Bondholders Sue San Bernardino; Could Derail CalPERS’ Deal

Two creditors have formally challenged the bankrupt city of San Bernardino’s agreement with California’s public pension system (CalPERS) to pay the fund in full when it produces a bankruptcy exit plan. Though CalPERS hasn’t been named in the lawsuit, it’s reviewing the case.

Challenge for CalPERS

San Bernardino issued bonds to raise money to fill a hole in its retirement fund, which is administered by CalPERS. The bankrupt city also makes regular payments on behalf of its employees to CalPERS, which in turn pays retired city workers.

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Last year, the city made public an agreement with CalPERS to pay the fund in full when it produces a bankruptcy exit plan. The city has been ordered to produce a bankruptcy blueprint by May.

However, Luxembourg-based Erste Europäische Pfandbrief-und Kommunalkreditbank AG (EEPK), which filed the lawsuit in federal bankruptcy court in Riverside, Calif. sued San Bernardino on Wednesday for agreeing to pay in full its debt to CalPERS while not treating bondholders equally.

New York-based Ambac Assurance Corp, which insures a portion of the pension obligation bond debt, also joined EEPK in suing San Bernardino. Both firms are owned over $59 million. The two creditors claim their holdings in pension obligation bonds should be paid alongside CalPERS.

The case resonates with Stockton

CalPERS, America’s biggest public pension fund with assets of $300 billion, has been battling bond holders on Wall Street in connection with the bankruptcy filings of not only San Bernardino, but also Stockton. CalPERS is fraught with uncertainty as the pension fund faces uncertainty while dealing with the bankruptcy filings.

Wednesday’s case echoes that filed against the city of Stockton, which, like San Bernardino, declared Chapter 9 bankruptcy in 2012.

As reported by ValueWalk, last year, a judge ruling in the case, reversed a decision that would have left Stockton public employees facing pension cuts of up to 60%. The court ruling allows the bankrupt city in the shadows of Los Angeles to pay bond investors pennies on the dollar while keeping intact pension plans for its public employees.

San Bernardino and Stockton filed for bankruptcy within weeks of each other in 2012, each partly blaming the high cost of union contracts. Initially San Bernardino quit paying CalPERS, only to resume monthly payments after striking a deal with the system. Stockton kept up payments and declined to fight CalPERS’ legal claim that it must be paid before bondholders.