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Pensions Earthquake: San Bernardino Defaults–After Bankruptcy

San Bernardino, which owed almost $10 million on its pension bond debt ever since it declared bankruptcy in 2012, has defaulted, according to Reuters. Since September, the city has avoided dealing with the bondholders, who have been left out in the cold.

Last August, Judge Meredith Jury of the U.S. Bankruptcy Court for the Central District of California ruled that San Bernardino, California could declare bankruptcy, even though the city had stopped paying the California Public Employees’ Retirement System (CalPERS) the money CalPERS was owed.

The city later insisted it would pay CalPERS, the nation’s largest public pension fund, and has indeed paid monthly dues to the $300 million pension behemoth while ignoring payments to its bondholders, who hold $50 million in pension obligation bonds issued in 2005.

San Bernardino’s city attorney, Gary Saenz, told Reuters in January that the city would present a plan in May in which CalPERS would be paid in full–but Europäische Pfandbrief-und Kommunalkreditbank AG (EEPK), which held roughly $50 million in pension obligation bonds; Ambac Assurance Corp, which insures some of those bonds; and Wells Fargo Bank, would have lower priority than CalPERS. He said, “Our bankruptcy plan will include an amount that is fair and reasonable to impair those creditors.”

San Bernardino declared bankruptcy in July 2012, claiming a $45 million deficit. In 2005, the city relied on its $50 million pension bond debt to help lay some of the money the city owed CalPERS.

EEPK and Ambac Assurance Corp. filed a January lawsuit against San Bernardino asserting that their bonds were one pension obligation, and if the city paid a certain amount to CalPERS the same amount would have to be paid to them.

Next week, EEPK attorneys are expected to request a date for the lawsuit to be considered by the court. The city filed papers with the court on Friday to head off the lawsuit, arguing that the bondholder argument “transcends novelty.”

Predictably, Rosanna Westmoreland, speaking for CalPERS, simply called the bondholder argument “wrong.”

Reuters contributed to this report.

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