By Ed Mendel
Monday, October 29, 2012

CalPERS filed court actions against two financially troubled cities, San Bernardino and Compton, after they stopped making legally required payments to the big pension fund, a rare default not made in the Stockton and Vallejo bankruptcies.

For financially struggling local governments, an unauthorized halt or delay in payments to the pension fund is not something CalPERS wants to become widely viewed as a workable option.

CalPERS can offer some relief in hardship cases. But stretching out payments is limited aid for a deeply distressed local government, hit by falling tax revenue in a down economy and, in some cases, years of alleged overspending and mismanagement.

San Bernardino has skipped more than $5.3 million in pension payments to CalPERS since filing for bankruptcy on Aug. 1. Last week CalPERS urged a federal bankruptcy court in Riverside to delay action on the city’s eligibility for bankruptcy.

Compton, reportedly considering bankruptcy last summer, made partial payments to CalPERS but still owes $2.7 million for pensions and health care. CalPERS asked a Sacramento superior court in September to order full payment with interest and penalties.

Stopping pension payments to the California Public Employees Retirement System is a new development in the struggle by local governments to cut pension costs.

When Vallejo filed for bankruptcy in May 2008, asking the federal court to overturn labor contracts, some thought bankruptcy might be a way to cut pensions protected by contract law as a “vested” right under a series of court decisions.

A federal bankruptcy judge in Sacramento reluctantly overturned a Vallejo electrical workers contract, noting that under city law the result would be binding arbitration that could be done under the old contract.

After emerging from bankruptcy last fall, Vallejo officials said they considered trying to cut pension costs in bankruptcy, but chose not to cut pensions after CalPERS threatened a long and costly legal battle.

Alarmed public employee unions, led by firefighters, pushed legislation to make local government bankruptcy unlikely if not impossible. A compromise bankruptcy bill last year, AB 506, requires 60 to 90 days of mediation or a fiscal emergency.

Stockton went through a 90-day mediation with creditors before filing for bankruptcy on June 28. Its bankruptcy plan eliminates retiree health care but does not cut pensions, which city officials said are needed to remain competitive in the job market.

The plan also would cut $197.5 million in bond payments over the next 25 years. Two bond insurers urged the court to find Stockton ineligible for bankruptcy because, among other things, no attempt was made to negotiate a reduction in CalPERS debt.

Lawyers for the bond insurers think their best chance for relief is blocking eligibility for bankruptcy. Once bankruptcy is approved, the court can reject a plan to cut debt that is not fair to all parties, but the court cannot impose a plan.

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