CalPERS not allowed to sue bankrupt San Bernardino

A federal bankruptcy judge Friday rebuffed an effort by the state’s pension system to sue San Bernardino and force it to meet its $1.7-million-per-month obligation to public workers’ retirement funds, a decision that could have wider implications in the ongoing public debate over public pensions and municipal debt.

U.S. Bankruptcy Court Judge Meredith A. Jury said requiring the financially troubled city to make payments to CalPERS would be a “death knell” to San Bernardino’s effort to rebound from financial ruin. The payments also would divert scant resources from police and fire protection, as well as other essential services.

“I don’t believe there’s anyone in this room who doesn’t believe the city is broke,”’ Jury told rows filled with attorneys for the city and its creditors in the Riverside courtroom.

San Bernardino stopped making payments to CalPERS, the city’s largest creditor, after filing for Chapter 9 municipal bankruptcy protection Aug. 1. Last month, the City Council voted to slash more than $26 million in spending and freeze debt payments to keep the municipality afloat through the bankruptcy process.

CalPERS asked the bankruptcy judge to allow it to sue in state court to collect retirement contributions. The fund’s attorney, Michael Gearin, said San Bernardino is $8.3 million in arrears, a figure that could increase to $20 million by July.

Gearin pointed out that two other California cities that declared bankruptcy in recent years, Vallejo and Stockton, continued making employee retirement payments even after filing for bankruptcy protection. He said allowing San Bernardino to skip that contractual requirement sets a bad precedent that could eventually threaten the solvency of CalPERS, the largest pension fund in the nation, with 1.65 million members and investments worth $248.5 billion.

“It ultimately could fail if enough employers don’t contribute,” Gearin argued. “The ongoing harm to the CalPERS system is growing rapidly.”

Attorneys for three labor unions representing city workers made similar arguments. The judge was not swayed but agreed to allow CalPERS and other creditors to renew their challenges at a later time.

San Bernardino Mayor Patrick Morris said the ruling ensures that the city will keep police and firefighters on duty while it works on its financial recovery. Under the city’s current spending plan, San Bernardino will resume making payments to CalPERS in July.

“We have very high-aspiring goals to pay all of our creditors,” said Morris, a former Superior Court judge. “We’re not trying to stiff anybody.”

phil.willon@latimes.com