By Tim Reid and Jim Christie
Oct 18 (Reuters) - San Bernardino, California, has failed to
make more than $6 million in payments to the state's powerful
public employee pension fund, heightening speculation of a
high-stakes showdown between the fund and other creditors as the
city seeks eligibility for bankruptcy protection.
Since July 31, the day before San Bernardino declared
bankruptcy, the city has failed to make six biweekly employer
contribution payments of more than $1 million to the California
Public Employees' Retirement System (Calpers), a city
The action taken by San Bernardino is in stark contrast with
two other California cities - Vallejo, which emerged from
bankruptcy in 2011, and Stockton, which is seeking bankruptcy
protection. Both cities decided to keep current on all payments
to the pension fund.
How San Bernardino deals with its future obligations to
Calpers remains to be decided, but even opening the door to
negotiating payments to Calpers is significant, said Karol
Denniston, a San Francisco lawyer who helped draft California's
bankruptcy process law.
Calpers is the largest pension system in the United States
and serves many Californian cities and counties. It has long
argued that pension contributions cannot be touched, even in
"This is a David and Goliath approach of taking it head on,"
Denniston said, referring to the halted payments. "San
Bernardino has taken on Calpers without even filing a motion,"
Vallejo asked other creditors to renegotiate or reduce their
claims, while leaving Calpers untouched. Wall Street bondholders
and insurers are already challenging Stockton's eligibility to
file for Chapter 9 bankruptcy because it has avoided any
potential clash with Calpers when it filed for bankruptcy.
Wall Street has also signaled that it intends to fight
Calpers' historical primacy as a creditor in the San Bernardino
case, with bond underwriters gearing up to file challenges to
the bankruptcy next week.
A Calpers official confirmed the missed payments. Of the
unpaid portion, $1.2 of that has been deemed delinquent because
of the amount of time that has elapsed since that payment came
due, the official added.
A spokesperson for San Bernardino said the failed payments
to Calpers are "one of a number of obligations that the city has
deferred due to our dire cashflow situation in order to keep
making payroll to our employees and to keep paying for those
materials and services that are most critical to our continued
operations while the city works through its financial crisis."
"Those deferred payments will then become one of the
obligations we will have to deal with later," the spokesperson
The city says it hopes to make the deferred payments part of
a negotiated plan with Calpers that "can be added to future
payments over an agreed-upon number of years."
San Bernardino is the third California city to seek
bankruptcy protection this year, following Stockton and Mammoth
The city of 210,000, 60 miles east of Los Angeles, lists
Calpers as its biggest creditor, with unfunded pension
obligations totaling $143.3 million. Calpers says it uses a
different calculation method and pegs the debt at $319.5
Its late payments to Calpers was first reported by Debtwire.
The outcome of how Calpers and bondholders are treated as
creditors in Stockton and San Bernardino's bankruptcies, and
whether Calpers receives preferential treatment, will have broad
implications for local governments around the country that are
struggling to balance their budgets amid soaring employee
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