CalPERS loses round in bankruptcy fight with San Bernardino

CalPERS suffered a setback in its fight with the city of San Bernardino, which owes the pension fund more than $14 million after filing for bankruptcy.

A judge Friday rejected CalPERS’ request to challenge the city’s bankruptcy eligibility at the U.S. 9th Circuit Court of Appeals. U.S. Bankruptcy Judge Meredith Jury said granting the request would be “duplicative and not an efficient use of judicial resources.” In August, she ruled the city was eligible for bankruptcy, dismissing CalPERS’ argument that San Bernardino was simply trying to avoid paying its bills.

The wrangling over bankruptcy eligibility is a warmup to a potentially epic fight – a test case of whether a city can use bankruptcy to reduce its pension obligations.

The judge’s decision Friday doesn’t end the eligibility skirmish. CalPERS can still take take the matter to a U.S. District Court judge – which it did on Friday.

“Although we disagree with the (bankruptcy) judge’s decision, we will continue to pursue our appeal and uphold our fiduciary duty to guarantee our members receive the public pensions that were bargained with their employer and promised,” said the California Public Employees’ Retirement System. If the city is allowed to slash its payments, CalPERS has said it would have to reduce benefits.

San Bernardino says bankruptcy is the proper forum for hashing out its debts. The City Council adopted a tentative plan for repaying creditors in October, but the plan remains confidential while the city’s proposal goes to court-supervised mediation. Lawyers for the city say letting CalPERS’ appeal would interfere with the mediation process.

San Bernardino’s annual bill to CalPERS is $25 million. It halted payments for several months after filing for bankruptcy last year. It resumed payments when the new fiscal year began in July but still owes CalPERS more than $14 million.