San Bernardino not paying CalPERS, pointing to future fight over pensions
City officials were somewhat puzzled by national media attention after CalPERS' announcement last week that the city hadn't made any of its required payments to the state pension system since filing for bankruptcy in August.
San Bernardino officials had publicly decided to defer as many payments as they could - but their stance with CalPERS also highlights what will likely be a long and bitter fight.
The reason for the city hasn't made the payments, which according to CalPERS total $5.3 million, is simple, said Mayor Pat Morris' son and chief of staff, Jim Morris.
"We're not paying them because we don't have the money," Jim Morris said, adding no one was spoiling for a fight. "We don't want to pick a fight with the 400-pound gorilla in the room."
As the mayor and City Council fight over details of where to cut spending and how to raise new revenue, they've generally agreed on this guiding principal: Take care of employees and essential services first. Other obligations can be settled in bankruptcy court.
But CalPERS - the California Public Employee Retirement System, used by many cities - has argued that it should be among the first priorities, a position spokeswoman Amy Norris reiterated on Friday.
"We do intend to enforce it," Norris said. "We do intend to try to collect this, and ultimately if they can't and are unable to recover it, we have the option of terminating the plan."
In both San Bernardino and Stockton, which filed for bankruptcy in June, CalPERS is the largest creditor, but Stockton has continued making payments, Norris said.
That's because the Stockton City Council is shying away from a fight with a powerful potential adversary, said Paul Goyette, an attorney involved in that bankruptcy proceeding.
"It looks like San Bernardino - and probably bondholders and other creditors - are going to make it an issue," Goyette said.
Even in Stockton, bondholders and others may argue that they shouldn't take huge losses while CalPERS gets everything it's owed, he said.
Jim Morris said San Bernardino does intend to restructure its debt to CalPERS, when the time comes for that battle.
"We have to undertake that to survive," he said. "There will be a restructuring of our pension costs. We can't maintain them."
CalPERS' lawyers have argued that bankruptcy court has no authority over the system because it is part of the state government, the CalPERS general counsel wrote in a statement available on the system's website.
"The relationship between CalPERS and a municipal employer is not a mere commercial contract between a creditor and a debtor," Mixon wrote. "Instead, it is an aspect of the state's control over a municipality that is protected from interference under constitutional principles and federal bankruptcy law."
That's a question that will likely get tested later in San Bernardino's bankruptcy process, said Franklin Adams, a partner at Riverside-based Best Best & Krieger who specializes in bankruptcy law.
"That's the $64 billion question," Adams said, adding that he thinks the court will find it does have the authority but the fight will carry a political cost.
"My guess is it'll get treated kind of like a termination (of the plan) in that CalPERS will have to pass it along to the retirees, which is not very politically palatable for some folks," Adams said. "They'll have some angry retirees if they do that."
One thing at a time, said Councilwoman Wendy McCammack.
"I don't think anyone's surprised" about the city stopping CalPERS payments, McCammack said. "We have to focus on other things.... We're not `not paying.' We're not paying yet. This was part of our plan to defer payments so we can pay employees."