In a setback to CalPERS, a bankruptcy judge today indicated she won't give the pension fund permission to sue the city of San Bernardino for its failure to make its payments.
U.S. Bankruptcy Judge Meredith Jury, following a hearing in Riverside, made a tentative ruling in the city's favor, according to reports by Reuters and Bloomberg news.
If CalPERS were able to force the bankrupt city to pay, "the impact on the city's ability to reorganize would be astronomical," Jury said during the hearing, according to Bloomberg.
The city halted payments to CalPERS after filing for bankruptcy in early August. It now owes CalPERS more than $6.9 million.
Normally, bankruptcy shields a debtor against litigation; CalPERS was seeking the right to file suit to collect its payments.
The judge still hasn't ruled on another CalPERS claim, that San Bernardino should not be allowed to file for bankruptcy at all.
CalPERS spokesman Robert Glazier said the pension fund wasn't surprised by the ruling.
"Today's hearing is one step of many on a journey," he said by e-mail. "We are confident the court will recognize the priority of our members and the obligations owed to them."
The case is seen as a crucial test of CalPERS' power and the sanctity of public employee pensions. San Bernardino says it merely wants to defer all payments to CalPERS until next July, but the pension fund is insisting that the city pay up now.
Another test case is brewing in Stockton, which filed for bankruptcy in June. Stockton is still making its payments to CalPERS, but that's being challenged by other creditors.