By Tim Reid
(Reuters) - Bankrupt San Bernardino, California, presented a new budget on Monday in which it proposed renegotiating its obligations to the state's powerful public employee pension, a move that could have far-reaching implications for the fund and other creditors in the bankruptcy proceedings.
San Bernardino's interim city manager released the city's "pendency plan" - in effect its operating budget while it seeks bankruptcy protection under Chapter 9 of the bankruptcy code.
As part of the plan, the city seeks a renegotiation of its debt to the California Public Employees' Retirement System (Calpers).
The city has already halted payments to Calpers since it declared bankruptcy on August 1, and owes more than $6 million in dues to the fund.
The city says its halted payments to Calpers are merely deferrals, but the move is in stark contrast to the path taken by two other Californian 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.
Calpers is the largest pension system in the United States and serves many cities and counties in California. It has long argued that pension contributions cannot be touched, even in bankruptcy.
San Bernardino's move, underscored in Monday's budget plan, sets up a showdown between Calpers and other creditors, particularly Wall Street bondholders and bond insurers, over how they will be treated as creditors in the city's bankruptcy.
Wall Street has already signaled that it intends to fight Calpers' historical primacy as a creditor in the San Bernardino case.
The pendency plan, which must be adopted by a deeply split city council before it can take effect, seeks to close the city's $45.8 million General Fund deficit, which has left San Bernardino barely able to meet its city payroll.
The plan proposes deferring payments to Calpers, negotiating payments over time and discussing the "reamortization" of its Calpers liability - that is, renegotiating or adjusting its dues to the pension fund.
The plan also seeks cuts elsewhere, such as the city's payment of its employees' contribution to Calpers, the elimination of vacant sworn positions in the Police Department, and the reduction of available overtime in the Fire Department.
"Without restructuring its finances or maintaining the protection of Chapter 9, the City could not pay its employees, retirees, bondholders or vendors. This would result in uncontrolled default and, presumably, a collapse of public services," the document states.
San Bernardino, with a population of 210,000, is the third California city to seek bankruptcy protection this year, following Stockton and Mammoth Lakes.
The city, 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.
Calpers has already formally objected in court to San Bernardino's efforts to seek bankruptcy protection.
(Editing by Mohammad Zargham)