruptcy application.

The San Bernardino and Stockton cases are expected to set important precedents over whether municipal bondholders or pensioners get priority when a city goes broke.

Calpers said in its appeal that San Bernardino did not file for bankruptcy in good faith, did not explore any alternatives to bankruptcy, and has failed to provide any meaningful financial information to creditors during the bankruptcy process.

Calls to San Bernardino’s city manager’s office, and to the city’s public affairs office, were not immediately returned.

San Bernardino, beset by local political infighting, declared bankruptcy last summer, stating that it had essentially run out of cash to meet its day-to-day obligations.

The city’s mayor, Pat Morris, said at the time that the city was mired in pension debt and could not afford its Calpers obligations.

Morris joined four other California mayors last week in announcing a statewide ballot initiative to make it easier for cities to renegotiate pension deals with current workers, a move that will be fiercely opposed by Calpers and unions.

When San Bernardino was found eligible for bankruptcy in August, U.S. federal bankruptcy judge Meredith Jury said: “I don’t think anyone in this courtroom seriously thought the city was anything but insolvent.”

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