By Ed Mendel
Thursday, December 20, 2012

CalPERS accuses San Bernardino of halting payments to the big pension fund in a plan to use bankruptcy to cut pensions owed workers. But the city says it’s simply unable to pay now and wants to work out a way to repay CalPERS over time.

A federal bankruptcy court in Riverside is scheduled tomorrow (Dec. 21) to hear a CalPERS plea to block or delay San Bernardino’s eligibility for bankruptcy, a key leverage point for creditors as CalPERS acknowledged in a court filing.

San Bernardino filed for bankruptcy Aug. 1, getting an automatic stay of debts. If the court rules that the city is eligible for bankruptcy, the leverage shifts to the city as it negotiates a plan to “adjust” or cut its debt to emerge from bankruptcy.

The court can rule on whether the plan of adjustment is fair, but cannot impose a plan. As the city noted in a filing: “The court can confirm a plan of adjustment even if some classes of creditors do not approve, a process known as ‘cram down.’”

Vallejo emerged from bankruptcy last fall with an agreement among all creditors, a process that took more than three years. City officials said they considered cutting pensions, but did not after CalPERS threatened a long and costly legal battle.

Stockton filed for bankruptcy last June and has an eligibility hearing scheduled Jan. 8. The city plans to eliminate its retiree health care coverage, but wants to preserve pensions unaltered to remain competitive in the job market.

San Bernardino became the first bankrupt city to halt payments to CalPERS, owing $6.7 million by the end of the month. The debt will total $13 million by next June, possibly $19 million if unions do not agree to pay half of normal costs under a new law.

The California Public Employees Retirement System called down the legal thunder, hiring a consultant to check San Bernardino books and a law firm that used strong language last week in a bankruptcy objection: “sham,” “extort” and “criminal.”

During bankruptcy, the filing said, the city intends “to mislead its employees into believing that they are receiving the full compensation promised to them while intending to reduce their pension benefits through a plan that will be forced on them at a later date.”

City payments to the pension fund are the same as wages, CalPERS argued, and the city plan for operating while in bankruptcy takes money that should go to the pension fund and spends it for other purposes.

“The city’s pendency plan would have the city’s employees continue to provide valuable services to the city, but allow the city to withhold full and prompt payment of the employee’s earned wages by withholding the required contributions to CalPERS,” the filing said.

The city stopped making the employer contribution to CalPERS but has passed along the smaller employee contribution. The term “pendency” used for the plan for operating while in bankruptcy is said to have originated in the Vallejo bankruptcy.

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