By Tim Reid and Peter Henderson
LOS ANGELES, Nov 28 (Reuters) - America's biggest public
pension moved aggressively against the bankrupt city of San Bernardino, California, on Tuesday night over the city's
decision to halt payments to the fund.
The move laid bare a high-stakes battle shaping up between
Wall Street and state pension funds over how they are treated
when cities run out of money.
The powerful California Public Employees' Retirement System
(Calpers) filed a legal motion declaring its intention to sue
San Bernardino for millions of dollars in pension arrears, a
move that the fund has never before had to make in a municipal
bankruptcy.
San Bernardino, a city of 210,000 about 60 miles east of Los
Angeles, filed for bankruptcy protection on Aug. 1. Since then,
it has halted its bi-weekly, $1.2 million payment to Calpers,
saying it wants to defer any payments to the fund until fiscal
year 2013-2014. Calpers says the city is already $6.9 million in
arrears since Aug. 1.
The San Bernardino bankruptcy is fast emerging as a
precedent-setting case over how creditors, especially Wall
Street bondholders and insurers, are treated in a municipal
bankruptcy, because never before has a city seeking bankruptcy
halted payments to Calpers or threatened its historical primacy
as a creditor.
Under Californian state law, the contract between Calpers
and debtor cities is viewed as inviolate and has been treated as
such by state courts. Unlike Calpers, other creditors have
historically been forced to renegotiate or forgive debt to
debtor cities.
The Californian city of Stockton, also seeking bankruptcy
protection, decided to keep current on all payments to Calpers,
as did the city of Vallejo, which emerged from bankruptcy in
2011.
San Bernardino's decision to halt its payments, and its move
on Monday night to include in a new budget an attempt to
renegotiate the terms of its debt with Calpers, is uncharted
territory for the pension fund. Wall Street bondholders and
insurers have already indicated their intention to test Calpers'
primacy as a creditor in the San Bernardino case.
Calpers, one of the biggest pension funds in the world,
serves many cities and counties in California. It is San
Bernardino's biggest creditor. The city, which has a nearly $46
million deficit for the current fiscal year, lists its unfunded
pension obligations to Calpers at $143.3 million. Calpers says
if the city halted its relationship with the fund immediately,
the debt would be $319.5 million.
Under the U.S. bankruptcy code, all legal actions against a
debtor city by creditors are stayed until the bankruptcy has
been approved, or thrown out.
In the legal motion filed to the bankruptcy judge overseeing
the San Bernardino case shortly before midnight on Tuesday,
Calpers asked for that stay to be lifted so it could redeem its
debt in a state court. It also said even if the stay was not
lifted, it would still seek redress in a state court.
Calpers expressly stated that it was "concerned about
inappropriate preferential treatment that might be given to
other creditors" in San Bernardino's bankruptcy. Calpers has
long argued that pension contributions cannot be touched, even
in a bankruptcy.
The move by Calpers is the opening battle that could see
the case move all the way to the U.S. Supreme Court, America's
highest court, said Karol Denniston, a Californian bankruptcy
expert who authored part of the state's bankruptcy code.
All municipal bankruptcy cases, including San Bernardino's,
are adjudicated in federal court. Calpers is in effect asking
that the state law governing its contractual relationship with
debtor cities not be trumped in federal court, Denniston said.
"We've never been here before," Denniston said. "This is the
opening move in complex legal issue over how much power a
federal bankruptcy court has over a state contract. The state
statute, and Calpers, says Calpers always gets paid in full.
This is the first time this has ever been tested."
Robert Glazier, a Calpers official, said: "This legal action
would allow us to collect the employer contributions from San
Bernardino which are required by state law, to maintain the
integrity of the San Bernardino pension plan for its public
employees and retirees and to avoid needless procedural disputes
and additional legal costs."
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