Bondholders Confront CalPERS in San Bernardino Bankruptcy Case

January 1, 2013
« Next Previous »

Creditors who are the city’s bondholders in the San Bernardino, California, bankruptcy case are displeased with the position taken by the California Public Employees’ Retirement System – or CalPERS – and they are taking their concerns to court.

The bondholders filed a legal protest against CalPERS, arguing that the pension fund is seeking preferential treatment in the bankruptcy case. In their 114-page protest, the bondholders said they have the same rights as the pension fund and are prepared to take the fight all the way to the Supreme Court to prevent CalPERS from obtaining permission from the court to sue the city on its pension obligations. They argue that allowing the pension fund to sue San Bernardino could result in tens of millions of dollars in losses for the Wall Street bondholders.

Immediately following San Bernardino’s appeal for Chapter 9 protection under bankruptcy law in August, CalPERS demanded the right to sue the city. San Bernardino fell behind on $6.9 million in pension payments after it filed for bankruptcy.

CalPERS group argues that the pension obligations of member cities must be met no matter what – an argument that encouraged the city of Vallejo to continue making payments following its bankruptcy in 2008, according to the Sacramento Bee. CalPERS said that California state law supports their bid to primacy, and that pension contributions cannot be reduced even in the event of bankruptcy.

Despite these arguments, the city said it plans to resume payments in July 2013, and also asks to restructure its current debt to lower the amount it must pay.

CalPERS is the city’s biggest creditor and San Bernardino’s unfunded pension obligations to the fund amount to $143.3 million, according to Reuters. Wall Street bondholders follow CalPERS as the city’s second biggest creditor, owning roughly $50 million in bonds.