LOS ANGELES — San Bernardino officials didn’t even have a chance to file a pendency plan in bankruptcy court before receiving backlash from the city’s largest creditor, the California Public Employees’ Retirement System.
City officials had until Nov. 30 to file the plan in U.S. Bankruptcy Court in Riverside, Calif. outlining how the city will conduct its finances while it works its way through the bankruptcy process.
The city also filed documents Friday responding to objections to its eligibility for bankruptcy from CalPERS and a city employees union. A hearing has been scheduled for Dec. 21.
City Attorney James Penman argued in court documents that the city union and Calpers objections are without merit and were filed “despite ample and compelling evidence of the city’s eligibility for Chapter 9 relief.”
CalPERS filed a motion with the court last Tuesday — just a day after the city council voted to approve the pendency plan — requesting relief from an automatic stay that prevents it from suing the city in state court over $6.9 million in missed payments. The bankruptcy court does not have the jurisdiction under Chapter 9 bankruptcy code to order the city to pay its bills, but the state court does.
“This legal action would allow us to collect the employer contributions from San Bernardino which are required by state law, to maintain the integrity of the San Bernardino pension plan for its public employees and retirees,” CalPERS chief executive officer, Anne Stausboll, said in a statement.
A city may not operate under the protection of the bankruptcy court without paying its post-petition bills and without complying with state laws, including those governing employee compensation and the state retirement system, CalPERS attorneys argued in the filing.
“By its own admission, the city has failed to make required postpetition contributions to CalPERS,” Calpers attorneys argued in court documents. “The city admits that is has not paid to CalPERS any of the employer portion of its contributions during its bankruptcy case.”
The pendency plan would defer $12.9 million in CalPERS payments until fiscal 2013-14 to help close the insolvent city’s $48.5 million budget gap. The plan also mentions negotiations with CalPERS actuarial staff to reamortize its pension fund liability over the next 30 years for a fresh start for a $1.3 million savings per year.
The city does, however, plan to make some payments to CalPERS in fiscal 2012-13 and is working to negotiate repayment with the pension fund, according to court documents filed by the city.
Amy Norris, a CalPERS spokesperson, failed to respond to a question about whether the two parties have been working on a payment plan for the city’s $143 million in pension debt.
San Bernardino has about $90 million of outstanding pension obligation bond debts and owes another $200 million for securities issued by the city’s now-dissolved redevelopment agency. The city failed to make a $1 million interest payment due Oct. 1 on taxable pension bonds issued in 2005. The pendency plan would “defer” $3.37 million in payments the city owes on its pension bonds for fiscal 2012-13.
San Bernardino is the first insolvent California city to fail to remain current on pension payments while in bankruptcy.
In the Chapter 9 case involving Stockton, insurance companies filed motions against the city as it remained current on its CalPERS payments while defaulting on its bonds.
Insurers of San Bernardino’s pension obligation bonds filed a motion Friday supporting San Bernardino’s eligibility to be in bankruptcy and arguing that Calpers claims are not entitled to any priority over other creditors.
San Bernardino could break ground in other ways, because CalPERS’ decision to file the motion is the opening move in what could be a precedent setting case, said Karol Denniston, a partner in the San Francisco office of law firm Schiff Harding.
The case could determine what happens with the CalPERS contract, which is currently protected by the state’s constitution, Denniston said.
CalPERS is saying to the city “you can’t finance your bankruptcy on the back of not paying us,” she said.
But the city is saying in its pendency plan that it doesn’t have enough money to fund the bankruptcy case and cover expenses that protect the public health, safety and welfare of its citizens.
“I think it’s likely the judge will lift the stay, because it’s a state law contract and involves the interpretation of California law,” said William Brandt, president and chief executive officer of Chicago-based DSI Civic Financial Restructuring.
It makes more sense for the issue to be determined in a state court where they are more familiar with this application of the law, Brandt said.
“Where I see the collision coming is if the court grants the motion to lift the stay, and CalPERS files suit and wins: is the bankruptcy court going to enforce the order?” Denniston said. “And how does that fit into the bankruptcy plan.”
Denniston said the pendency plan did a good job of outlining the challenges faced by the city, but fell short of explaining to the bondholders or CalPERS what it plans to do about making payments.
“It doesn’t say what happens next other than I’m going to defer you,” Denniston said.
Mark Tennehaus, director of research at New Jersey-based RSW Investments sees recent events as a wake-up call of sorts for bond investors.
“The municipal bond industry needs to do a better job of paying attention to pension and OPEB liabilities,” Tennehaus said.
Prior to the crash, “people just gave local municipalities offering documents a glance, everything was investment grade including the bond insurance,” he said. “People need to be more discriminating.”
