By Tim Reid
Oct 24 (Reuters) - America's biggest public pension system
filed a formal objection on Wednesday to a quest by San
Bernardino to seek bankruptcy protection, citing the "disarray"
in the Californian city's finances.
San Bernardino, a city of 210,000 people 60 miles (97 km)
east of Los Angeles, declared bankruptcy on Aug. 1. Since then
it has halted pension payments to the powerful California Public
Employee Retirement System (Calpers), its biggest creditor.
The case could set precedent in how local governments deal
with soaring pension costs. In particular, it is setting the
stage for a showdown between Calpers and Wall Street bondholders
and bond insurers over how they are treated as creditors in a
municipal bankruptcy.
Last week Calpers made clear in public statements it would
not tolerate San Bernardino, or any other Californian city,
missing payments into its fund. Since it declared bankruptcy,
San Bernardino has missed six biweekly payments totaling over $6
million.
On the deadline day for creditors to file objections to San
Bernardino's bankruptcy claim, Calpers filed a 20-page objection
and 116 pages of exhibits.
In its filing on Wednesday Calpers, which has long argued
that contributions to its fund can never be suspended, even in a
bankruptcy, said any arguments about whether San Bernardino can
seek bankruptcy protection should be deferred until the city
presented a detailed financial plan.
"The city's financial records are in disarray," Calpers said
in its filing.
It added: "In filing this preliminary objection, the goal of
Calpers is not to start a costly battle over eligibility (for
bankruptcy) but rather to defer any dispute about eligibility
until the City has produced credible projections which could
form the basis of a feasible plan."
By 5 p.m. on Wednesday, the deadline for filing objections,
no bondholder creditors appeared on the court docket as
objecting to San Bernardino's eligibility for bankruptcy
protection.
Karol Denniston, a Californian attorney and expert in
Chapter 9 bankruptcy, the section of the federal code that deals
with municipal bankruptcies, said not objecting could well have
been a deliberate strategy by those Wall Street creditors.
If they objected to the city's eligibility and prevailed,
Denniston said, the case would be dismissed - robbing
bondholders of taking the fight to Calpers over the pension
fund's status as a creditor.
"The absence of objections suggests a strategy of allowing
the bankruptcy to proceed so they can focus on the issue of what
type of creditor Calpers is," Denniston said.
San Bernardino is the first Californian authority to hold
back payments from Calpers or indicate it might treat the
pension fund like other creditors.
Two other Californian cities - Vallejo, which emerged from
bankruptcy in 2011, and Stockton, which is seeking bankruptcy
protection - decided to keep current on all payments to Calpers.
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