Bankrupt San Bernardino to halt payments to Calpers, bondholders

Reuters News
Posted: Nov 26, 2012 9:22 PM
Bankrupt San Bernardino to halt payments to Calpers, bondholders

By Tim Reid and Jim Christie

SAN BERNARDINO, California (Reuters) - Bankrupt San Bernardino, California, voted on Monday to present a plan to a bankruptcy judge that seeks to balance its budget through deferring payments to the state's public employee pension fund and to the city's bondholders.

San Bernardino's council passed the plan after the judge overseeing its request for bankruptcy protection demanded an orderly budget be filed in court by Friday, November 30.

San Bernardino's "pendency plan," intended as the city's operating budget as it works its way through bankruptcy, is aimed at closing a nearly $46 million budget deficit for the current fiscal year. It also seeks savings through cuts in jobs, pensions and overtime payments.

The plan runs to just 12 pages, in stark contrast to the pendency plan approved in June by Stockton, another California city seeking bankruptcy protection.

Stockton - a city of 292,000 85 miles east of San Francisco - produced a restructuring plan that ran to 790 pages. It came after over 90 days of mediation with the city's creditors.

San Bernardino, a city of 210,000 about 60 miles east of Los Angeles, avoided any discussions with creditors by declaring a fiscal emergency in July.

Its 19-month pendency plan calls for about $26 million in salary and benefit cuts. Another $35 million in savings would come from the deferral and renegotiation of payments to creditors, particularly the powerful state pension fund and holders of nearly $50 million in pension obligation bonds.

San Bernardino has already halted its biweekly $1.2 million payment to the California Public Employees' Retirement System (Calpers) since it filed for bankruptcy protection on August 1.

The city calls the halted payments "deferrals," but under the pendency plan it would not resume any payments to Calpers until the 2013-2014 fiscal year. It also wants to negotiate its debt to Calpers so it can be repaid over 30 years.

Calpers, America's biggest pension fund which serves many cities and counties in California, is San Bernardino's biggest creditor. The city lists its unfunded pension obligations to Calpers at $143.3 million. Calpers says if the city halted its relationship with the fund immediately the debt would be $319.5 million.

Calpers has already formally objected to San Bernardino's bankruptcy filing. While it says it wants to negotiate with the city, it has also said it will ultimately take legal action to recoup any unpaid pension payments.

San Bernardino's move to defer and negotiate payments to Calpers is in stark contrast to Stockton and Vallejo, another California city which emerged from bankruptcy in 2011. Both cities decided to keep current on all payments to the pension fund.

San Bernardino's case sets up a showdown between Calpers and other creditors, particularly Wall Street bondholders and insurers, over how they will be treated in the bankruptcy.

Calpers has long argued that pension contributions cannot be touched, even in bankruptcy. Wall Street has signaled that it intends to fight Calpers' historical primacy as a creditor in the San Bernardino case.

Such a fight could have far-reaching implications for Calpers and other creditors in future municipal bankruptcy proceedings.

Of most immediate concern to the city was getting a budget plan before the bankruptcy judge. She had indicated a frustration with the city's inability to produce a plan to balance its budget, which is why she set Friday's deadline.

Some council members, who object to cuts such as the elimination of 18 vacant positions in the police department, said they did not like the plan but feared that without it the judge might throw out the city's bankruptcy request.

"It's not a perfect plan," said councilman Robert Jenkins, who is affiliated with the city's unions. "But San Bernardino has to get past this next hurdle."

The plan also seeks to cut firefighter overtime payments and to reduce employee pension payments currently paid by the city.

(Reporting by Tim Reid; Editing by Jackie Frank)