San Bernardino

The California city’s road to federal bankruptcy protection is now confronted by a major state obstacle from the city’s largest creditor, the California Public Employees’ Retirement System or Calpers. The city, which filed its plan in U.S. Bankruptcy Court last Friday, outlining how the city will conduct its finances while it works its way through the bankruptcy process, also filed documents responding to objections to its eligibility for bankruptcy from Calpers and a city employees union, with the city arguing that the city union and Calpers objections are without merit and were filed “despite ample and compelling evidence of the city’s eligibility for Chapter 9 relief.” Calpers had filed its motion the day after the city council voted to approve its request for Chapter 9 protection and requesting relief from an automatic stay that prevents it from suing the city in state court over $6.9 million in missed payments. Calpers asserts that a federal bankruptcy court does not have the jurisdiction under Chapter 9 bankruptcy code to order the city to pay its bills, but the state court does: “This legal action would allow us to collect the employer contributions from San Bernardino which are required by state law, to maintain the integrity of the San Bernardino pension plan for its public employees and retirees,” CalPERS chief executive officer, Anne Stausboll, said in a statement. San Bernardino’s pendency plan would defer $12.9 million in Calpers payments until fiscal 2013-14 to help close the insolvent city’s $48.5 million budget gap. The plan also mentions negotiations with Calpers’ actuarial staff to reamortize its pension fund liability over the next 30 years for a fresh start for a $1.3 million savings per year. San Bernardino, however, plans to make some payments to Calpers in fiscal 2012-13 and is working to negotiate repayment with the pension fund, according to court documents filed by the city.

Catch-22. In the Chapter 9 case involving Stockton, insurance companies filed motions against the city as it remained current on its Calpers payments while defaulting on its bonds, but San Bernardino is saying in its pendency plan that it does not have sufficient resources to fund the bankruptcy case and cover expenses that protect the public health, safety and welfare of its citizens (e.g. essential services). The guru of municipal bankruptcy, in response to a question from Bloomberg this week aptly replied:

“You can impair contract obligations where it’s necessary for a higher public good. That’s why you can condemn property. The higher public good is that we’re not going to forfeit essential public services to pay for pensions that are not affordable. That’s part of the legal basis. You could set up a quasi-judicial body that makes fact determinations. Both the city and the state and the unions could present their sides and they’ll make the determination.”

San Bernardino submits its spending plan this a.m. The City believes its plan will resolve the chief complaint of the California Public Employees’ Retirement System, according to its papers filed in U.S. Bankruptcy Court. Calpers is seeking to sue San Bernardino over missed pension payments as well as asking U.S. Bankruptcy Judge Meredith A. Jury (really) to dismiss the city’s Chapter 9 petition. Should Judge Jury grant either request, Calpers would be free to sue San Bernardino in state court to seize property or find some other way to collect the debt the pension fund is owed. Calpers spokesman Brad Pacheco said he couldn’t immediately respond to a request for comment on the filing. In August, San Bernardino became the third California city to file bankruptcy in less than three months.