By Tim Reid and Jim Christie
LOS ANGELES/ SAN FRANCISCO, Dec 14 (Reuters) - A high-stakes
legal battle intensified Friday as the largest U.S. pension fund
filed court papers denouncing the financially troubled
California city of San Bernardino for what it called a "sham"
bankruptcy and accused the city of "criminal behavior" in
withholding payments to the pension plan.
The filing by the California Public Employees' Retirement
System, or Calpers, came 10 days after San Bernardino city
officials traveled to Sacramento to plead with top Calpers
executives for more time to make its payments.
At issue is whether the pensions of government workers take
precedence over other payments in a municipal bankruptcy - which
could have ramifications for municipal creditors, including Wall
Street bondholders, as more cities and towns have trouble
meeting their obligations.
No agreement after the Calpers and San Bernardino meeting
was reached, and Calpers officials told Reuters they have little
latitude to allow San Bernardino - or any other city that pays
into its pension fund - to alter the payment schedule.
In a closely related action, bond insurers who are
responsible for the debt of Stockton, California, filed papers
in that city's bankruptcy case denouncing Calpers' efforts to be
treated differently from other creditors. Stockton has continued
to make payments to Calpers while halting payments to some
Both cities went bankrupt in the wake of the housing bust
and years of financial mismanagement, and the two comparatively
rare municipal bankruptcy cases are expected to set important
precedents as to who gets paid when a government goes broke.
But while Stockton was well prepared when it filed for
bankruptcy protection last June, San Bernardino's finances and
government operations are in deep disarray as political factions
battle one another, according to an ongoing Reuters
investigation. The city filed for bankruptcy on Aug. 1 with no
plans as to how it would meet its obligations.
SAN BERNARDINO EMERGENCY BUDGET 'NO PLAN AT ALL'
Calpers, which manages $241 billion in assets and serves
many California cities and counties, said in its legal filing
that San Bernardino appears to have been operating for more than
a decade without necessary financial controls and lacks even
basic mechanisms such as monthly cash-flow reports.
Calpers said San Bernardino's proposed plan for operating in
bankruptcy, filed last month, was "no plan at all."
"It is merely an attempt to buy time, at the expense of
Calpers and other post (bankruptcy) petition creditors," Calpers
said in arguing the city was not entitled to bankruptcy
protection. Calpers has already filed actions in state court,
which could end up arbitrating the situation if bankruptcy
protection is denied.
Calpers accused the city of "criminal" conduct for not
making pension payments that are part of employee compensation
In markedly aggressive language, Calpers said the city had
"buried its head in the sand," rather than deal with a
long-standing financial crisis.
"The city gravely needs to get its house in order... Ten
years of history suggest that the city is not going to implement
meaningful change until forced to do so. This court needs to
hold the city's feet to the fire."
Calls and emails to San Bernardino's city manager and budget
chief went unanswered. Most city employees do not work on
San Bernardino, a city of 210,000 about 60 miles (97 km)
east of Los Angeles, is broke and can barely make payroll, city
officials have said. It has not made its $1.2 million biweekly
payments to Calpers since the bankruptcy filing and now owes at
least $8 million, in addition to a long-term debt to the fund
that the city pegs at $143 million.
Calpers argues that under California law it has primacy as a
creditor, asserting that it is in essence an "arm" of the state
and must continue to be paid in full, even in a bankruptcy.
Wall Street bondholders and insurers vehemently disagree,
arguing that federal bankruptcy law trumps state authority and
should allow them to fight with Calpers in court as equal
Both sides have told Reuters they are willing to fight this
issue all the way to the U.S. Supreme Court, which could take
STOCKTON HAMMERED BY BOND INSURERS
In a filing late Friday in the Stockton case, bond insurers
Assured Guaranty Corp and Assured Guaranty Municipal Corp argued
that Stockton should not be eligible for bankruptcy because the
city "cannot provide sufficient, persuasive and credible
evidence of insolvency."
The bond insurers also hammered the city for not seeking
concessions from Calpers.
Stockton aims to unfairly restructure its finances "on the
backs of those from whom it previously borrowed hundreds of
millions of dollars," the insurers' lawyers said in their
A Calpers spokesperson said the bond insurers were aiming to
"cover their business losses by raiding the retirement funds of
hard working employees who serve the people of California."
Stockton, a city of 300,000, in June became the largest city
to file for bankruptcy in U.S. history after its leaders said
deeper spending cuts would endanger public safety services.
A statement issued by Stockton's spokeswoman said the city's
elected leaders and staff must "maintain the city's ability to
deliver critical health and safety related municipal services to
In San Bernardino, the first city ever to deliberately halt
payment to Calpers, city officials are in a desperate scramble.
On Dec. 5 senior finance officials from San Bernardino met
with Calpers' chief executive officer and chief financial
officer at the pension fund's Sacramento headquarters. The
meeting lasted about 90 minutes.
According to Calpers officials, the meeting was cordial and
the city officials stressed that their plan to defer payments is
made in good faith.
But in its court filing Friday, Calpers alleged just the
opposite, accusing the city of acting in bad faith in failing to
propose a viable plan to meet its obligations.
Calpers officials say it is highly unlikely they can accede
to any proposal to defer payments.
"Calpers does not have the power to 'negotiate' the amount
of employer contributions owed by the city," Peter Mixon,
Calpers' General Counsel, told Reuters. "The city of San
Bernardino cannot alter the requirements of state law."
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