By Tim Reid
(Reuters) - America's biggest public pension system filed a formal objection on Wednesday to a quest by San Bernardino to seek bankruptcy protection, citing the "disarray" in the Californian city's finances.
San Bernardino, a city of 210,000 people 60 miles east of Los Angeles, declared bankruptcy on August 1. Since then it has halted pension payments to the powerful California Public Employee Retirement System (Calpers), its biggest creditor.
The case could set precedent in how local governments deal with soaring pension costs. In particular, it is setting the stage for a showdown between Calpers and Wall Street bondholders and bond insurers over how they are treated as creditors in a municipal bankruptcy.
Last week Calpers made clear in public statements it would not tolerate San Bernardino, or any other Californian city, missing payments into its fund. Since it declared bankruptcy, San Bernardino has missed six biweekly payments totaling over $6 million.
On the deadline day for creditors to file objections to San Bernardino's bankruptcy claim, Calpers filed a 20-page objection and 116 pages of exhibits.
In its filing on Wednesday Calpers, which has long argued that contributions to its fund can never be suspended, even in a bankruptcy, said any arguments about whether San Bernardino can seek bankruptcy protection should be deferred until the city presented a detailed financial plan.
"The city's financial records are in disarray," Calpers said in its filing.
It added: "In filing this preliminary objection, the goal of Calpers is not to start a costly battle over eligibility (for bankruptcy) but rather to defer any dispute about eligibility until the City has produced credible projections which could form the basis of a feasible plan."
By 5 p.m. on Wednesday, the deadline for filing objections, no bondholder creditors appeared on the court docket as objecting to San Bernardino's eligibility for bankruptcy protection.
Karol Denniston, a Californian attorney and expert in Chapter 9 bankruptcy, the section of the federal code that deals with municipal bankruptcies, said not objecting could well have been a deliberate strategy by those Wall Street creditors.
If they objected to the city's eligibility and prevailed, Denniston said, the case would be dismissed - robbing bondholders of taking the fight to Calpers over the pension fund's status as a creditor.
"The absence of objections suggests a strategy of allowing the bankruptcy to proceed so they can focus on the issue of what type of creditor Calpers is," Denniston said.
San Bernardino is the first Californian authority to hold back payments from Calpers or indicate it might treat the pension fund like other creditors.
Two other Californian cities - Vallejo, which emerged from bankruptcy in 2011, and Stockton, which is seeking bankruptcy protection - decided to keep current on all payments to Calpers.
(Reporting by Tim Reid; Editing by Lisa Shumaker)
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