CalPERS has fired back at the city of San Bernardino and its pendency plan for operating during the Chapter 9 case, calling it “criminal” and a “sham.” A copy of the pendency plan can be found here. Since filing for bankruptcy, the city has stopped making its bi-weekly payments to CalPERS. As a result, San Bernardino now owes CalPERS approximately $8 million.
While CalPERS may cast aspersions on the city’s motivation, financially, the city is faced with either making the CalPERS payment or making its payroll. Even though the hit to CalPERS is 0.00329% of its overall portfolio, CalPERS has a legitimate concern that any acquiescence to San Bernardino’s refusal to pay will set a negative precedent for future Chapter 9 cases. As there are pending municipal bankruptcies underway throughout the state, CalPERS does not want to undermine its position that it is a priority creditor for the municipalities of California.
The legal issue is whether the pensions of government workers take precedence over other payments in a municipal bankruptcy. CalPERS argues that under California law, it has priority as a creditor, asserting that it is in essence an "arm" of the state and must continue to be paid in full, even in a bankruptcy. Wall Street bondholders and insurers disagree, arguing that federal bankruptcy law trumps state authority and allows them to fight with CalPERS in court as equal creditors. CalPERS legitimately fears the adage that, as San Bernardino goes, so goes the State.
Please click here to read more.