CalPERS must now confront a powerful group of foes in its multimillion-dollar fight with bankrupt San Bernardino: the city's bondholders.
A group of major bondholders filed a 114-page legal protest against CalPERS on Monday, saying the pension fund is trying to win preferential treatment in San Bernardino's case. CalPERS has been demanding the right to sue the city, which has fallen behind on $6.9 million in payments to the giant pension fund after filing for Chapter 9 bankruptcy protection in August.
The bondholders' protest increases the likelihood that San Bernardino's bankruptcy filing will become a major test of CalPERS' clout and the sacredness of public pensions in general.
A similar fight with municipal bondholders is brewing in Stockton, which filed for Chapter 9 protection in June.
The California Public Employees' Retirement System argues that its member cities and counties must pay their bills to the pension fund, no matter what. Its threat to sue Vallejo which considered scaling back its pension obligations after going into bankruptct protection in 2008 prompted the city to keep the money flowing to CalPERS.
"CalPERS is fighting for these dedicated public employees," the pension fund said in a statement posted on its website Monday, "and we will protect our members' retirement security, including taking appropriate action to safeguard their pensions."
San Bernardino, however, has said it doesn't plan to resume payments to CalPERS until next July 1, and wants to restructure its debt to lower how much it pays each year. The city is supposed to pay $24 million a year to CalPERS.
Entities in bankruptcy protection generally are shielded from litigation. CalPERS filed a motion in late November in U.S. Bankruptcy Court in Riverside to remove the shield so it can go after San Bernardino.
But the city's bondholders have now stepped in, saying CalPERS "would be receiving special treatment" if it's allowed to sue.
A Michigan pension expert, Joseph Esuchanko, filed written testimony on the bondholders' behalf, saying San Bernardino's lack of payments "in no way jeopardizes the actuarial soundness" of the pension system. CalPERS' assets total nearly $245 billion.
The protest was filed by a group of financial firms representing bondholders as well as two insurance companies that guaranteed repayment of the cities' bonds. Together, they're in danger of losing tens of millions of dollars in the San Bernardino case.
One of those insurers, National Public Finance Guarantee Corp. of New York, already has been fighting with CalPERS over the Stockton bankruptcy case.
Stockton, unlike San Bernardino, is continuing to make its pension contributions to CalPERS at a rate of $29 million a year.
National Public filed court papers saying Stockton should treat all creditors the same and not give preferential treatment to CalPERS. The company's protest is pending.
Editor's note: This story was changed Dec. 11 to clarify the content of court papers filed by National Public Finance Guarantee Corp.