By Tim Reid and Jim Christie
Thu Oct 18, 2012 8:51pm EDT
Oct 18 (Reuters) - San Bernardino, California, has failed to make more than $6 million in payments to the state's powerful public employee pension fund, heightening speculation of a high-stakes showdown between the fund and other creditors as the city seeks eligibility for bankruptcy protection.
Since July 31, the day before San Bernardino declared bankruptcy, the city has failed to make six biweekly employer contribution payments of more than $1 million to the California Public Employees' Retirement System (Calpers), a city spokesperson said.
The action taken by San Bernardino is in stark contrast with two other California cities - Vallejo, which emerged from bankruptcy in 2011, and Stockton, which is seeking bankruptcy protection. Both cities decided to keep current on all payments to the pension fund.
How San Bernardino deals with its future obligations to Calpers remains to be decided, but even opening the door to negotiating payments to Calpers is significant, said Karol Denniston, a San Francisco lawyer who helped draft California's bankruptcy process law.
Calpers is the largest pension system in the United States and serves many Californian cities and counties. It has long argued that pension contributions cannot be touched, even in bankruptcy.
"This is a David and Goliath approach of taking it head on," Denniston said, referring to the halted payments. "San Bernardino has taken on Calpers without even filing a motion," she added.
Vallejo asked other creditors to renegotiate or reduce their claims, while leaving Calpers untouched. Wall Street bondholders and insurers are already challenging Stockton's eligibility to file for Chapter 9 bankruptcy because it has avoided any potential clash with Calpers when it filed for bankruptcy.
Wall Street has also signaled that it intends to fight Calpers' historical primacy as a creditor in the San Bernardino case, with bond underwriters gearing up to file challenges to the bankruptcy next week.
A Calpers official confirmed the missed payments. Of the unpaid portion, $1.2 of that has been deemed delinquent because of the amount of time that has elapsed since that payment came due, the official added.
A spokesperson for San Bernardino said the failed payments to C alp ers a re "one of a number of obligations that the city has deferred due to our dire cashflow situation in order to keep making payroll to our employees and to keep paying for those materials and services that are most critical to our continued operations while the city works through its financial crisis."
"Those deferred payments will then become one of the obligations we will have to deal with later," the spokesperson added.
The city says it hopes to make the deferred payments part of a negotiated plan with Calpers that "can be added to future payments over an agreed-upon number of years."
San Bernardino is the third California city to seek bankruptcy protection this year, following Stockton and Mammoth Lakes.
The city of 210,000, 60 miles east of Los Angeles, lists Calpers as its biggest creditor, with unfunded pension obligations totaling $143.3 million. Calpers says it uses a different calculation method and pegs the debt at $319.5 million.
Its late payments to Calpers was first reported by Debtwire.
The outcome of how Calpers and bondholders are treated as creditors in Stockton and San Bernardino's bankruptcies, and whether Calpers receives preferential treatment, will have broad implications for local governments around the country that are struggling to balance their budgets amid soaring employee retirement costs.
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