San Bernardino defends CalPERS payment plan in bankruptcy

Defending its plan to fully repay its debts to CalPERS, the bankrupt city of San Bernardino has asked a judge to dismiss a lawsuit by creditors demanding equal treatment.

The city’s motion is the latest chapter in the ongoing saga over public pensions in California and how they’re treated in bankruptcy. The judge overseeing Stockton’s case ruled last fall that municipal pension plans can be altered just like any contract in bankruptcy, but he also approved the city’s plan to keep paying CalPERS in full in order to preserve its retirement program.

A similar fight is playing out in San Bernardino, which filed for Chapter 9 municipal bankruptcy in 2012. After months of bickering, the city said it planned to pay its $24 million-a-year CalPERS bill in full and had begun repaying the big pension fund millions of dollars in past-due payments.

Two of San Bernardino’s creditors filed suit over that plan in January: Luxembourg bank EEPK and Ambac Assurance Corp., a New York bond insurer. They’re seeking repayment on a $59 million bond issued by the city in 2005.

The city borrowed the money, in fact, to help pay its pension costs to CalPERS, the California Public Employees’ Retirement System. Because of that, EEPK and Ambac said the bonds are part of a “single pension obligation” – the equivalent of the city’s relationship with CalPERS. That means whatever payments San Bernardino makes to CalPERS, it must make comparable payments to EEPK and Ambac, they argued.

In seeking dismissal of the suit, San Bernardino’s lawyers said EEPK and Ambac’s argument “transcends novelty” and is “made out of whole cloth.” A hearing is set for May 11 in U.S. Bankruptcy Court in Riverside.

The city hasn’t yet filed a plan detailing how it would treat EEPK and Ambac’s debts, as well as other obligations. But it is clear the plan doesn’t call for full repayment of those debts. City Attorney Gary Saenz told Reuters in January that it will propose a repayment plan that includes reductions to those creditors in “an amount that is fair and reasonable.”

Cutting payments to CalPERS would trigger substantial reductions in pension payments to current and future retirees. That could drive many municipal employees to take jobs elsewhere. “You can’t have a workforce without pensions,” Saenz said.

The same argument prevailed in the Stockton case after a disgruntled bondholder objected to the city’s decision to make full payments to CalPERS. U.S. Bankruptcy Judge Christopher Klein ruled it would have been legal for Stockton to reduce its pension plan, but he went along with the city’s proposal anyway.