RIVERSIDE, Calif. - Bankruptcy proceedings have given San Bernardino some time to get its financial house in order, but the city's move to impair the nation's largest public pension fund will not go down without a fight.
This week, Michael Lubic, an attorney representing the California Public Employees' Retirement System, told U.S. Bankruptcy Judge Meredith Jury that the city has a projected balanced budget showing cash-on-hand of $33 million for fiscal 2013-2014.
If that's true, then the city has enough money to pay the $13 million in missed payments to the California Public Employees' Retirement System, Lubic, a partner at K&L Gates, said during an interview following Tuesday's hearing at the bankruptcy court in Riverside, Calif. In April, during the city's annual budget process, city officials announced that beginning on July 1 San Bernardino would resume its $1.2 million bi-weekly payments to CalPERS.
But San Bernardino Mayor Pat Morris said at the time that the city would not be able to make up missed payments to CalPERS totaling $13 million and a workout would probably be needed.
If the city does make CalPERS whole, how does that affect the city's other creditors, including bondholders?
The city has $90 million of outstanding pension obligation bond debts, according to budget documents, and another $200 million owed to holders of securities issued by the city's now-dissolved redevelopment agency. The RDA's bonds have not been included in the bankruptcy.
This issue has been playing out since last summer in both Stockton and San Bernardino as the state's two cities wind their way through bankruptcy court.
In April, U.S. Bankruptcy Court Judge Christopher Klein ruled that Stockton was eligible to be in bankruptcy; that decision has yet to be made in San Bernardino.
Jury postponed until June 5 arguments on the city's eligibility to be in bankruptcy and motions made by CalPERS and two city employee unions seeking relief from the bankruptcy's automatic stay to sue in state court.
CalPERS, along with two city employee unions, filed objections to the city's eligibility for bankruptcy protection last year, but the issue has been postponed while discovery issues are worked out.
Lubic and attorneys for two city employee unions reiterated arguments during the hearing that the city has been remiss in providing necessary documents for them to get a clear picture of the city's financial situation.
"Some of this is going to sound familiar," Lubic said.
"The advisors of CalPERS continue to work with the city to understand the current financial situation of the city, but the process continues to be painfully slow," Lubic said. "We believe it's slower than it needs to be, because the city has added people to the finance function."
He said similarly-sized cities have more than the city's 25 financial services employees.
"For whatever it's worth, the city could use further resources for the finance function," Lubic said.
The city, obviously since 2007 has had an inadequate financial team, Lubic said in an interview.
Jury postponed arguments on eligibility and relief from stay based on continued complaints from creditors that the city is not providing them with needed financial documents.
Jury asked creditors if they would have enough information to argue those two issues if she granted another continuance: or if they did not, if what was still lacking at that point would be narrowed down to evidentiary discovery issues best resolved by the court.
The city's bankruptcy attorney, Paul Glassman of Stradling Yocca Carlson & Rauth, said he is ready to move forward now on the eligibility issue.
"The groundwork has been set for the city to move forward on eligibility," Glassman said. "At this point, the city has provided the creditors with all the financial information that is relevant for eligibility."
Attorneys for the creditors argued that while the city has done a much better job of providing documentation since it hired additional financial staff that it still has not provided all the financial documents needed by creditors.
Creditors need further clarification on how much money the city has based on the disparities in the numbers, Lubic said.
"We need to understand what is in the different funds," Lubic said. "The funds have not been reconciled since 2011."
When was the last time the city was audited? Jury asked Lubic.
The next audit will catch the city up to June 2012, which is about a year behind, he said.
The audit will require a fair amount of work, because the city has 77 different funds that need to be reconciled, he said.
"It is not something that can be done by two people in two weeks -- it's much more complicated than that," he said.
He added that CalPERS has made it clear that "our goal is not to have expensive litigation. It's to get to where the city could have been if it had gone through the Assembly Bill 506 process," referring to a pre-bankruptcy mediation process set up by a 2011 California law that California cities are supposed to use before they enter bankruptcy.
Cities can skip the process if they can demonstrate they have cash flow problems severe enough that they can't operate as a city outside of bankruptcy.
Stockton went through the AB 506 process. San Bernardino did not.
"We need good numbers and we need to sit down and talk about it," Lubic said. "While we are prepared to go forward with eligibility and at the same time with the motion to lift the automatic stay; we don't think we have the resources to do that right now."
During his arguments, Lubic pointed out that at three separate junctures the city's reported cash flow amounts showed significantly different amounts.
For instance, papers filed in court on Jan. 31, 2013, showed the city had $4.2 million when the real number is $26.8 million, Lubic said.
"These are materially different numbers that are coming out as a result of people going through the papers to understand," Lubic said. "I think in a case like this, it is very important to get the real numbers."
The parties also said they anticipate clearing up some confusion related to the disparity in the numbers during a deposition hearing planned for Friday with Michael Busch.
Busch, president of Urban Futures, has been representing the city as its financial advisor during the bankruptcy proceedings. He and other Urban Futures employees, who are working with the city on a contract basis filling vacant financial positions, helped the city draft a budget for the next two years.
"Sometimes the tail wags the dog in these cases," said Aron Oliner, of San Francisco law firm Duane Morris, who represents the San Bernardino Police Officers Association. "Good numbers are necessary to move forward."
