CalPERS was dealt an early setback Friday in its fight to collect millions of dollars owed by the bankrupt city of San Bernardino.
A bankruptcy judge tentatively turned down CalPERS' request for permission to sue San Bernardino for the money.
At a hearing in Riverside, U.S. Bankruptcy Judge Meredith Jury said San Bernardino would be crippled financially if forced to pay CalPERS right away. The city hasn't paid CalPERS since filing for bankruptcy protection in August and owes the pension fund more than $6.9 million.
The judge's ruling wasn't a surprise. Bankruptcy filings usually protect a debtor from lawsuits, and judges generally don't allow exceptions.
Nonetheless, the decision shows how the San Bernardino bankruptcy is shaping up as a watershed moment for the California Public Employees' Retirement System.
CalPERS says it must get paid by its member cities and counties, no matter what, and its powers as a state agency trump the shield provided by bankruptcy laws. When Vallejo toyed with the idea of reducing pension payments after filing for bankruptcy in 2008, the city quickly backed down after CalPERS threatened litigation.
San Bernardino, by contrast, says it can't afford to pay CalPERS now. It plans to resume payments next July, when the new fiscal year begins, and will deal with the unpaid debt at a later date.
The city's allies against CalPERS include its lenders, who say the pension fund is improperly trying to elbow its way to the front of the line and get paid ahead of everyone else.
Friday's ruling "is an opening move in what's going to be a big stakes, high stakes legal issue," said Karol Denniston, a San Francisco attorney and expert on municipal bankruptcies.
CalPERS spokesman Robert Glazier said the pension fund wasn't shocked by the decision.
"Today's hearing is one step of many on a journey," he said in a prepared statement. "We are confident that the court will recognize the priority of our members and the obligations owed to them."
The judge has yet to rule on another CalPERS argument that San Bernardino shouldn't be allowed to file for bankruptcy at all.
Another big test case looms in Stockton, which filed for bankruptcy protection in June. The city is paying CalPERS, but two of its largest creditors filed legal protests, saying CalPERS shouldn't be afforded special treatment.