San Bernardino Creditors Want Same Terms as CalPERS

San Bernadino (Lucy Nicholson / Reuters)
Lucy Nicholson / Reuters
Newport Beach, CA

The City of San Bernardino, now in default, has asked a judge to dismiss a lawsuit filed by two creditors that loaned money in good faith to the city and want the same repayment terms as the California Public Employee Pension System (CalPERS).

U.S. Bankruptcy Judge Steven Rhodes, in the City of Detroit bankruptcy, ruled in December 2013 that public employee pensions may be cut by a federal court, despite state constitutional protections. CalPERS attorney Michael Ryan argued at the time that if a municipality in bankruptcy is allowed to break state laws and ignore its obligations to the pension system, it “may threaten the actuarial soundness of the system as a whole.”

That seems to have motivated San Bernardino to propose its own bankruptcy reorganization sparing cuts to its CalPERS pensions.

CalPERS announced in January that its solvency had improved and that its public pension plan is only $89.7 billion underfunded. Unfortunately, CalPERS’s “Rainbows, Butterflies and Unicorns” analysis claims it can pay 77 percent of its pension promises by compounding earnings at 7.5% return without any losses for the next 30 years. Most analysts worry that if CalPERS only earns 4.5% a year–a rate conservative private sector pensions aim for–the fund’s long-term liability is going to be a staggering $290 billion.

An even bigger solvency risk for CalPERS is that its government clients continue making the contribution percentage required by statute, membership category and benefit formulas to fund their 1,126,133 covered employees’ pensions.

Approximately 50 California cities that have not filed for bankruptcy have declared a financial emergency claiming they may not be able to meet their financial obligations. In what could be a show-stopper for CalPERS, Kern County Supervisors declared a fiscal emergency in mid-January, blaming the fall in oil prices.

San Bernardino, which filed for Chapter 9 municipal bankruptcy in 2012 and stopped paying CalPERS $24 million-a-year obligations, announced in December that it planned to begin paying CalPERS’ annual payment and make past-due payments.

With San Bernardino trying to make CalPERS a favored creditor, Ambac Assurance Corp., a New York bond insurer, and EEPK, a Luxembourg bank, sued the city in Riverside branch of the U.S. Bankruptcy Court with a complaint that San Bernardino shouldn’t paying CalPERS debt when it hasn’t paid their $59 million debt.

EEPK and Ambac claim their bonds are part of a “single pension obligation”–the equivalent of the city’s relationship with CalPERS. They argue that whatever payments San Bernardino makes to CalPERS, it must make equally to EEPK and Ambac.

San Bernardino’s lawyers, in seeking dismissal of the lawsuit, told the court the arguments being made by EEPK and Ambac “transcends novelty” and is “made out of whole cloth.” They emphasized that the city hasn’t yet filed a plan of reorganization detailing how it would treat EEPK and Ambac’s debts, as well as other obligations.

But City Attorney Gary Saenz told Reuters that San Bernardino will propose a repayment plan that includes reductions to certain creditors in “an amount that is fair and reasonable.” He added that cutting CalPERS would trigger substantial pension payment reductions to current and future retirees, driving many municipal employees to take jobs elsewhere. “You can’t have a workforce without pensions,” Saenz said.

Bankruptcy Judge Christopher Klein ruled in the Stockton case it would be legal for Stockton to reduce its CalPERS pension plan payments. The judge still went along with the city’s proposal and cut a bondholder obligation by 90 percent and paid CalPERS in full.

Judge Meredith Jury set a hearing for May 11 to hear arguments why San Bernardino should be allowed not to pay creditors on an equal basis.