Business & Real Estate

Creditors launch challenge to CalPERS, pensions in San Bernardino bankruptcy

Government pensions, once thought to be ironclad in California, are under attack in court once again.

Two creditors have formally challenged the bankrupt city of San Bernardino’s plan to repay its debts to CalPERS, setting up another big court fight over pension plans and whether cash-strapped governments can keep their promises to retirees.

The challenge comes two months after San Bernardino officials said they would pay the city’s $24 million-a-year CalPERS bill in full, ending two years of suspense. The city also revealed it had begun repaying millions of dollars in past-due obligations to CalPERS, debts that arose when San Bernardino halted payments to the pension fund for several months after filing for bankruptcy in 2012.

Ambac Assurance Corp., a New York bond insurer, and EEPK, a Luxembourg bank, sued the city Wednesday in U.S. Bankruptcy Court in Riverside, where San Bernardino has been sorting out its financial woes since 2012. Their complaint: San Bernardino shouldn’t be paying its CalPERS debt when it hasn’t paid them a dime on debts totaling more than $59 million.

Their debts “must be treated in all respects equivalently” to the CalPERS debt, the two creditors said in legal papers.

San Bernardino hasn’t yet said how it proposes to treat other creditors, including EEPK and Ambac. City officials couldn’t be reached for comment.

CalPERS spokesman Brad Pacheco said, “We’re reviewing the suit,” but declined further comment. The California Public Employees’ Retirement System has consistently argued that pensions are guaranteed by the state Constitution, and that governments must pay their pension contributions in full, even if they’re bankrupt. EEPK and Ambac’s suit doesn’t name CalPERS as a defendant.

Public employee pensions in California survived a similar challenge last fall. The judge overseeing Stockton’s bankruptcy initially declared that the city had the legal right to reduce its payments to CalPERS and curtail pension benefits. But a month later, the same judge approved Stockton’s plan to keep paying CalPERS in full anyway, despite legal protests from a creditor scheduled to get just 12 cents on the dollar.

The judge’s reasoning was that a reduction in payments to CalPERS would have created chaos for Stockton. Under the pension fund’s mechanism, benefits to current and future retirees would have been slashed 60 percent. Stockton officials said employees would quit in droves, leaving the troubled city ungovernable.

Legal experts said the outcome in Stockton showed that, for all practical purposes, public pensions in California are untouchable. The disgruntled creditor, Franklin Templeton Investments, is appealing the decision.

As for San Bernardino, labor leaders said they weren’t surprised to hear of a new challenge to pensions.

“It’s not breaking news to me that a Wall Street bank would do everything it can to get more money, and would have little or no regard for anyone else’s situation,” said Dave Low of Californians for Retirement Security, an advocacy group backed by public employee unions.

Teague Paterson, of the Oakland law firm Beeson Tayer & Bodine, which represents public employee unions, said the challenge from Ambac and EEPK “seems like a stretch.” He said cities and counties have to maintain their pension programs in order to retain qualified workers.

“You need to be able to offer (pensions), not only offer but guarantee that the offer will be honored,” he said. Paterson isn’t involved in the San Bernardino case.

But Dan Pellissier, a California pension-reform advocate, said San Bernardino should try to scale back its annual CalPERS bill.

“The whole purpose of bankruptcy is to come up with a fair resolution of your debts,” said Pellissier, president of California Pension Reform. “Providing pensions with special protections is contrary to the purpose.” He said San Bernardino is “doing a disservice” to its residents by not attempting to tackle pension costs.

Pension-reform advocates note that Detroit won approval last fall for a bankruptcy plan that includes a 4.5 percent reduction in pension benefits. Pellissier said there’s no reason similar cutbacks couldn’t take place in San Bernardino.

The pension plan “can be modified in moderate ways,” he said.

CalPERS has said that under state law, it has to impose substantial cuts in benefits if a member municipality doesn’t pay its bills in full.

The challenge from Ambac and EEPK didn’t come out of nowhere. When San Bernardino announced its repayment plan for CalPERS in November, a lawyer for EEPK said the arrangement was unfair to other creditors and hinted a protest was coming. The city’s deal with CalPERS “is really more of a surrender,” said the lawyer, Vincent J. Marriott III.

Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.

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