CalPERS likely to lose next court battle, San Bernardino bankruptcy observers predict
The judge handling San Bernardino's bankruptcy likely will not lift a stay so CalPERS can sue over missed pension payments, several attorneys studying the legal battle predicted Tuesday.
That could save expensive legal fees for the city, which plans to resume payments in fiscal year 2013-14 and repay the rest later because it says paying earlier would ruin the city.
The two cities' bankruptcy cases are being watched because they cover untested legal ground and touch on potential changes to the California Public Employee Retirement System - the nation's largest retirement system - but there are also practical concerns, said bankruptcy attorney Karol Denniston.
"Despite all the legal complexity, we actually are faced with a very simple economic math problem," Denniston said. "We have x amount of money to deal with y amount of liability, and the sooner the parties are given ability - not necessarily authority - to negotiate, the better."
Denniston, who helped draft a law governing California bankruptcies known as AB 506, led a webinar about the bankruptcy cases in San Bernardino and Stockton along with Louis T. DeLucia, also of the San Francisco law firm Schiff Hardin.
Both tentatively predicted that bankruptcy Judge Meredith Jury would refuse to lift the stay, which means CalPERS would remain unable to sue in state court for payments the city stopped making when it filed for bankruptcy Aug. 1. Those payments total about $6.9 million so far, according to CalPERS.
"Recognizing that we're not taking a position on behalf of any client, and speaking academically - pure speculation - my gut tells me that the court and the parties (CalPERS and San Bernardino) may find themselves in the very same place regardless of the path taken," DeLucia said.
That's because arguments about CalPERS payments would have to wind their way through state courts before eventually being reconciled with decisions made in federal bankruptcy court, a point Jury will likely recognize and seek to avoid, DeLucia said.
Denniston agreed, adding that because of that reasoning, a denial of the stay wouldn't mean Jury disagreed with CalPERS.
And in an interview Tuesday, bankruptcy attorney Franklin C. Adams of Riverside-based Best Best & Krieger also agreed Jury would probably prefer not to let another set of courts weigh in.
"That would really goof up the bankruptcy process, and I don't think a bankruptcy court is going to let a state court meddle in that respect, where a state court makes a judgment and then enters an order to make payment while it's in protection of bankruptcy court," said Adams, whose firm has been watching the case and entered the broader bankruptcy case Tuesday on behalf of two of the city's creditors.
Adams noted that San Bernardino is now at the center of pension discussions, after Stockton decided to keep its debts to CalPERS intact. Other creditors there are fighting that decision, saying some of the money should instead go to them.
"(Stockton officials) don't have the political fallout of saying we're not going to pay our pensioners," he said. "San Bernardino doesn't have that luxury. They're trying to put together this pendency plan, and they're just so scrapped that they had to do this."
CalPERS, which argues that state law requires payments to the system, had an unfunded liability of nearly $107 billion when it last reported in June 2010 and is experiencing a low rate of return - 1 percent last year - as the number of retirees increases. Meanwhile, many of the cities whose payments fund the system are facing deep fiscal problems.
"CalPERS has problems, and it's got challenges itself," said San Bernardino City Attorney James F. Penman. "One interpretation of what they're doing is they're just demonstrating to retirees and people in the retirement system who haven't yet retired that they're doing everything in their power to make sure payments come in."
Penman said he wasn't in private CalPERS meetings, but hoped the judge sided with the city and that CalPERS saw it as in their best interest.
"I can't see what benefit it would be to CalPERS to cause any city to dissolve, and if we paid CalPERS what they say we owe them, we would dissolve," he said.
This report has been modified to correct the unfunded liability for CalPERS.