CalPERS Seeks to Prevent City of San Bernardino From Using Bankruptcy to Avoid Meeting Pension Payment Obligations

The California Public Employees’ Retirement System (CalPERS) is seeking to sue the bankrupt City of San Bernardino to require the City to meet its pension obligations.   The City entered Chapter 9 bankruptcy proceedings in August 2012, in part due to an unfunded pension liability of upwards of $140 million. 

In In re San Bernardino, Case No. 12-28006 (U.S. Bankruptcy Court, Cent. Dist. Cal.), CalPERS argued that it should be placed ahead of other creditors because the City’s debts to CalPERS are statutory liens, required to be paid by state law.  CalPERS asserts that since the City declared bankruptcy, the City has failed to make almost $7 million in required payment to CalPERS.  Accordingly, CalPERS asked the court for permission to sue the City to require the City to make all missed payments and to make the necessary future payments going forward; or alternatively for the City to be kicked out of bankruptcy court altogether.

Though the amount the City owes CalPERS is only a minimal fraction of the overall CalPERS budget, CalPERS apparently fears that if cities like San Bernardino (and Stockton, also in bankruptcy, where CalPERS has made similar arguments) are permitted to avoid pension obligations through bankruptcy, more public agencies may consider entering bankruptcy expressly to avoid such obligations.  The net effect of multiple agencies failing to meet their obligations could ultimately affect CalPERS’ ability to keep up with the payments it owes current and future retirees.

The court’s decision in San Bernardino (and in Stockton, where similar legal proceedings are further along) could have far reaching impacts on the continuing solvency of public employee pensions, and could play a significant role in public agencies’ considerations of bankruptcy as an option to address costly pension obligations.