By Ed Mendel
Monday, June 24, 2013

Bankrupt San Bernardino skipped its payments to CalPERS this fiscal year, an unpaid bill totaling more than $13 million, and exposed a weakness in the pension system’s legal power to collect from deadbeats.

Current law authorizes CalPERS to place a lien on the assets of government agencies only if they terminate their contract and leave the system, a legal step intended to get enough money to cover the debt or “unfunded liability” for promised pensions.

In April, the CalPERS board approved a staff proposal to sponsor legislation that would “provide CalPERS with a present lien on all assets of a contracting public agency in the amount of all obligations owed to the system.”

A spokesman for the California Public Employees Retirement System, Brad Pacheco, said the proposed legislation is on a “second track,” not necessarily prompted by the San Bernardino bankruptcy or intended for application there.

At a CalPERS finance committee meeting in April, board member J.J. Jelincic asked if the proposed legislation should be an “urgency” measure, which could take effect quickly but would require a two-thirds vote of approval.

“I would think that makes it much more difficult in this environment, at this time of year, to move it through,” said a CalPERS lobbyist, Danny Brown. Officials said last week CalPERS plans to wait until next year to introduce the bill.

When San Bernardino filed for bankruptcy last August, staying debt collection, the city stopped payments to CalPERS this fiscal year but plans to resume next month. In the Stockton and Vallejo bankruptcies, the cities did not skip CalPERS payments.

A CalPERS request to sue San Bernardino for payment in state court was rejected by U.S. Bankruptcy Judge Meredith Jury in December. She said employee pay would be threatened and the ability to reorganize in bankruptcy undercut.

This month the judge approved a CalPERS request to remove a law firm representing a bond insurer, National Public Finance Guarantee. The law firm, Winston & Strawn, hired lawyers from a firm representing CalPERS in bankruptcies.

The CalPERS vs. bond insurers battle in the San Bernardino and Stockton bankruptcies is widely watched because of the potential for a precedent-setting decision: Can pension debt be cut in bankruptcy, and if so whose pensions would be cut?

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