The bland bureaucracy that dispenses pension checks to half a million Californians has taken on a new identity: fierce and unyielding champion of government retirees.

Facing an unprecedented legal fight over the cash it receives from member cities and counties, CalPERS has come out swinging. It has gone to court to keep the dollars flowing, while portraying itself as the only thing standing between helpless retirees and greedy Wall Street types and irresponsible politicians who would grab their pensions.

"If we do not stand up for our members, then who will?" CalPERS declared on its website last week.

CalPERS' aggressive posture stems from the twin bankruptcy filings of Stockton and San Bernardino. The pension fund maintains that both cities are legally obligated to keep up their annual contributions to CalPERS – more than $20 million apiece.

That stance has prompted legal protests from the cities' bondholders. They say CalPERS, in its zeal to get paid, is illegally trying to jump ahead of other creditors in the bankruptcy cases.

San Bernardino itself has joined the fray against CalPERS, saying it literally could be forced out of business if it doesn't get a breather on its pension obligations. Not surprisingly, the city's retired workers have weighed in on CalPERS' behalf.

No decisions are expected in either case until sometime next year, said CalPERS general counsel Peter Mixon.

Final resolution, in fact, could take years. Karol Denniston, an expert in municipal bankruptcy law, said the fight over CalPERS could reach the U.S. Supreme Court.

Denniston said CalPERS has no choice but to insist on getting paid. If Stockton or San Bernardino's payments to the pension fund are cut back, then other member cities in financial distress could be tempted to try to reduce their contributions.

"It's going to open the doors to everybody else," said Denniston, a San Francisco lawyer who helped write a year-old state law on municipal bankruptcy. "It's big stakes."

The California Public Employees' Retirement System says it's simply standing up for the little guy.

"Our responsibility is to look out for the members and their pensions," board President Rob Feckner said in an interview. "Nobody else seems to look at that – they're looking at their own interests."

Claims of scapegoating

Besides the state, CalPERS handles the pensions of about 2,000 cities, counties and school districts.

CalPERS officials say retirees are being scapegoated for problems caused by foolhardy local officials who overspent their budgets and Wall Street bondholders who should have understood that lending money to municipalities carries the risk of not getting repaid.

"The members did their jobs," Feckner said. "They came to work and were promised 'X' when they retired."

A $245 billion heavyweight, CalPERS has helped shape the very structure of public employee benefits in the state. It has the unilateral authority to set annual contribution rates from the state and participating local governments.

Six of CalPERS' 13 board members are elected by current or retired public employees; Feckner is a school district employee in Napa. The fund has long immersed itself in the politics and policy of state pension issues.

In 1999, CalPERS persuaded the Legislature to substantially increase state worker pensions, saying the costs could be borne by booming investment returns. CalPERS predicted the state's annual pension contributions would remain at $766 million or less for at least a decade. Many local governments responded by boosting their own workers' pensions.

When the investment markets sagged and the state's annual contribution to CalPERS zoomed past $3 billion, Republican lawmakers and others began attacking benefit levels as too generous.

CalPERS was quick to defend itself, noting that the average pensioner receives under $30,000 a year and shouldn't get blamed for weak investment results.

Still, the fund took less of an advocate's role as the push for pension reform gained momentum. When Gov. Jerry Brown and the Legislature reached a deal in September to reduce pensions for new employees, CalPERS issued financial projections on the savings and essentially endorsed the rollbacks.

Fighting to collect

It is displaying no such passivity when it comes to collecting the money owed by Stockton and San Bernardino.

In Stockton, the pension fund is taking on companies that insured the city's bond debt. Those companies, which stand to lose millions in the bankruptcy, are challenging Stockton's decision to keep paying CalPERS.

In San Bernardino, CalPERS is fighting with the insurers, bondholders and the city itself.

CalPERS demanded the right to sue San Bernardino after the city halted its pension payments in August. Normally, bankrupt debtors are shielded from litigation. The city is $6.9 million behind in its payments to the pension fund, although it says it plans to resume payments when the new fiscal year starts next July.

Fund officials make no apologies for pressing the fight. CalPERS is facing "a direct attack on the system and the members," Feckner said.

In its court filings, CalPERS said the relationship between the pension fund and its member cities isn't an ordinary contract – the kind that can be broken in bankruptcy court. Instead, cities are bound by statute to make their payments.

"This statutory provision goes to the very heart of CalPERS' mission," the pension fund's lawyers wrote in the San Bernardino case. Without timely payments, "CalPERS will be unable to provide an actuarially sound retirement system."

Part of what's stoking the fire is that CalPERS, under state law, simply can't compromise with San Bernardino, according to Denniston.

The lawyer, who isn't involved in either the Stockton or San Bernardino cases, said most creditors can negotiate a deal that reduces the outstanding debt. The most CalPERS can do is work out a deal to stretch out the payments, she said.

"There is no easy way out," she said.

Last week San Bernardino brought the point home in dramatic fashion. It filed court papers complaining that CalPERS was trying to impoverish the troubled city by demanding its money.

The city's bondholders, in a separate filing, scoffed at the idea that CalPERS – which just announced it will hire 86 high-salary employees at a total annual cost of $16 million – will be weakened financially by delays in the city's payments.

The city's retirees, though, are siding with CalPERS. A group of 11 retirees filed a court motion last week saying CalPERS should be given the right to sue San Bernardino.

"The failure to do so will directly jeopardize the pensions of nearly two thousand city retirees, who have collectively spent tens of thousands of years in public service," the retirees' lawyers wrote.

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