CalPERS challenges San Bernardino's bankruptcy effort

Published Friday, Oct. 26, 2012 - The Sacramento Bee

Facing a direct challenge from a city that won't pay its bills, CalPERS is firing back.

CalPERS formally challenged the city of San Bernardino's right to file for bankruptcy protection after the city fell behind on $5.2 million in payments.

The powerful pension fund, in a lengthy court filing, suggested that San Bernardino is trying to use the bankruptcy laws to get out of paying its bills.

The city's actions raise "a serious question of whether its underlying purpose has been merely to 'buy time' or evade creditors," CalPERS said in a filing late Wednesday in U.S. Bankruptcy Court in Riverside.

San Bernardino officials have said they aren't trying to pick a fight with the California Public Employees' Retirement System. Rather, they say they simply can't pay the city's bills, and CalPERS is just one of several creditors that's getting stiffed. The city filed for Chapter 9 municipal bankruptcy in August.

CalPERS hasn't cut off San Bernardino's retirement benefits but pledged last week to "assert its rights and remedies available under the law" to collect the money it's owed.

Ultimately, CalPERS could terminate San Bernardino's pension program, which would almost certainly leave the city's municipal retirees with less-generous benefits than they were promised.

In objecting to the bankruptcy petition, CalPERS said the protection under the Chapter 9 law gives the city an "inherent advantage" over creditors.

But Karol Denniston, a San Francisco bankruptcy attorney not connected to the case, said getting the filing dismissed won't solve the underlying dispute.

"There's still no more money and San Bernardino still has to do its restructuring," she said.

CalPERS also complained that the city had implied it would keep making its required payments to the pension fund.

Until fairly recently, public-employee pensions were considered sacred – and participating cities and counties faithfully made their payments to CalPERS.

Vallejo considered lowering benefits after going bankrupt in 2008, but backed off after CalPERS made threatening noises.

That attitude is changing as municipalities cope with sluggish tax revenue and escalating retirement costs. In Stockton, CalPERS is under assault from two bond insurance companies facing heavy losses in that city's bankruptcy case. The two companies are trying to cut off the city's payments to CalPERS.