San Bernardino Seal

By Ed Mendel
Monday, December 25, 2012

RIVERSIDE — A federal judge last week rejected a CalPERS request to sue bankrupt San Bernardino for a growing unpaid bill, but gave preliminary support to the argument that the bill must be paid in full before the city can leave bankruptcy.

The widely watched question of whether the bankruptcy will reduce pensions promised retirees or payments made by the city to CalPERS may now turn on the ability of the city to pay.

U.S. Bankruptcy Judge Meredith Jury agreed to a 60-day discovery period sought by CalPERS to probe city finances. City officials said they plan to hire a half-dozen persons to help a skeleton staff provide information to the big pension system.

The judge rejected a CalPERS motion to lift the automatic stay on debt collection imposed when San Bernardino filed for bankruptcy Aug. 1. She said employee pay would be threatened and the attempt to reorganize under bankruptcy law undercut.

Jury said she would be “highly disappointed” if CalPERS sued the city in state court, citing an appeals court decision giving bankruptcy court precedence. A CalPERS lawyer replied that an “end run” is unlikely but left the option open.

The judge indefinitely delayed a ruling on whether San Bernardino is eligible for bankruptcy, a step that would give the city more leverage in negotiations with creditors. She urged the city to begin thinking about an “end game” plan now.

In an emergency filing for bankruptcy, the city said debt deferral was needed to continue meeting payroll. Unlike in the Stockton and Vallejo bankruptcies, San Bernardino stopped making payments to CalPERS.

The city’s unpaid bill to CalPERS, growing at $1.7 million a month, is now more than $8 million. The debt is expected to reach $13 million to $19 million by the end of the fiscal year in June, depending on whether unions agree to pay more toward pensions.

San Bernardino contends that a new city manager and finance officer hired last spring discovered a $19 million general fund cash deficit. The city blames years of overspending, faulty bookkeeping, a weak local economy and the housing bust.

A CalPERS attorney, Michael Gearin, told the court Friday the city has an unexplained $14.7 million cash surplus. He argued that the city could pay its CalPERS bill if ordered to do so by a state court.

In the Vallejo bankruptcy, unions waged a lengthy and unsuccessful court battle to dip into restricted special funds to help close a general fund deficit. San Bernardino already has borrowed $15 million from special funds and is proposing to defer repayment.

The judge told an attorney for the city, Paul Glassman, during a four-hour hearing that CalPERS apparently hopes to discover a “pot of gold” stashed among the city special funds.

Glassman said all of the special fund information is on the city website, except for limited access to the water department. He said the city has borrowed from special funds to survive but cannot simply “raid” them.

CalPERS said the city only produced about a dozen of the more than 50 financial documents requested. During a hearing recess, CalPERS and the city were unable to agree on a discovery plan. They will try again before the next court hearing Jan. 22.

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