Cities’ disputes with CalPERS have ramifications, Moody’s says

San Bernardino’s and Compton’s disputes with CalPERS, the state’s public employee pension fund, could have ramifications for other cities and their creditors, credit rating firm Moody’s said in a new report.

“These situations could open the door for courts to decide whether pension payments can be legally suspended or modified if a California local government is in financial distress and/or bankruptcy,” Moody’s wrote in its weekly credit outlook released Friday.

On one hand, the report warned that if the financially troubled cities succeed in delaying or reducing their CalPERS payments, it “could incentivize other financially distressed cities to seek concessions from all creditors,” including bondholders.

On the other hand, if cities are not required to make full pension payments while in bankruptcy, the report said, more might be left for other creditors, including bondholders.

San Bernardino, facing a $46-million general fund deficit, filed for Chapter 9 bankruptcy protection Aug. 1 and stopped making the employer portion of its pension payments. As of Friday, the city owed nearly $5 million to the pension fund, CalPERS spokeswoman Amy Norris said.

CalPERS filed an objection to San Bernardino’s bankruptcy, suggesting it was simply a maneuver to avoid creditors and that the city had not developed a plan to pay its expenses in the future.

“It appears that the City is financing its postpetition operating deficit by incurring postpetition obligations and simply not paying its postpetition bills,” the filing said. It accused the city of “digging a hole that gets deeper every day.”

The city said deferring pension fund payments was necessary to allow the city to pay employees and “keep providing the most basic and critical services to the community.”

Compton, which has not filed for bankruptcy but has struggled with a $40-million deficit and a lack of cash to pay bills, also fell behind on its CalPERS payments, prompting the agency to file a lawsuit against the city in September.

At that time, the city owed about $2 million, which later grew to $2.7 million, but it has since paid down all but about $600,000.

City Manager Harold Duffey said the city will be able to bring its payments up to date in December, when it expects to receive about $5 million from a parcel tax designated to pay pension costs. The city is also hoping to secure a $10-million line of credit this month.

“If PERS looks through their records, they clearly understand the city has had a history of falling behind on PERS payments and catching up in December,” Duffey said.

He said the current issues with CalPERS stemmed from a conversation about bankruptcy at a City Council meeting in July. City officials have since said they have no intention of filing for bankruptcy, but the discussion “made everyone nervous,” Duffey said.

Other California cities that previously filed for bankruptcy, including Vallejo and Stockton, continued to make their CalPERS payments. Some of Stockton’s creditors, including bond investors, have challenged that city’s bankruptcy filing, arguing that the city should have sought concessions from CalPERS.

“If either San Bernardino or Compton succeed in redefining its pension obligations, it would set a precedent that CalPERS (and potentially CalSTRS, the California State Teachers’ Retirement System) can be brought to the negotiating table,” the Moody’s report said. “CalPERS, however, has every incentive to pursue all of its legal rights to their fullest extent to make these cities pay under California law, and so discourage other fiscally stressed California municipalities from withholding their required pension payments.”

abby.sewell@latimes.com